Biovail Corp Q2 2010 Earnings Call Transcript

Aug. 5.10 | About: Biovail Corp. (BVF)

Biovail Corp. (BVF) Q2 2010 Earnings Call August 5, 2010 8:30 AM ET

Executives

Nelson Isabel - VP of IR & Corporate Communications

Bill Wells - CEO

Gilbert Godin - COO

Peggy Mulligan - CFO

Analysts

Annabel Samimy - Stifel Nicolaus

Mitchell - Piper Jaffray

Fred - RBC Capital Markets

Greg Fraser - Bank of America

Operator

Welcome to the Second Quarter 2010 Earnings Call for Biovail Corporation. At this time all participants are in a listen-only mode. This conference call is being webcast on the worldwide web at www.biovail.com. (Operator's Instructions)

As a reminder, a replay of the conference call will be available until 7:00 PM Eastern Time on Thursday, August 12, 2010 by dialing 416-695-5800 for Toronto and International callers and 1-800-408-3053 for United States and Canada, using access code 5600465 followed by the pound sign.

On behalf of the speakers who follow, investors are cautioned that the presentations and responses to questions may contain forward-looking statements within the meaning of Section 27(a) of the Securities Act OF 1933, as amended and Section 21(e) of the Securities and Exchange Act of 1934 as amended, and which comprise forward-looking information under applicable Canadian provincial securities laws. For the purposes of this caution we refer to such statements as forward looking statements. Forward looking statements involve risks and uncertainties and undue reliance should not be placed on such statements.

Certain material and factors or assumptions are applied in making forward looking statements and actual results may differ materially from those expressed or implied in such statements.

Forward looking statements include, but are not limited to our goals, targets, strategies, intentions, plans, beliefs, estimates, expectations, outlook, guidance and other statements, which contain language such as likely, should, guidance, belief, anticipate, expect, intend, plan, will, may, could, would, target, continue and other similar expressions.

For additional information about the material factors or assumptions underlying such statements and above the material factors that may cause actual results to vary from those expressed or implied in such statements, please consult the company's earnings press release dated August 5, 2010, and available on the company web site as its filings with the U.S. Securities and Exchange commission and the and the Canadian Securities Administrators, including the risk factors detailed in its most recent Form 10-K, and its registration statement, on Form S-4 filed with the Securities and Exchange Commission, on July 21st 2010, as well as other risks and uncertainties, set forth from time to time in the reports filed with the Securities and Exchange Commission and the Canadian Securities Administrators.

The company does not undertake to update any forward-looking statements except as required by law.

At this point, I would now like to turn the call over to Nelson Isabel, Vice President, Investor Relations and Corporate Communications for Biovail Corporation. Mr. Isabel will moderate today's call.

Nelson Isabel

Thank you, operator, and good morning, everyone. On the behalf of Biovail, thank you for joining us. On this morning's call, Biovail management will discuss the financial and operating highlights of the second quarter of 2010 as well as the proposed merger with Valeant Pharmaceuticals International.

Joining us in today's conference call are Bill Wells, Chief Executive Officer of Biovail Corporation, Gilbert Godin, Chief Operating Officer and Peggy Mulligan, Chief Financial Officer. All will be available to participate during the question-and-answer session with research analysts immediately following our remarks.

We'll try to get to as many questions as possible while limiting the call to approximately one hour. Other participants are encouraged to follow-up with the company after this morning's call by calling 905-286-3000 and asking for Investor Relations.

Bill, please go ahead.

Bill Wells

Thanks Nelson. Good morning, everyone. Biovail once again delivered solid financial results in the second quarter, with revenues increasing 23% and adjusted cash EPS up 17% year-over-year. We are clearly maintaining the momentum from 2009 and assuming the proposed merger with Valeant closes later this year, we believe we will have succeeded in moving Biovail to high growth, much more quickly than we would have been able to as a standalone company.

The merger with Valeant will create a dynamic, specialty pharmaceutical company diversified by product line, therapeutic area and geography, and focused on growth and cash flow generation. The new Valeant will have multiple growth platforms, including specialty CNS, dermatology, Canada and emerging markets. All supported by strong cash flows by a broad portfolio of legacy products. Needless to say, we are excited about the value creation potential of the combined company.

Two weeks ago we received good news when we were informed that the Federal Trade Commission had granted early termination of the waiting period under Hart-Scott-Rodino Act. This brings us one step closer to completing the transaction.

In addition to Biovail shareholder approval, the merger is subject to approval by Valeant shareholders, confirmation of financing and the satisfaction of customary closing conditions and regulatory approvals.

In the meantime, we continue to work on the integration planning process for the two companies. Twelve work streams have been created across multiple functional areas. In terms of senior management decision at this point only the CEO and CFO positions have been confirmed. Mike Pearson will be the new Valeant CEO and Peggy Mulligan will be the CFO. As you know I will be the new Valeant Chairman.

We continue to expect cost synergies from the transaction to be at least $175 million by the second year of operations. We also continue to expect a foreclosing and have the new Valeant hit the ground running immediately thereafter.

Let's talk quickly about Biovail's financials. Biovail delivered strong cash flow from operations in the quarter, $109 million on a GAAP basis and $94 million before changes in working capital and excluding cost related to the merger, once again demonstrating the strength of our operating business.

As the end of July, we had cash balances of over 200 million and no outstanding borrowings under our revolving credit facility. Peggy will review the financial highlights of the quarter shortly.

Our restructuring efforts are largely complete and as a result we expect to reap the benefits of the bulk of our targeted annual cost savings of $48 million to $60 million in 2010.

Now I'll talk about Wellbutrin XL. Our targeted non sales force programs to support market share and patient and physician loyalty, which we began late in the first quarter are now beginning to show results. We've now begun the third cycle of our sampling program and over 70% of physicians contacted representing 8,300 physicians have requested sample packs.

In addition, through mid-July, over 5,000 coupon redemptions have been processed. Recent IMS data continue to be encouraging as we've seen Wellbutrin XL's market share stabilize just north of 6%. The Wellbutrin transaction has so far provided much better financial returns than originally projected.

Gilbert will now provide an overview of operations in the quarter. Gilbert?

Gilbert Godin

Thank Bill and good morning everyone. I'll begin my remarks this morning by providing an update on Xenazine, which was launched to US specialists by Lundbeck in late November, 2008. Through June 30, 2010, a total of 2,940 patients have enrolled or are in the process of enrolling with the Xenazine distribution center and 28,279 scripts have been filled. Approximately 20 months post launch, Xenazine continues to track to 4,000 to 6,000 peak patient number.

As we've discussed previously, the rate of enrollment has slowed as the initial migration of patients from the longstanding compassionate usage program to the commercial program is largely complete.

Our commercial partner Lundbeck is now focusing its marketing efforts on centers of excellence in the U.S., and on helping a broader number of physicians fully understand the safe and effective use of Xenazine and the drugs REMS program.

Switching to the sale of non-core assets, in July of 2010 we completed the sale of our Contract Research Division or CRD to Lundbeck Theaureuputic Research for cash proceeds of approximately $6.8 million. Biovail no longer considered the CRD a strategic fit as a result of the company's transition to its specialty CNS strategy. With the sale of CRD we have realized our target of over $70 million in total gross proceeds from the divestiture and monetization of non-core assets.

The CRD sale will also result in lower research and development revenues. Through the first half of 2010, the CRD generated revenues of $5.2 million, however the transaction will benefit the bottom line as it will also eliminate CRD expenses, which are primarily included in Biovail's research and development expense line, CRD expenses were $6.7 million in the first half of 2010.

In Porto Rico, our manufacturing facility in Carolina, is now expected to be closed in the fourth quarter of 2010, after which time all manufacturing operations are expected to be consolidated at our Steinbach facility. We are continuing to actively market the Carolina facility.

I will now briefly discuss some of our product development pipeline assets, beginning with Staccato loxapine. The FDA review of the product's new drug application is ongoing, further to the October 11 action date. We continue to plan for an approval for an inpatient usage, although the bulk of the anticipated spending will not occur until after the PDUFA date.

Turning to pimavanserin, last week our partner at Acadia announced the initiation of a new Phase 3 trial to evaluate the efficacy, tolerability and safety of pimavanserin, in the treatment of Parkinson's disease psychosis or PDP. The new study is expected to enroll about 200 patients at clinical site located in North America, randomized on a one-to-one basis to two study arms and will receive oral doses of either 40 milligram of pimavanserin or placebo once daily for six weeks.

The primary endpoint of this study is antipsychotic efficacy as measured using a group of nine items from hallucinations and the delusions domain of the SAPS scale. This refined study design could help mitigate the placebo response seen in prior trials, reduce viability and enhance sensitivity in measuring the efficacy of pimavanserin in PDP patients.

Biovail is responsible for 50% of the cost of the study, which are expected to be between $10 million and $15 million.

In the GDNF program in conjunction with our partner MedGenesis Therapeutics, we were pleased to announce a $2.1 million grant in the second quarter from Michael J. Fox Foundation to further develop GDNF as a treatment for Parkinson's Disease. The grant is payable over three years and subject to specific milestones. We expect to meet with the FDA late this year to discuss the required clinical program.

In June we acquired the U.S. and Canadian rights to istradefylline, a new chemical entity targeted for the treatment of Parkinson's Disease. We paid an upfront fee of $10 million and we have pay up to $20 million in potential milestones through FDA approval.

Istradefylline is a late stage product that represents a novel approach for the treatment of Parkinson's Disease. We will be seeking a meeting with the FDA in the near-term to discuss istradefylline's development path forward. This product could represent a near-term revenue opportunity for Biovail.

The last part that will discuss is BVF-324 a novel formulation tramadol for the treatment of premature ejaculation. Based on a reassessment of the commercial opportunity for the product, and taking into consideration the slower than expected enrollment rate in the Phase 3 trials, a decision was made to terminate its development. A charge of $2.8 million was accrued in the second quarter for the expected wind-down cost of the two European studies that were underway.

As a result of this termination and the sale of our CRD, research and development expenses in 2010 will be lower than we originally anticipated by approximately $15 million. We now anticipate R&D expenses for the year to be approximately $95 million, excluding upfront and milestone payments.

In Canada, we were recently notified of an application filing with the Therapeutic Products Directorate or TPD for generic formulation of Wellbutrin XL We are reviewing the application, and if appropriate intend to initiate patent infringement litigation to enforce our intellectual property rights. This will preclude TPD approval until such litigation was concluded or the expiry of 24 months, whichever is earlier.

I will end my remark with a comment on U.S. Healthcare Reform. We continue to believe our exposure is not material given the nature of our commercial portfolio and the structure of our supply agreements. In the second quarter of 2010, the legislation did not have a material impact on our financial results.

That concludes my remarks. I will now turn the call over Peggy Mulligan, Biovail's Chief Financial Officer. Peggy?

Peggy Mulligan

Thanks Gilbert and good morning everyone. In accordance with U.S. GAAP Biovail reported net income of $34 million or earnings per share of $0.21 in the second quarter of 2010. These amounts include $10.2 million in acquired-in-process research and development expenditures, related to the transaction with Kyowa, $7.6 million in costs related to the transaction with Valiant and other specific items that in aggregate negatively impacted net income and EPS by $21.2 million and $0.13 respectively. Accordingly, EPS excluding specific items was $0.34 in the quarter.

In the second quarter of 2010, cash EPS was $0.54 compared to $0.59 in the second quarter of 2009. Excluding the merger related costs and cash restructuring charges, cash EPS was $0.60, a 17% increase over the prior year period as similarly adjusted.

A reconciliation of GAAP EPS to cash EPS as well as the table listing specific items is provided in our second quarter earnings release issued this morning. Total revenues for the three months ended June 30, 2010 were $239 million compared with $194 million for the second quarter of 2009, an increase of 23%.

Product revenues in the second quarter of 2010 were $231 million compared with $188 million in the second quarter of 2009, a 23% increase that reflects higher revenues from Wellbutrin XL, tetrabenazine products, Biovail Pharmaceuticals Canada, the Zovirax line, the company's generic portfolio and legacy products. Partially offsetting factors include lower revenues from Ultram ER and Cardizem LA as a result of the introduction of generic competition to both products.

Wellbutrin XL revenues were $54 million in the second quarter of 2010 compared with $37 million in the 2009 period, a 45% increase that reflects the May 2009 acquisition of the full U.S. commercialization rights to the product, partially offset by the impact of the introduction of generic competition to the 150 milligram strength in May of 2008.

The supply of Wellbutrin XL tablets to GlaxoSmithKline for distribution in Europe and other markets generated revenues of $5.4 million to Biovail in the second quarter of 2010, compared with $2.6 million in the prior-year periods.

Biovail's global tetrabenazine franchise generated second-quarter 2010 revenues of $21.4 million. In the U.S. Xenazine generated revenues of $16.3 million, compared with $11.0 million in the prior-year period.

Biovail also recorded $4.0 million in revenues from sales of the product in Europe and around the world. In Canada, Nitoman generated revenue of $1.2 million 2010, which is included in Biovail Pharmaceutical Canada's revenues. Zovirax continued to perform strongly. Revenues for this franchise were $41.4 million in the second quarter of 2010, a 14% increase versus the prior year periods.

With respect to Biovail Pharmaceuticals Canada, or BPC, second quarter revenues were up 53%, year-over-year, reflecting the strong performance of Wellbutrin sales and Tiazac XC, as well as the positive impact of fluctuations in foreign currency exchange rates. At constant exchange rates, BPC revenues were up 30%, in the second quarter, of 2010, compared to the prior-year period,.

Generic product revenues, increased 52% year-over-year in the second quarter of 2010, reflecting higher prescription volumes for our generic formulations of Cardizem CD, partially offset by lower pricing and lower prescription volumes for other of these products.

Legacy product revenues were also strong in the quarter, increasing 15%, year-over-year to $46.5 million.

Turning to the expense side of the income statement, Biovail's R&D expenses in the second quarter were $37.3 million, compared with $44.7 million for the second quarter of 2009. Excluding acquired IPR&D expenses associated with our now divested CRD as well the $2.8 million accrual related to the termination of the BVF-324 program, R&D expenses were $20.8 million in the second quarter of 2010, compared with $10.7 million in the prior year period, reflecting increased activity across several pipeline programs.

Looking forward, we now expect to incur R&D expenses of approximately $95 million in 2010, which excludes upfront and milestone payments.

Biovail's balance sheet remains strong. At the end of the July 2010, we had cash balances in excess of $200 million. The company has $350 million in convertible notes outstanding, and $17.5 million obligations related to the acquisition of the worldwide developments and commercialization rights to tetrabenazine in June 2009.

There are no outstanding borrowings under the committed $410 million revolving credit facility. Cash flow from operations was $109 million in the second quarter of 2010 compared with $97 million in the second quarter of 2009. Cash flow from operations before changes in operating assets and liabilities and excluding merger-related cost was $94 million in the second quarter of 2010, once again demonstrating the strong cash flow generation of Biovail's businesses.

For more comprehensive detail pertaining to Biovail's financial and operational performance, for the three months ended June 30, 2010, please refer to the earnings news release distributed by the company earlier this morning.

In line with the company's dividend policy, Biovail's Board of Directors has declared the payment of the dividend of $0.095 per share payable October 4th, 2010 to shareholders of record on September 1, 2010. The ex-dividend date is August 30, 2010.

Let me close by reminding everyone that following a $1 per common share dividend expected to be paid after the close of the merger with Valeant the combined company does not intend to pay dividend. That concludes my comment. Bill?

Bill Wells

Thanks Peggy. I am pleased with the financial success of the second quarter of 2010, which once again demonstrated the robustness of Biovail cash flow generation capabilities. The highlight of the quarter, however, was undoubtedly the proposed with Valeant. This transaction will accomplish immediately what we were working towards of a five year period. We'll have multiple growth platforms that we can leverage, including a second therapeutic area in the U.S. dermatology.

When we originally chose specialty CNS as Biovail focus area in May 2008, you may recall that we did a deep dive into the six other therapeutic areas that we identified as being the most attractive. Dermatology was one of those six and we are pleased to be adding our Zovirax franchise to Valeant existing portfolio in this area.

The opportunity in Canada is also very compelling. BPC revenues in the second quarter of 2010 are up 53% year-over-year, and Valeant's Canadian operations posted a 44% growth rate in the same quarter. Together we'll be the largest Canadian pharmaceutical company and the partner of choice for foreign companies looking to commercialize their products in Canada.

Importantly, the combined company will likely not have any significantly patent plus in the next several years. There are few large specialty pharma companies that can make a similar claim.

The opportunities for growth are numerous and substantial and the greater resources of the combined company will allow us to pursue more and larger transactions. Business development track records of both companies over the past two and half years speak for themselves and should provide comfort to shareholders that capital allocation decisions will continue to be made prudently and always with the overarching objective of enhancing shareholder value.

We'll now take questions. Operator?

Question-and-Answer Session

Operator

Thank you. We will now take questions from the listeners. (Operator Instructions) Our first question is from Annabel Samimy from Stifel Nicolaus.

Annabel Samimy - Stifel Nicolaus

Thank you for taking my call. I had a few questions actually. Can you help us determine what the state of some of your programs may be? We all saw the internal projections and your SEC filings and we are curious to know what those projections assume in terms of pipeline programs.

Bill Wells

Yes, we are conducting a pipeline review together with Valeant as part of the overall integration planning. No decisions have been made with regard to as a pipeline program, so we will be looking at the programs of both companies. I do expect we will probably see that some of those programs are cancelled or partnered as we go forward, again from both companies. Part of the synergies that we are planning to get are from the pipeline.

In terms of our projections, which were in the S4 that went out, those projections were based on the status quo of Biovail assuming that our business is operating as it has been today. We don't want to get in to any detail on the underlying assumptions around those projections. We are not given guidance in the past and we don't feel that we should delve into any great detail in those numbers. We were required to put them out as part of the legal and regulatory requirements around the merger, but don't intend to go any further on that.

Annabel Samimy - Stifel Nicolaus

Can you in a minimum tell us whether Staccato was assumed in the assessments given there it is almost at the approval stage?

Bill Wells

Staccato was obviously a program that we anticipate will be approved and so Staccato would be a program that is in those assessments.

Annabel Samimy - Stifel Nicolaus

Okay, great. Then on gross margins, you have some pretty strong gross margins this quarter. What is that a function of?

Peggy Mulligan

Annabel, its Peggy, we have did suggest that between 70% and 74%, is a fairly good run rate to always consider our margins at. The elements of mix come in there, but certainly what you are seeing is, the tremendous efforts on the manufacturing team side, affecting most of the transition over to Steinbach and the closure of the Carolina site. So some positive pick up on margins resulting from those very strong activities.

Annabel Samimy - Stifel Nicolaus

Okay. Then one more question if I may ask, in Xenazine we saw a nice uptick in that. Would you say that's primarily a factor of Lundbeck's and your efforts to educate the broader physician population or is there any price increases in there? Could you put some color there.

Gilbert Godin

Okay, good morning, Annabel, this is Gilbert, first let me say, we always try to report most recent numbers in the case of Xenazine, so that would have been July. Unfortunately while the numbers for July appear to be good, we'll have to wait a little bit. They are preliminary and they are being [scrubbed] at this point. We've seen through over the last year and half or almost two years now, typically some lumpiness, both in patient counts and in revenue numbers, but still over the long-term trending steadily.

I think that what you have been seeing this last quarter is more that that. It's been a good quarter, indicative of this study progression. We are confident that those trends are continuing to trend to our net-net, still tracking to the steady state number of 4,000 to 6,000 patients. So good outcome our vantage point and more granularity to follow fairly shortly.

Annabel Samimy - Stifel Nicolaus

Okay. So there are no price increases in that at all?

Gilbert Godin

There might have price increases in the very recent past. I don't think that they would be of a nature to explain. A good quarter however.

Operator

(Operator Instructions) Our first question will be from David Amsellem from Piper Jaffray.

Mitchell - Piper Jaffray

Hi, this actually [Mitchell] for David. Just following along the question about your strategic options going forward, can you tell us at least if the R&D synergies that you plan to get those mainly from, I guess the later stage assets or maybe some of the earlier stage pipeline assets.

Bill Wells

It is pretty premature to say that. The pipeline review has not been completed.

Mitchell - Piper Jaffray

Okay. Just done a [trial]. Then last question, I guess Mylan got approval for Wellbutrin XL in July. Do you see that as any sort of competitive threat? Is that going to affect your sampling or couponing activities?

Gilbert Godin

This is Gilbert, [Mitchell]. I guess the generic marketplace in this as much Wellbutrin is concerned is a market in itself. I think that our performance here is resulting more from our sole activities or tactical plans to support the brand. The actual battle within the generic players here is unlikely to influence the brand. You will see those players jockey for position as a take more and more aggressive pricing orientations but that's above the net of it with respect to the brands.

Bill Wells

Just I will leap in there. We are seeing very good performance out of Wellbutrin. I think it's fairly compelling that the actions we have taken on the marketing side with sampling and couponing are having an affect that's seems to be pretty clear from the IMS data. Personally I am very encouraged by the performance of Wellbutrin and as you know the financial results versus what we had originally anticipated when we bought the assets are significantly better than the original projections.

Operator

(Operator Instructions) Our next will be from Doug Miehm from RBC Capital Markets.

Fred - RBC Capital Markets

It's actually [Fred] calling for Doug. Just a quick question on the generics and legacy portfolio, was it some broad based pricing increases or could you add little bit more color to that?

Bill Wells

We have been continuing to manage the price, I would say judiciously, which means that nothing excessive just what we think would be appropriate in context of a fully generic size marketplace, these come into play. With respect to the general portfolio as you know these products are commercialized by our partners and we are not per se party to the pricing decisions. We benefit from those overall product revenues but we are not a participant in the commercial decisions.

Operator

The next question will be from Greg Fraser from Bank of America.

Greg Fraser - Bank of America

Firstly, a quick question on the pipeline, it sounds like the decision to start the pimavanserin studies for PDP was independent of the pipeline review that you will be conducting after the merger closes and that everything in the pipeline will be on the table when you conduct that review. Is that the case?

Bill Wells

That's correct. Until the merger closes, its business as usual and the pipeline review will be completed, I think probably shortly before the merger closes, but no decisions will be made or actions implemented until after the merger closes.

Greg Fraser - Bank of America

Okay. Then on Xenazine, was there any meaningful change in the dropout rate either higher or lower relative to the first quarter?

Gilbert Godin

We've never reported dropout rates. However, I think I can comment that there were no meaningful changes, if one thing it would be kind of positive signs on that front.

Greg Fraser - Bank of America

Okay. Can say when that it could possible in the future that we may learn more about your more specifics about your life cycle management programs for Xenazine?

Bill Wells

Well, we do have a program which is BVF-018, which is the modified release version of Tetrabenazine which will be targeted at Tourette Syndrome, so that that would be the program which is for lifecycle management. We have had some recent communications with the FDA related to that program and we are in conversations with them about the program and the best way structure trials going forward. So it is a very active program.

Greg Fraser - Bank of America

Okay. Then lastly is it possible to quantify the positive impact that the competitors issues with [topicine] had on your Q2 sales? Thank you.

Bill Wells

That certainly had a positive impact, it's not possible to quantify, it, we haven't calculated that number.

Operator

Thank you. There are no further questions at this time so I will return the meeting back to you Mr. Isabel.

Bill Wells

Actually this is Bill Wells, I will close the meeting. So I want to thank everybody here for participating and for your interest in Biovel. I would also like to thank all of the Biovel's employees for their continued hard work and dedication.

We are in the midst of a very exciting chapter in Biovel's history, but I know it's going to be very stressful, as we go through a process of this type with the merger, and your professionalism, dedication and focus on the business is greatly appreciated during this period.

As I said before, I am very proud of all of you, and very proud of everything that we together have accomplished.

Thank you so much and we look forward to your continuing interest in the new Biovel as we go forward.

Operator

The conference has now ended. Please disconnect your lines at this time. We thank you all for your participation and have a great day.

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