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Valeant Pharmaceuticals International, Inc. (NYSE:VRX)

Q3 2010 Earnings Call

November 4, 2010 8:00 AM EST

Executives

Laurie Little – IR

Mike Pearson – CEO

Rajiv De Silva – President and COO, Specialty Pharmaceuticals.

Peggy Mulligan – CFO

Analysts

Randall Stanicky – Goldman Sachs

Gregg Gilbert – Bank of America Merrill Lynch

Marc Goodman – UBS

Corey Davis – Jefferies

Douglas Miehm – RBC Capital Markets

Annabel Samimy – Stifel Nicolaus

Lennox Gibbs – TD Securities

Michael Tong – Wells Fargo

Hari Sambasivam – National Bank Financial

Graham Tanaka – Tanaka Capital

Juan Sanchez – Ladenburg

Operator

Good morning. My name is Amanda and I will be your conference operator today. At this time, I would like to welcome everyone to the Valeant third quarter 2010 earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you.

Ms. Laurie Little, you may begin your conference.

Laurie Little

Good morning, and welcome, everyone to Valeant's third quarter 2010 financial results conference call. Joining us on the call today are Mike Pearson, Chief Executive Officer; Peggy Mulligan, Chief Financial Officer; and Rajiv De Silva, President and Chief Operating Officer of Specialty Pharmaceuticals.

In addition to this live webcast, a copy of today's slide presentation can be found on our website under the Investor Relations section within the webcast event details.

Before we begin, please turn your attention to the slide containing our cautionary statement regarding forward-looking statements. Certain statements made in this presentation and other statements made during this call and the Q&A session afterwards may constitute forward-looking statements.

In addition to supplement the consolidated financial results prepared in accordance with generally accepted accounting principles, the company uses non-GAAP financial measures that exclude certain item.

The company has provided guidance with respect to adjusted non-GAAP cash flow from operations, which is a non-GAAP financial measure that represents adjusted cash flow from operations. The company has not provided reconciliation of this forward-looking non-GAAP financial measure due to the difficulty in forecasting and quantifying the exact amount of the items excluded from the non-GAAP financial measure that will be included in the comparable GAAP financial measure.

Statements made on this call do not and will not constitute an offer to sell or the solicitation of an offer to purchase common shares of the company. Valeant intends to file a registration statement including the perspective with the Securities and Exchange Commission for the offering of the common shares pursuant to the Special Dividend Reinvestment Plan.

Before investing an eligible shareholder should read the prospectus in that Registration Statement and other documents that company has filed with the SEC and with the CSA for more complete information about the company and the offering. You may also obtain these documents free of charge from Valeant's website or by directing a request to Investor Relations at our corporate headquarters.

Information related to the Special Dividend Reinvestment Plan is being provided here pursuant to and in accordance with Rule 135 under the Securities Act of 1933, as amended.

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

Mike Pearson

Thank you, Laurie. Good morning, everyone, and thank you for joining us. This quarter is an unusual quarter from a financial reporting perspective with the merger of Valeant and Biovail closing three days before the end of the quarter.

Up to the close the Legacy Biovail business continued to be managed by Legacy Biovail management and the Legacy Valeant business continued to be managed by the Legacy Valeant management. Since September 28th, the combined business has been managed by the new Valeant team.

Due to GAAP requirements reported third quarter results reflect the full third quarter financial results of Legacy Biovail and the last three days of Legacy Valeant. However, to allow for a less complex operational transition, Legacy Valeant product shipments were cut off anywhere from three to 13 days before the end of the quarter depending on the geographic market. As a result, reported Legacy Valeant revenues only represent a partial quarter and reported new Valeant revenues only contain Legacy Biovail revenues.

Finally, a large portion of all integration costs, including all severance costs flow through the third quarter income statement. Therefore the third quarter performance of the new Valeant is difficult to assess based on reported numbers, although I will attempt to make some sense to the numbers on this morning's call.

On today's call, I plan to first discuss our operational results for the third quarter; second, have Rajiv update you on our integration efforts; third, have Peggy provide you with the financial overview; and finally, I'll come back and discuss high-level elements of our fourth quarter financial outlook.

Turning to the operational results, first for Legacy Biovail; Legacy Biovail results for the quarter, especially top line sales were poor. This was primarily due to the fact that most line managers in Legacy Biovail knew they would not be continuing in the new Valeant, and their hearts and minds were clearly not focused on the business. However, there is a silver lining. The underlying script trends for the most important Biovail products, Wellbutrin XL, Zovirax and Xenazine, continued their historic trends so there has been no change in trajectory for an overall market demand sampling.

I'm also pleased to note that the Biovail Canadian business continued to perform well showing 32% quarter-on-quarter growth.

Since the end of the quarter, we have also seen an uptick on Wellbutrin XL weekly script trends. More important, as new Valeant management begins to familiarize itself with Legacy Biovail's businesses we see many of the same opportunities to improve performance that we saw two-and-a-half years ago at old Valeant.

By restructuring partnerships, optimizing the marketing mix, cut in spending, and through innovative managed care strategies we feel cautiously optimistic that we can significantly improve the already strong cash flows being generated by Legacy Biovail products.

Turning to Legacy Valeant, third quarter performance of the Legacy Valeant business remained strong, but due to the early cut off of product shipments, quarter-to-quarter comparisons are difficult. This slide provides the sales shipment cutoff dates. That is the last date products were shipped out of our warehouses for each of Legacy Valeant's businesses.

The next slide shows the growth of each of the segments of the old Valeant's businesses despite these early cutoff dates. I would like to point out that the US neuro excludes Diastat sales, which as we have frequently guided the investment community, saw the entry of an authorized generic from Teva on September 1st. I would also like to point out that Europe's growth, as you can see, was 5% in US dollars for the partial quarter.

On a constant currency basis, in Q3, this growth would have been 13%. Our European business continues to outperform the market, as the market in constant currency dollars grew about 7% over the prior year according to IMS data.

I would also like to highlight the continued strength of our US dermatology business. Acanya and [inaudible] volume among dermatologist surpassed BenzaClin by 8% in September and Atralin TRX across all prescribing physicians was up over 70% over September of 2009.

CeraVe continued its growth trend into the quarter. In total, our growth in retail drug store scans increased by over 80% when compared to 2009. In addition, we launched two new SKUs, a facial moisturizer with 30 SPF for morning use and a foaming cleanser.

In summary, despite the unavoidable distractions of integration, the Legacy Valeant business continues to perform well.

Our overall approach to integration can be characterized as fact based and fast. A great deal of research and my own personal experience at McKenzie suggest speed of execution is the single most important determinant of success versus failure in a transformational merger, and we have applied this principle to the Valeant-Biovail integration.

From the outset, we made clear to everyone in the organization that the strategy of the new company would be the old Valeant strategy and the operational philosophy would be the old Valeant operational philosophy, and we have proceeded quickly and decisively from the onset.

Rajiv will take you through the details of the integration execution, but the overall philosophy was to put in an industry leading lean cost structure; minimize the company's development spend in risky programs; organize in a decentralized approach and maintain a diversified product and geographic footprint and take advantage of Biovail's attractive corporate structure and strong cash flows; and as important, have the company as fully integrated as possible by year end, so line management can refocus efforts as quickly as possible on generating cash and growing the business. I am pleased to report this morning we are well ahead of schedule.

Now, let me ask Rajiv to give you some of the details.

Rajiv De Silva

Thank you, Mike. Although just over a month has elapsed since the merger closed, we have accomplished a great deal in a short period of time and our synergy capture is well underway.

We have completed our R&D pipeline review and notified all of our counterparties as to the decisions that have been made. All North American employees have been informed as to their employment status and those being terminated have been provided termination dates that are either immediate or provide for a concession period. We have identified the facilities that would be closed or consolidated. And finally, we are working on an additional action plans to capture other synergies in areas internally identified.

Our number one objective is to move quickly and protect our business units from prolonged distractions and to enable their full attention on running our operations.

We have moved quickly to identify R&D programs that will not fit within the new Valeant strategy from both a development perspective as well as a financial perspective. We have notified all of our counterparties, some of whom you may have seen issue announcements regarding our decisions.

We expect the vast majority of the transitional activities to be completed by the end of the year, but a few wind down activities will continue into 2011. As a result, while most of the restructuring expenses associated with the transitions would be born in 2010, some expenses could slip into the first quarter of 2011. In total, we expect exit cost of approximately $15 million to $20 million due to these actions.

As this next slide illustrates, Valeant will continue to maintain a robust development pipeline in four key areas; dermatology, ophthalmology, neurology, and our orphan and other drug categories.

Our portfolio will consist of lower risk programs, primarily late-stage compounds and lifecycle management of existing products. We will continue to pursue partnering relationships in order to maximize the value of our compounds and find other pharmaceutical companies that will help fund our development programs. In particular, we will continue to build upon our core competency in dermatology and tropical compounds.

We anticipate that our total R&D spend in the future will be less than 4% of total sales, although that is not a metric that we will use to evaluate our portfolio. Rather, this is to provide you with a basic estimate to understand what will drive our financials in the future.

As mentioned previously, we have made significant strides in communicating with the workforce from both companies as quickly as possible. We began with a headcount of approximately 1,725 people from the combined workforce in the US and Canada.

Manufacturing personnel were exempt from this exercise which accounts for about 675 people. Out of the roughly 1,050 left, we terminated about half, most of who will be leaving by the end of the year and some who will be retained for a period of time thereafter, mostly in areas such as finance and IT for transition purposes.

By at the end of 2011, we should have about 550 employees in North America. Excluding manufacturing, our personnel cost, after the reductions are roughly equivalent to Legacy Valeant alone.

With the merger now complete, we have taken the opportunity to consolidate our non-manufacturing sites into a more efficient and manageable number. Many of these sites came about through various acquisitions. Most of the sites will be shut down, while a few will be downsized.

Going forward, we anticipate maintaining three primary locations in the US, Northern New Jersey, Petaluma, California, and Durham, North Carolina, with a small transition location in Southern California. We expect to save over $10 million on the closure and restructuring of offices.

Finally, we have also identified several additional areas of cost savings from both the commercial organization and overall G&A. These costs are anywhere from duplicative corporate expenses to external consulting costs, data acquisition costs, distribution costs as well as general spend rationalization across the two companies in areas such as travel and other procurement.

All these decisions and actions bring us to our estimated synergy targets which we previously disclosed as achieving a full-year run rate of $300 million in synergies by the end of 2012, with $200 million of this achieved in 2011. Additional synergies are anticipated from longer term projects such as manufacturing optimization.

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

Peggy Mulligan

Thank you, Rajiv. From a financial reporting and presentation perspective, this quarter is quite complex and I suspect would be confusing to many. I’ll do my best in the next few minutes to cover the key elements which should help clarify a number of points.

First, let me remind you, as required under Generally Accepted Accounting Principles, the merger transaction has been accounted for as a business combination with Legacy Biovail determined to be the acquirer. Accordingly, the third quarter results reflect the full third quarter results of Legacy Biovail and only three days results to Legacy Valeant.

As Mike has already explained, Legacy Valeant affected an early shipping cutoff, so there are effectively no results related to Valeant included in the operating results reported other than three days of costs, which are principally interest expense and amortization.

The balance sheet reflects the recognition at fair value of the Legacy Valeant assets and liabilities acquired under the merger. Not surprisingly, there are number of items that impacted our bottom line results this quarter as a result of the merger.

Let me first address restructuring costs. We originally estimated and communicated that restructuring costs would be approximately $130 million to $150 million. In concert with the detailed synergy analyses, we have also more thoroughly assessed one-time cost of achieving these synergies and now estimate that restructuring costs will come in between $135 million to $180 million.

Of this amount, approximately $50 million to $60 million is expected to be noncash, with $46 million of that attributable to share-based compensation program. Merger related restructuring charges of $95 million were booked in the third quarter. Virtually all of which were in respect to employee termination costs and includes the $46 million in respect to the share-based compensation.

Acquisition related costs associated with the merger of $28 million were recorded in the quarter. This represents primarily investment banker and legal fees. The quarter also reflects the write-offs of deferred financing charges in the amount of $5.8 million. This noncash charge arises from the cancelation of Legacy Biovail's prior credit facility. I'll discuss our overall financing in a moment. Finally, Mike will speak to the legal settlement charges in the quarter of $38.5 million later in the call.

Turning to the financial recording of the transaction; Generally Accepted Accounting Principles require the recognition of Legacy Valeant's assets and liabilities in the account at their fair value. The concept of fair value is determined by the consideration given, which in this case was the value of the Legacy Biovail shares exchanged.

Of course, the share values of both legacy Biovail and legacy Valeant increased significantly from the date of the merger announcement due to the effective merger date, an increase of approximately 80%. We believe this increase was reflective of the market's assessment of the enhanced value of the companies on a combined basis and was driven significantly by the expected synergies and overall effective tax rate announced.

As a result, the balance sheet at September 30th reflects a net increase in intangible assets of $5.1 billion, reflecting the current estimates of the fair value of Legacy Valeant's brand and product rights of $3.8 billion, and its in-process research and development of $1.4 billion. Goodwill of $2.9 billion has been recorded in the third quarter in the effect of the merger.

Other merger-related accounting matters include the write-off of inventory by $72.1 million to fair value, a noncash charge of $20.9 million in operating expenses related to the evaluation of replacement stock-based awards and a number of complex tax results that I will speak to you in a moment.

I would briefly remind you that at this time the allocation of the purchase price is preliminary and may be subject to change.

In the third quarter of 2010, our income tax expense reflected the following largely merger-related items. First, we recorded evaluation allowance against a portion of the Legacy Biovail's net deferred tax asset in respect of its US tax loss carry-forwards. This arose when the merger triggering the ownership change limitations of Section 382 and the relatively low tax evaluation of Legacy Biovail in the US.

Secondly, GAAP requires us to record taxes throughout the year at a rate that reflects the expected effective annual rate. The addition of Legacy Valeant's fourth quarter results at their higher tax rate will result in an overall higher blended rate for the year. The step up to this higher annualized rate is recognized in the quarter, so without the benefit of the inclusion of Legacy Valeant's results in reported income.

Tax expense also reflected the nondeductible portion of the acquisition-related costs and charges for legal settlements in jurisdictions of lower statutory rate or in Canada, where a full valuation allowance exists against tax loss carry-forward is available.

Our cash position at September 30th was $598 million, including $6 million of marketable securities. Reported cash flow from operations for the quarter, which I'll remind you again, represents only Legacy Biovail was a very strong $110.9 million.

Financing on our balance sheet includes $1 billion of term loan A, $500 million of term loan B, $1.2 billion of senior notes at seven and 10 years, the Legacy Biovail convertible notes of $350 million face value, and the Legacy Valeant convertible notes of $225 million face value. We also have an undrawn revolver of a $125 million.

We’re pleased with the ultimate results of our merger-related financing. Overall, we reduced our funding by $72 million due to strong cash flows and moved $1.2 billion of that to an unsecured basis. In addition, our overall effective borrowing rate is 5.79% as compared to the expected 6.1% on the merger-related financing. This reduced debts loads, at reduced rates, coupled with our strong cash flows provides a balance sheet well positioned for future growth and capital management.

Finally, I would like to go over a few important calculations that should help you in modeling our new combined company. Our total shares outstanding are currently, approximately, $300 million. Our fully diluted share count, using an all-in-the-money assumption, is estimated to be approximately 339 million shares. Of course, both of the convertible notes are significantly in-the-money due to the significant run-up in the stock price. This created a big swing in the overall dilution to the tune of 18 million shares.

We utilized our strong cash position to help mitigate some of the dilutive effects expected from the merger, as we net share settled for any stock-based compensation units that were required to be issued, and for which the company was subject to requirement to withhold income tax on. This avoided the issuance of approximately 3 million shares.

As we've discussed, the third quarter results reflect a significant number of one-time charges and effectively include only the operating results of Legacy Biovail. At the same time, the weighted average number of common shares outstanding is distorted by the inclusion of three days of post merger share exchanges. Because of this distortion of both the numerator and denominator in the calculation of earnings per share, we've determined it would not be of any value to report cash EPS this quarter, under either the Legacy Biovail or the Legacy Valeant methodologies.

We are currently assessing the most meaningful adjusted EPS calculations to assist management and our shareholders in measuring the company on the go-forward basis. We will advise this measure at our 2011 guidance call and begin reporting this measure in Q1 of 2011.

Mike, back to you.

Mike Pearson

Thank you, Peggy. In addition to synergy savings, we have been actively looking for additional cost savings opportunities to improve our P&L and to create increased cash flow for our shareholders. I would like to highlight one of those today; legal spending or litigation. Similar to when I first arrived at Valeant two-and-a-half years ago, Legacy Biovail's litigation docket is both expensive and expansive.

In the last months, we have settled three of the most expensive cases. Our ADLAC [ph] class-action suit and our malicious prosecution cases with SAC and Gradient. These alone should reduce our legal spend by over $10 million next year and we will continue to actively resolve the remaining litigation wherever prudent.

Because this quarter was primarily a Legacy Biovail quarter from a reporting perspective, we did not make any changes to our segment reporting. But we will now be making changes to our segments beginning next quarter to better reflect how we plan to run the combined business.

We expect to have four major operating segments, US, neuro and other, US dermatology, Canada and Australia, and finally branded generics. Using the last 12 months as a basis, the combined company would have had approximately $1.9 billion in total revenues, broken down into these four operating segments plus an alliance and royalty revenues segment.

Today, we announced that our Board of Directors declared the payment of the $1 post-merger special dividend. This dividend will be paid on December 22nd, 2010 to shareholders of record on November 15th, 2010. Importantly, shareholders will be given the option to receive their dividend in cash or to reinvest the cash amount in shares of the new company. As a reminder, after the payment of this dividend, it is the company's intention to seize payment of any future dividends.

We believe more value is delivered to our shareholders through the investment of our cash resources and growth investments, debt repayment or return to shareholders by the repurchase of shares. In this regard, I am pleased to announce the Board of Directors also approved a $1.5 billion securities repurchase program. Over the foreseeable future, we plan to deploy our cash in a similar fashion as the past; on acquisitions, on debt reduction, and on share repurchases.

Finally, while this quarter was a difficult one to quantify and compare due to all the transactional activity, we are already one month into the fourth quarter and looking towards the future. Each of our business units are now being run by general managers, who are fully committed to remaining true to our growth strategy and philosophy. We run lean organizations with an emphasis on growth and cash generation. We expect that we will see improved results from this operating approach in the fourth quarter and beyond.

I do want to point out four items which will have a negative impact on our reported revenues on a going-forward basis. First, under purchase accounting, Legacy Valeant GSK's alliance revenue will not continue going forward. Second, Diastat sales will continue to erode given Teva's entry into the market. Third, Legacy Biovail's contract R&D business was sold and we will no longer be recognizing those revenues. And finally, ribavirin royalties are greatly diminished; they were less than $5 million in the third quarter and will soon be immaterial.

In spite of these negative events, we currently expect to have total combined revenue of approximately $500 million in the fourth quarter and adjusted cash flow from operating activities of approximately $200 million in the fourth quarter.

Finally, we expect to be in the position to provide financial and strategic guidance to everyone in early 2011. We will again hold a conference call and provide more update at that point.

In closing, while we cannot provide the same level of detail about our third quarter performance as usual, our business continues to deliver solid operating performance, generate strong cash flows and produce significant value for our investors. The integration is moving quicker than expected and we remain quietly confident about our future.

With that, we will now open the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Randall Stanicky from Goldman Sachs. Your line is now open.

Randall Stanicky – Goldman Sachs

Great, thanks guys for the question. Mike, just in light of the R&D spend levels at 4% of revenue, can you just – going forward, can you just talk a little bit about business development, how you're thinking of that in terms of deal size and productivity or activity per year, and then maybe give us your pro forma debt level or comfort level on that front?

Mike Pearson

Sure, thanks. In terms of business development, I think as evidenced by a couple of deals we announced in the last week, we are gearing up that side of the activities again. We will continue to be looking for both sort of the small tuck-in acquisitions that we've been historically doing at Valeant, but we're also looking at somewhat larger but still what I would view as tuck-in acquisitions given the increased size of the company. So, again, one cannot forecast exactly when and what those deals will be but that's clearly a key part of our growth strategy going forward.

In terms of debt levels, I think the Board is comfortable at about 3 times EBITDA in terms of coverage. But given our strong cash flows, we think we'll be bringing that number – we're already below that number and we'll continue to bring that down. So we have a fair amount of capacity in the war chest for business development deals.

Randall Stanicky – Goldman Sachs

This may be a question that you're going to expand on in early '11, but are you able to walk through some of the projects in the pipeline that you've thus far eliminated?

Mike Pearson

The R&D projects?

Randall Stanicky – Goldman Sachs

Yes, exactly.

Mike Pearson

I wasn't planning to. So if you have any questions you can ask me now.

Randall Stanicky – Goldman Sachs

What projects have you – Legacy Biovail projects have you eliminated or killed thus far?

Mike Pearson

Yes. So if we go to slide – if you look at slide 15 you can see the six major projects that we've decided to terminate. We had a series of portfolio reviews. These were Barbados assets and our Barbados subsidiary made the decision to terminate all of these. There is a few others that may also be terminated.

But any project that we were incurring no cost on, we decided not to terminate yet until we get to the next phase of clinical development. The review was based both on strategy but actually a vigorous financial assessment where we did a risk-based MPV, and all these deals we did not feel the investment from our perspective was warranted.

Randall Stanicky – Goldman Sachs

Okay, great. Thanks guys.

Operator

Your next question comes from the line of Gregg Gilbert from Bank of America Merrill Lynch. Your line is now open.

Gregg Gilbert – Bank of America Merrill Lynch

Thanks, I have a few. I think starting with Peggy, can you give us the sales impact, and I'm sorry I don't have access to the slides, they are tough to get. But what was the sales impact of the three to 13 days for Legacy Valeant and what amount of Valeant costs were in COGS, SG&A and R&D?

Mike Pearson

And so I'm going to take that question because it's unfair to Peggy given that she was not part of Legacy Valeant. What we do is we show that – we have a slide that shows products sales growth by segment. We also tell you that for safety, by market, that we last shipped. You can do your own calculations in terms of – if you want to try to sort it out.

It's almost an impossible exercise because you're trying to predict something that actually never happened. But if you do your own rough calculations, it should give you a pretty good number. We are not providing more details below the top line sales number in our queue or in our presentation.

Gregg Gilbert – Bank of America Merrill Lynch

Can you describe why, Mike? Why would you not try to help us understand the reality of the business in the quarter?

Mike Pearson

Well, I think there is a few reasons. One is, they're really not audited. We avoided having to do that and so the numbers that we give you are not there. Also, quite frankly, the costs are a little bit distorted given the different sort of sales cutoffs in the different markets and the expenses continued, so they’re not representative of what the business has been historically or going forward.

I think what I can say is that if you look at our numbers in the Legacy Valeant in terms of how is the business doing versus second quarter and what you'll see in the fourth quarter, is the general trends and terms of COGS, SG&A, et cetera, they're either the same as the second quarter or perhaps even some improvement.

Gregg Gilbert – Bank of America Merrill Lynch

When will the 10-Q be filed and will there be revenue detail in there by product or by product area?

Peggy Mulligan

The only revenue as required under GAAP Gregg is the total revenue. The 10-Q should be filed either tomorrow or Monday.

Gregg Gilbert – Bank of America Merrill Lynch

Okay. Then shifting, looking ahead then on the fourth quarter, the $500 million you expect in 4Q, what's the split between Legacy Valeant and Legacy Biovail? I think it's fair to ask that at least one time before we get into several quarters of history. And then the three to 13-day issue Mike, does that factor in, in any way to the $500 million dollars you expect to report in 4Q?

Mike Pearson

Sure. It's fair to ask anything and I guess it's fair to answer anything. We are not looking – quite frankly, we've reorganized into our new segments and once we get there we may choose or we may choose not to break it out by the different segments, so we are running this business as an integrated company.

I can even tell you what the expectation is across the two companies because I can tell you, what neuro will be, I can tell you what derm will be, I can tell you brand generics will be, I can tell you what Canada, Australia will be, although I am not going to give you that precision on this call. Clearly, if we stop shipping products early in the third quarter that will have an impact on the fourth quarter.

Gregg Gilbert – Bank of America Merrill Lynch

So the $500 million in actual is actually lower than $500 million in terms of real normalized sale?

Mike Pearson

That would be correct.

Gregg Gilbert – Bank of America Merrill Lynch

Okay, all right, thanks. I’ll get back in line.

Operator

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

Marc Goodman – UBS

Just two things; one, Peggy, can you talk about just from Legacy Biovail what is left with respect to the legal expenses and just give us like an annualized type of run rate there? And then second of all, Mike, maybe you can just dive into the Poland, Mexico, Brazil little bit just help us give some color on what happened in the quarter and maybe quarter-to-quarter or year-over-year whatever will be helpful? Thanks.

Peggy Mulligan

Marc, on the legal, as usual the 10-Q disclosure has a extremely robust will be the best way to describe it legal note, so a good detail will be in there. But from a litigation standpoint with these three settlements in the court are really what remains is primarily IT-related litigation from the old Biovail size.

Mike Pearson

And in terms of the brand generic businesses, I talked about Europe which showed a 5%, although it's not a full quarter comparison which really translates into a 13% growth on constant currency versus the market of 7%, so we actually feel quite good about our European business. It's regained full momentum, and so results are very strong.

In terms of Latin America, it grew 27%, very little currency fluctuation in the last quarter. So again, the business has continued to perform quite well down there. And the integration of Bunker and Delta is on schedule. So the Brazilian market is clearly stronger in terms of the underlying market than the Mexican market. As we speak, Mexico continues to suffer from all the issues down there including crime and the economy. Brazil has very robust underlying market growth which we are the beneficiaries down there.

So, we feel those businesses are quite solid. The integration has zero impact at all on them. And so those results we think will continue to be quite robust. We obviously can't control currency, but as we speak, we definitely have tailwinds this quarter in terms of currency.

Marc Goodman – UBS

As far as Mexico, you mentioned crime and things like that. I mean are you able to quantify how much you're losing and is this just temporary?

Mike Pearson

Yes, well, we're not losing. Particularly, it was a comment on the market that historically Mexico has grown from a pharmaceutical market standpoint to 7%, 8% a year constant currency.

This year, the growth is lower single digits. And how much you can attribute to the economy, how much you can attribute to the US economy, how much you can attribute to tourism, how much you can attribute to oil prices, and how much to crime? I can’t, I'm not smart enough to figure that out, but net effect of all that is the slowdown in the overall pharmaceutical market in the country.

Now, again, it's not unusual in these emerging markets that sales growth tends to be a little lumpier. We had the same issue earlier on in Europe where actually the whole market, in Poland and Hungary and Czech, whatever actually declined in the first quarter, but now is again growing back where it used to be about 7%.

Marc Goodman – UBS

Thanks.

Operator

Your next question comes from the line of Corey Davis from Jefferies. Your line is now open.

Corey Davis – Jefferies

Thanks. Mike, I don't know if I missed in your opening remarks, but in the press release your quote was that you were disappointed with the Biovail performance in the Q3. So I guess, I'd ask if you could elaborate if that was more on the revenue or product side or more on the profitability side, because one of those two is obviously much more fixable than the other.

Mike Pearson

Actually, I think they are both quite fixable. I think, quite frankly, it was more on the revenue side. If you look at the growth, it was actually negative growth on a quarterly comparison basis. Actually the growth of the business was quite strong in the first two months of the quarter, in the final month there was a significant drop off.

And I think at that point people knew what was happening, people knew we were early to communicate, and I think people just didn't managed the business as carefully and as closely, at the end which is just human nature and fine. And that's why, I pointed to the script trends.

The actual underlying market demand for the products there has been no change if anything it's been a bit of an uptick. So it was just sort of managing the quarter and making sure that you make the numbers that you say you're going to make.

Corey Davis – Jefferies

At this point in the US from most of businesses, how would you characterize your inventory levels? Are they higher, lower or got normalized?

Mike Pearson

I think our inventory levels are internal in the plants, they are about where they have been historically, one can always improve, and we'll look at that. In terms of distributor, inventory levels they are below a month.

One of the things we're doing is renegotiating contracts with all our major distributors in the US and Canada given our increased volume, which we believe will lead to lower costs.

We're also exploring with them whether we want to take inventory levels down further from around to three or two weeks in these two markets, which – and that's one of the reasons in terms of our outlook for the $500 million, we're taking that into possible account.

Corey Davis – Jefferies

Last question on the future of retigabine, how would you encourage us to model that not in terms of the numbers, but any change in your thinking as to whether or not you like to continue to participate with the deal as it is or possibly restructure that just if anything has changed in that front with respect to the regulatory progress?

Mike Pearson

As you know, we have our PDUFA date is now on November 30th, and our fingers are crossed as are Glaxo's, and I think also the prospective patients, and we can't predict what's going to happen. We remain cautiously optimistic that this product will get approved, we're hoping sooner rather than later. In terms of how we might restructure any kind of agreement, I would say you should be open to that happening, but can't say anything more at this point.

Corey Davis – Jefferies

Great, thanks very much.

Operator

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

Douglas Miehm – RBC Capital Markets

Just a couple questions about the international markets, you'd indicated you're going to be launching a number of products in the EU, Brazil, maybe you could just tell us whether that's all on track and how things look in that regard?

Mike Pearson

Yes, we actually had our colleagues from both Europe and Latin America with us last week as we were working on the 2011 budget. The product launches that we talked about at the beginning of the year are largely on track. So a number of products have been launched in each of the three markets Europe, Brazil and Mexico. So nothing ever gets launched earlier than people predict, but overall we’re staying with our plan.

Douglas Miehm – RBC Capital Markets

Okay, great. Secondly, you talked about the $500 million in Q4 and $200 million in cash flow coming under that quarter. Is that a good guidelines for looking into the future or would you expect that sort of cash flow coming from that type of revenue number to the ratio to remain constant or improve as we look out to 2011?

Mike Pearson

We’re not going to give any guidance on 2011 on this call, but certainly we would be highly disappointed if all of a sudden we stop growing or we stop becoming more efficient.

Douglas Miehm – RBC Capital Markets

Okay. And then finally just recently Pfizer went ahead and bought Brazilian company Teuto, do you think that has any impact on your business down there or what are your thoughts on what they’re up to in that market given how fast it's growing for you right now?

Mike Pearson

Well, it's a very large market. We have a very small share. Pfizer did not have as stronger presence in Brazil as many of the other markets being the largest pharmaceutical company in the world. So I think what they were looking to do was establish a real presence there, and so they bought this company.

I think certainly a lot of pharma companies are looking at Brazil right now, sanofi bought Medley last year that was a significant acquisition. So I think companies will continue to focus on Brazil given the intrinsics of Brazil.

I think our strategy will continue to be looking at acquisitions that are probably below the size of what these larger companies are looking at. We're looking at acquisitions that have revenues less than $100 million, in some cases less than $50 million. And so far in terms of the discussions that we're involved in, we're not competing against any of these larger companies in the discussions.

Douglas Miehm – RBC Capital Markets

Okay, great. Thank you.

Operator

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

David Amsellem – Piper Jaffray

Just a few – lot has been made about pricing pressures in European markets. Can you talk specifically about what kind of pricing trends you're seeing in your present European business and especially Poland, and is there any hint that we may see, any belt tightening by governments with respect to pricing going forward?

Mike Pearson

I hesitate to predict the future, especially where governments are involved in. I can talk to you about what we have experienced last year. Basically in Central Europe, the Polish government and the other governments review prices every year and there was a net decline in price of on average about 3%. That's been pretty constant over the last – at least the last decade. Our net price in Poland last year increased 1%, over that would in 2009.

So far, in 2010, after three quarters, our net price increases has also been right around 1%. One achieves this through mix, so introducing the newer products and starting to bring some of the older products. So we do not expect any significant price increases at all. In Europe, we continued to plan for sort of a 3% decline year-on-year, but then we work like crazy to try to keep changing our mix.

There’s been a – the Polish government did issue a couple of statements a few months ago about looking at pharmaceutical pricing. We are involved with the meetings that are currently happening with the administration. So who know what will come out of it, but we feel – we do not anticipate sort of a major change like one observed in Turkey or some of these other countries over the last couple of years. But that being said, governments can do what they want.

David Amsellem – Piper Jaffray

Yes. Okay, that’s helpful. Switching gears, a Xenazine question; I'd like to get your thoughts on the products specifically, are you still planning to take the controlled release formulation into Phase II for Tourette for what Biovail had planned to do earlier this year?

Mike Pearson

So that's – I mentioned or the slide mentioned that we're in discussions with many of our partners in terms of what we might do with products. Lundbeck is one that we are in discussion with, we've had some discussions and we actually will be meeting with them in Barbados next week to talk about a full range of opportunities.

That asset is managed by our subsidiary in Barbados, and so they'll be taking the lead on that discussion. We will be joining them down there and discussing different ways of potentially restructuring new arrangements and also talk about that particular program.

So no decision has been made yet at this point in time.

David Amsellem – Piper Jaffray

Okay, got it. And one last question. Just coming back to your comments on Mexico, given the instability, I mean, can we assume that on the acquisition front that it's unlikely that you'll see brisk deal activity in Mexico and with the idea of focusing more on Brazil and just maybe talk about your acquisition strategy down in Mexico given your commentary?

Mike Pearson

My commentary would have been the same commentary I had last quarter and last quarter and last year. Mexico has been not performing as well as a country in terms of the pharmaceutical market for some period of time now. I actually do believe the fundamentals are actually quite strong in Mexico. And as you guys know better than I do, everything depends on price.

So, if you can pick up a great asset that's a lot less expensive in Mexico, because of the current economic conditions, we are quite willing to do that, because we do think the market over time will improve. Brazil is super robust right now, the pharma market in Brazil is growing over 15% the market a year right now. So – but in two years that might be down at 7%, because these are very lumpy, they're going to go up and down. So we're looking to build for long-term in these markets.

So I guess this is the long way of saying – long winded way of saying that we think Central Europe, Mexico and Brazil in the long term represent great pharmaceutical opportunities. The underlying growth is even in a bad year is much higher than from the more developed countries. We continue to be active looking for acquisition opportunities in all three.

And while it's always on one hand better to buy a company in a market that's growing really fast and everything is going well, unfortunately the price is usually higher as well. So we are always looking for opportunities to create value and sometimes create value is finding really good assets that are undermanaged in countries where there is problems. So I won't rule out Mexico.

David Amsellem – Piper Jaffray

Okay, thanks.

Operator

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

Annabel Samimy – Stifel Nicolaus

Hi, thanks for taking my call. Just a little bit curious, you've got a tremendous amount of cash flow coming from the Biovail assets, you've got a much more favorable tax rate, you’re getting rid of dividend. So you've got some significant cash flow coming into on this combined entity and I’m a little bit surprised that business development strategy is going to just stay with these small add-on.

So is there – could you just tell us like or should we just assume that the priority right now is that pay down or is this strategy going to be changing over time because that's a lot of cash to be sitting on and generating and not really doing much with other than add-on bolt-on small acquisitions?

Mike Pearson

So I think we have lots of plans for cash. As we talked about, we have the ability now to buy back shares, buy back converts, and reduce debt, and that's clearly one of our priorities. But if you look at our history we've been pretty acquisitive. And if I just reflect back at the prior volume, I think we did 18 or 19 acquisitions in about a year and a half, they ranged in size from less than $10 million up to $300 million. So, I think that you should expect the same.

I think with the higher cash flows the $300 million number might go a little bit higher, but what we're not looking to do is to do another Biovail type deal in the short term. We want to get this new company completely integrated. But again, we will continue to be focused on trying to create value for our shareholders, and we will never rule anything out. But our – the current things that are in our business development pipeline look at awful lot like the things we've done historically.

Annabel Samimy – Stifel Nicolaus

Okay. Are there any particular geographies that you're interested in entering that you aren't already in?

Mike Pearson

No.

Annabel Samimy – Stifel Nicolaus

Okay.

Mike Pearson

At this point in time we do not want to plant any new flags. Part of our strategy in creating value is through cost reduction, and that's what we always focus on that first, let's get the cost up, and if we can get the cost up that will pay for the acquisitions, and then the growth at upside is a lot easier to get cost up in geographies that we're already in.

And we’re – our market share in each of these geographies while growing there is still, there's an awful lot of room. So I would not expect us to – I don't expect that you'll wake up one morning and read about us making an acquisition in a geography that we're not already in.

Annabel Samimy – Stifel Nicolaus

Okay, great. Thank you very much.

Operator

Your next question comes from the line of Lennox Gibbs from TD Securities. Your line is now open.

Lennox Gibbs – TD Securities

Good morning, thanks. This is respect to the post merger integration. What level of cost savings do you expect to achieve by yearend on a run rate basis, that's [inaudible] that respect?

Lennox Gibbs – TD Securities

Rajiv will take that one.

Rajiv De Silva

I think as we have disclosed in the past, our expectation is that we will end up with the run rate of around $300 million in 2012. And for 2011, we expect to achieve about $200 million of those savings. So we expect to end this year certainly at that run rate.

Lennox Gibbs – TD Securities

So you expect at the end of this year at the $200 million run rate, is that what you are saying?

Rajiv De Silva

No. So we expect to end this year at a run rate that will allow us to achieve $200 million of savings in 2011.

Mike Pearson

Yes, part of it, as we said. Some – I would not take 200 and divide by four, because some of it will ramp up over the year. I think as we've talked about most of the development expense will begin this year, but there is some that may trail into the next year, there is some clinical trials that we’ll have to have and that type of thing.

Most of the people will be gone by the end of this year, but some in terms integrated in IT and finance will continue to be with us. We're working actively and gain out of facilities, but some of that may linger. So if you expect $200 million next year each quarter, it will save more. So you can put whatever slope on that curve you want, but we'll move as quickly as we can to get there. But it won't be at the full $200 million run rate on January 1.

Lennox Gibbs – TD Securities

Good. Then with respect to R&D capabilities to drive this facilities and competencies. Can you clarify what stays and what goes?

Mike Pearson

Sure. R&D, we're going to have in US and Canada, the R&D capabilities that we're going to have as we will pedal edema which is our dermatology and topical development activity, where we have a cadre of over 100 people working on development there.

We also contract that out to the outside, so part of that's for internal and part of that’s service based. We also have our neuro team that's down in North Carolina – into North Carolina, so those two remain and everything else goes.

Lennox Gibbs – TD Securities

Now, we do all of the Biovail, sorry, I am sorry –

Mike Pearson

I was just saying we do obviously have R&D capability, it looks a little different, it's generic R&D capability, so we have that in Poland, and Mexico, and Brazil as well.

Lennox Gibbs – TD Securities

So all of the Biovail competencies are gone, is that correct?

Mike Pearson

No, there are some people in the R&D organization that have come from Biovail, so some of our competencies remain, but the buildings will be eliminated.

Lennox Gibbs – TD Securities

Okay, thanks very much.

Operator

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

Michael Tong – Wells Fargo

Hi, good morning. Mike, I thought you said this, but I just want to make sure I heard you correctly with respect to the $500 million in the fourth quarter that includes the catch-up sales related to the early termination of shipment in the third quarter is that right, is that the right way to think about it?

Mike Pearson

That is correct, and we also just to be clear said approximately $500 million.

Michael Tong – Wells Fargo

Okay. And then –

Mike Pearson

We’re just getting our arms around this business, and so we want to give some sense of what we expect to do in the quarter. But yes, to the extent that we stop shipments early in different parts of our geographies which we did, obviously those products have now been shipped and have now been sold.

So, in a sense, looking at overall performance, so obviously our growth rates, our products in the ex-Valeant side should be higher in the fourth quarter than the third quarter because in a sense, we'll have longer quarters for most of those businesses.

Michael Tong – Wells Fargo

When you say ex-Valeant, do you mean Legacy Valeant?

Mike Pearson

Yes, I am sorry, the Legacy Valeant

Michael Tong – Wells Fargo

Okay. And then secondly could you help us think a little bit about what that tax rate for 2011 might be. I know you’re not providing guidance, but what's a good way to think about it?

Mike Pearson

I think about it awful lot and as soon as I figure out a good way to think about it, I'll tell you. We’re not giving any guidance right now.

Michael Tong – Wells Fargo

Okay.

Mike Pearson

I’m sorry. It will be lower, I guess we'd say it will be lower than Valeant's tax rate would have been and higher than Biovail's would have been. That's the range.

Michael Tong – Wells Fargo

Okay, fair enough. Thanks.

Operator

Your next question comes from the line of Hari Sambasivam from National Bank Financial. Your line is now open.

Hari Sambasivam – National Bank Financial

Thank you. Two questions. First of all could you kindly explain how you are sort of thinking about Biovail, the Legacy portfolio and the generic portfolios? I am just kind of wondering these are historically declining assets with declining prescription trends and so on. And I am just wondering do you continue with the pricing strategy that Biovail took or do you have a different strategy to manage these two lines.

And the second question I have is in terms of your manufacturing assets do you have a broad sense of what facilities might be consolidated and what a sort of a broad range might be in terms of your manufacturing synergies over say a two or three-year period? Thank you.

Mike Pearson

Sure. In terms of the Legacy I think you pointed two Legacy I assume you are talking about Wellbutrin and –

Hari Sambasivam – National Bank Financial

Well there is [inaudible] there is a number of old products in there in Legacy portfolio in addition to Wellbutrin?

Mike Pearson

Okay, sure. So for each of the products we are taking a hard look at what if anything we can do that we do have some different ideas that we’ve already started to implement. Again, we're cautiously optimistic.

As I mentioned, when I first joined Valeant, we had a similar set of assets that had been in decline for a number of years and maybe we were a little bit lucky but we were able to grow those assets and return to growth. So that's the objective.

Whether we will be able to achieve that objective, I guess we'll see, but we're certainly going to try the hardest. We do have some ideas, we do think there is some life, but we're not providing any guidance on what that might be.

In terms of manufacturing, if lesson number one in integrations is move quickly on rationalizing the things you're going to rationalize, lesson two is be careful on manufacturing. An awful lot of pharma companies have gotten into a lot of trouble from manufacturing standpoint and given the margins we have on our products, we're being very, very careful.

So, certainly we will look at manufacturing, certainly we will look at trying to continue to achieve synergies, certainly that exercise has already started.

Hari Sambasivam – National Bank Financial

So when you hide off those 675 people, effectively for the time being, there are going to be no major changes in that particular line for the time being?

Mike Pearson

No, I think what we've said is when we talk about our $200 million and $300 million of synergies, none of those people are included in those, that's all we're saying.

Hari Sambasivam – National Bank Financial

Thank you.

Operator

Your next question comes from the line of Graham Tanaka with Tanaka Capital. Your line is now open.

Graham Tanaka – Tanaka Capital

Yes, hi. Sort of related to the last set of questions, is there kind of an organic growth rate we can understand for the existing operations? I know it's hard to put the two pieces together, but kind of an average organic growth rate beyond which you will then supplement with acquisitions?

Mike Pearson

We’re not prepared at this time to talk about one. I think what we've said is that we will have a guidance call somewhere. I think it was early of January last year and somewhere roughly in the same timeframe. When we're still putting together our budgets, our forecasts, our work for next year, and it would be pretty mature to answer that question at this point. But we are working hard to get a sense for what that might be.

Graham Tanaka – Tanaka Capital

Okay. And kind of related to that, the R&D that's going to be remaining, what kind of a source of growth does that do you have in your minds, that might provide future growth and are there any hills or valleys in that pipeline in the next few years?

Mike Pearson

We have one in which we hope is a significant hill and that's retigabine. So we keep our fingers crossed there. And that certainly should be – if it gets approved and it's as successful as we hope should be a significant source of cash growth, the top line will be largely booked by Glaxo under the current arrangements. So it will be more of a cash flow infusion opposed to up right infusion. We remain again cautiously optimistic about a lot of our derm pipeline and some of the others.

But, again, it's a lot of singles, maybe a double or a two. Again in the branded generic business, we're launching 10 plus products a year per market, all of them are small, but they add up. So, yes, we do have from our pipeline around the world, we will continue to have growth, but it's not lumpy, it's not blockbuster. Retigabine is the only thing that has the potential to be a true blockbuster I believe.

We are launching products. In the US we talked about launching two new SKUs, which should make the three SKUs for the year in CeraVe. CeraVe is growing quite nicely. Part of that growth is because of the new launches that we are bringing into the market. So yes there is an element of organic growth that needs to come from our R&D, because even though we spend less than other people, we expect that to be productive. And if we don't get growth out of that R&D, we'll get rid of the rest.

So yes, we do assume that we'll have productive R&D spend.

Graham Tanaka – Tanaka Capital

Great, thank you. And the last is on acquisitions. What kind of EBITDA multiples are you seeing out there and what is the picture as far as accretion or your views on accretion?

Mike Pearson

Yes. So we don't worry too much about EBITDA multiples, because what we're looking for, what we look, sort of the at least existing EBITDA because the question is what can we do with this asset once we have it. We just picked up an Australian asset that was about one-time sales, it wasn't making a ton of money, but basically we took the asset and took none of the expenses and put it into organization. So on day one it starts making money.

BLX was able to acquire that, so we were able to enjoy the Biovail corporate structure in that deal as well. So what we're looking for is kind of undermanaged assets that don't make a lot of money, but has the potential to make a lot of money, eliminate the costs and put them in and try to buy them as inexpensively as possible.

So we do have the remodels, we have IRRs and rates of return. But in terms of sort of classic EBITDA multiples that's probably less relevant for the kinds of acquisitions that we do.

Graham Tanaka – Tanaka Capital

Great, thank you very much.

Operator

And your last question comes from the line of Juan Sanchez from Ladenburg. Your line is now open.

Juan Sanchez – Ladenburg

Actually most of the questions have been asked. I have just a couple. From the 80 million shares on convertible debt, how many of those are attributed to each one of the two convertible debt facilities?

And the second question will be in respect to future dilution coming from options given to management and employees, what should we think and how should we think of that like 1%, 2% outstanding or –?

Mike Pearson

I'll let Peggy answer this.

Peggy Mulligan

Sure. If you go back to one of the slides I spoke to our current outstanding issued in outstanding share count is 300 million. If you were to look at our existing options converts et cetera all on and in the money assumption for options and using the converts of today's market price you would have a fully diluted count of about 339 million shares.

Off that 18 million of the dilution comes from converts and frankly fairly even between the – or the Legacy Biovail and the Legacy Valeant converts and of course and the convert dilution can't continue as the share price move.

Juan Sanchez – Ladenburg

I think there are some new options being issued on shares.

Mike Pearson

So currently we have not issued any new options or shares. We will – as a company we will in the normal course of business do so, but nothing's being granted or issued at this point.

Juan Sanchez – Ladenburg

Got it. Thank you guys.

Mike Pearson

All right, well thank you very much, and we’ll look forward to talking to you in a few months.

Laurie Little

For those of you who are looking for the slide presentation, you need to go into the event details through our website and to our Investor Relations and there should be a PDF file. Please let me know if you have any other issues. Thank you very much.

Operator

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

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