Barr Pharmaceuticals, Inc. Q4 2007 Earnings Call Transcript

Barr Pharmaceuticals Inc. (BRL)

Q4 FY07 Earnings Call

February 28, 2008, 08.30 PM ET

Executives

Carol A. Cox - Sr. VP, Global IR and Corporate Communications

Bruce L. Downey - Chairman of the Board and CEO

William T. McKee - EVP and CFO

Analysts

Elliot Wilbur - Oppenheimer

Adam Greene - J.P. Morgan

Michael Tong - Wachovia Securities

Gregg Gilbert - Merrill Lynch

Frank Pinkerton - Banc of America Securities

Ronny Gal - Sanford C. Bernstein & Company

Randall Stanicky - Goldman Sachs & Co.

Rich Silver - Lehman Brothers

Marc Goodman - Credit Suisse

Ken Cacciatore - Cowen & Co.

Robert Jones - UBS

Corey Davis - Natexis

David Buck - Buckingham Research

Tim Chiang - FTN Midwest Securities

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Barr Pharmaceuticals Conference Call. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn over the conference to our host Carol Cox, Senior Vice President of Investor Relations. Please go ahead.

Carol A. Cox - Senior Vice President, Global Investor Relations and Corporate Communications

Thank you Jeanne. Good morning everyone and welcome to Barr's earnings conference call for the quarter and year ended December 31, 2007. Earlier this morning, we issued our press release through PR Newswire and have posted a copy on the Barr website at www.barrlabs.com. A copy of the release has also been provided to the SEC on Form 8-K. This morning's conference call is being webcast live and can be accessed through our website. A replay of the call will be available beginning at 10:30 A.M. Eastern Time on February 28 through 11:59 P.M. Eastern Time on March 6th.

I would like to take a moment to inform investors of several housekeeping items. First, since the company changed its fiscal year from June 30 to December 31 at the end of calendar 2006, and acquired PLIVA on October 24, 2006, the comparison information for the year ended December 31, 2007 and the 12-month period ended December 31, 2006, which is still unaudited is not very meaningful. On today's call and in our press release please note that 2007 refers to the Barr calendar year ended at December 31, 2007 and 2006 refers to the 12-month period ended December 31, 2006 and includes PLIVA results from October 25 through December 31, 2006. Secondly, I would like to let everyone know that we do intend to file our Form 10-K tomorrow morning on Friday. And before we proceed to the introduction to prepared remarks, I would also like to remind investors that we incorporate on this conference call by referencing risks and uncertainties set forth under the heading forward-looking statements in our earnings release and in our most recent filings with the SEC, all of which are available in the Investor Relations section of our website. So statements made by management contain information that is not historical, these statements are essentially forward-looking statements and are subject to risks and uncertainties and consequently actual results may differ materially from those expressed or implied in today's conference call.

Speaking on today's call are Bruce Downey, our Chairman and CEO who will provide an overview of the financial results for the quarter and the year-ended December 31, 2007 as well as an overview of the company's guidance for 2008 and Bill McKee, our Chief Financial Officer, who will review the financial results for the quarter and the year in greater detail and provide information about the forecast as well.

With that I would like to turn the call over to Bruce.

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

Thanks Carol, and good morning everyone. For the quarter, our revenues came in at $668 million or $669 million and adjusted earnings at $0.79 per share and as Carol said I don't think comparisons '07 to '06 are pretty meaningful because we acquired PLIVA in the middle of the fourth quarter last year. So the stand-alone I think we did extremely well and I am pleased with our results for the quarter. For the year, we… revenues at $2.5 billion and earnings… adjusted earnings per share at $3.16, again as we said before comparisons with prior year aren’t terribly meaningful given the transforming events that occurred during 2006 and the change in our fiscal year. I would note that beginning of the year our guidance for 2007 was $3 to $3.30 and remarkably even to me it came in exactly in the middle of the range at $3.16 despite all the moving parts that's going different ways in the P&L.

There are few items for the quarter that I would like to mention that are in the adjustments. First we’ve taken a reserve for the payment to Watson of monies owed under an agreement executed between Watson… actually between Shire and Duramed in the late 1990s relating to [inaudible] product. Under that agreement we are obligated to make a payment to Shire… now Watson upon the achievement of $100 million in profit from that product over a five-year period. It is now in our judgment more likely than not that that will occur and we've taken appropriate reserve to reflect that future payment.

Also in the quarter, there is a…. we discovered an error that we made in our second quarter financial statement where we failed to take a $10 million charge related to the extraction transaction that occurred in that quarter. That error was corrected in the fourth quarter and as a consequence the year… obviously the earnings for the year aren't effected as entries [ph] completely offset one another. But the consequences of the earnings in the fourth quarter are negatively impacted by that… correcting that error and the earnings in the second quarter were positively affected by the error. So I call that to your attention and it will be fully described in detail in the 10-K, which Carol mentioned will be filed tomorrow.

Just turning to some of the non-financial items that occurred during the course of the year and the quarter, I think we had made tremendous progress on a number of points and I’ll just run through some of those for you.

For the PLIVA integration the U.S has been completed now for a period of months. All of the business is being conducted under the Barr Laboratories label, through the Barr Laboratories sales force and organization that went very smoothly and completely seamless to our customers and really to ourselves. These [inaudible] is still scheduled close in the late summer early fall of this year with one exception there will be a small product that we make the contract… the contract manufacturer for another firm that will stay there through the period of that contract and we aren’t transferring that particular… particular product but again the benefits we expect to receive from that closure are on schedule and are actually being realized as we speak.

Third big item is when we acquired PLIVA you’ll recall there was a significant FDA issue involving the Zagreb facility and PLIVA had a remediation program that involved 135 individual commitments to correct problems at the site. That is now being completed and we have notified the FDA that we’re ready for re-inspection at this Zagreb facility. Despite of the problems there as you recall the facility remain eligible for FDA approvals and actually as we see that the approval over the course of the year and we are confident that we had made all the changes were necessary to bring the facility into complete FDA compliance and we look forward to having the inspection and moving that for over hang from the facility.

Also on the R&D side I think it's important to note that we’ve completely revamped the product selection process at PLIVA and to some extent at Barr to recognize that we have global opportunities now on our R&D portfolio as well as vertical integration opportunities in our portfolio. That process has been revamped regularly adding new products to the development program. In 2007 we spent something around $250 million on R&D, we expect that to be up in 2008 and as in the past we continue to look at our own organic growth, the R&D, output of our staff as the biggest return that we can achieve for our shareholders. We have now about 75 applications pending in North America, ANDA’s Canadian Application, NDA’s, far more than that around the world and we continue to be very optimistic about the prospects for the products that we are selecting.

I'll just point out a couple of items within that portfolio. There is 30 ANDAs pending. We filed something around 30 for the year, actually completed the work on more than that and had a very large number of filings in January. We simply couldn't get the paperwork filed in time to… in December to get it all in. But 30 applications, 60 ANDAs, 10 of those are injectable, 3 NDAs, a number of products pending in Canada and then as I said even more around the world. One other item that I think worth mentioning is, during the quarter we and you’ll see in our 10-K, we received a notifier that assorting the patent challenge on our SEASONIQUE patent. We believe that patent is quite strong but given the timing of the issuance of the patent, we would not be entitled to a 30-month stay. We will be filing suit against the company that has asserted the patent challenge and we will be seeking an injunction prior to the expiration of our exclusivity late next year. So, we again feel very positive about that patent and about the case and the full details will be disclosed in the 10-K, as Carol mentioned it will be filed tomorrow.

Also during the year on the balance sheet, we… after the acquisition of PLIVA, we had bank loans something over $2.4 billion related to the transaction. During the course of the year, we repaid $600 million of that. The bank loans are now at balance of $1.8 billion and we are repaying those notes at the rate of $50 million a quarter and made those payments out of cash flow and our cash reserve. As we mentioned earlier, we have plans to implement a more permanent financing structure that will have as part of our capital structure a long-term debt, the capital markets really as you… those of you who read the newspaper are aware not particularly favorable to those trends of issues right now. So we are continuing to rely on the bank after we put in place. From a part PLIVA, pay it down and when the time is right we will proceed with the financing that we would like to implement again to incorporate that as part of our permanent capital structure.

Looking forward for 2008, we expect our pre-tax income to grow in the range of 15% to 20% and then on adjusted EPS of $3.05 to $3.35 and I’d point out that the… that I have given way to the trend and our estimates no longer add back the charge for stock compensation as we have done in the past. That in essence lowers our forecast by about $0.20 a share year-over-year and on an apples-to-apples basis again I think since your estimates and First Call all excluded probably more appropriate for us just to adopt this method even though I don't think it's quite right. If you look at our estimates for the year, the $3.05 to $3.35 and compare that to the analyst reports [inaudible] we have done there are really two differences. If you look line by line as we did over the last few days, most of the items are basically consistent with one and other. There are two exceptions for that.

The first is the tax rate that we have incorporated in our estimate is really significantly higher than the tax rate that is included in the estimates and it is possible the tax rate could come down during the course of last year. We had certain items that allowed us to lower our tax rate over the year compared to what we predicted in the beginning of the year but those were really one-time items, tax-planning opportunities that we took advantage off and something we can’t really anticipate or schedule out. So, we have taken what I think is a pessimistic but really the appropriate approach at this point in the forecasted period and have a somewhat higher tax rate than are on the analyst reports. And secondly, our Alendronate sales are below… clearly below the $100 million estimates that some analysts had in their forecast over the past few weeks and months and that’s the second major difference between our forecast for 2008 and the analyst forecast that are on the street.

I would also point out that our earnings per share, adjusted earnings per share exclude business development and patent challenges other than scheduled launches that we know are going to take place. And during this course of this year we have four, five significant opportunities in the patent challenge area, the most… the nearest term is Yasmin which… the trial is completed in the fall of 2007 and we expect a decision within the next two, three weeks and then as the year unfolds we expect to complete the settlement of the TRI-CYCLEN LO case, which we announced earlier this year. We have [inaudible] a number of opportunities and as we go on I mentioned this before in our calls, it becomes increasingly difficult for us to give accurate guidance and simultaneously exclude the patent challenges because they are a significant part of our business and significant number of opportunities, but we've continued for the time being to exclude those from our estimates and therefore those aren’t included in the $3.05 to $3.35 estimate that we have given.

Finally, if you just look at the individual components of the business, we expect our U.S. Generic business to be relatively flat, the non-OC business to be up somewhat, the OC business to be down somewhat and in the European business, we expect that to be up significantly year-over-year and particularly our U.S. Proprietary business to be up significantly year-over-year. We have in our portfolio now Plan B, which is doing extremely well, ParaGard, which is doing extremely well, and SEASONIQUE, which is doing extremely well. All of which are being promoted and we expect those products to take our Proprietary business to new heights in 2008.

Now, with that I will turn the program over to Bill. I think he can give you some more detail on the individual line items in the financial statements and following his discussion we will take your questions.

William T. McKee - Executive Vice President and Chief Financial Officer

Okay. Thank you, Bruce. I guess I’ll just begin with a reminder as many people who have been before heard this but for those that are new, our P&L includes both results from continued operations, as well as discontinued operations. Specifically for Barr, those discontinued operations include the results of our Italian business, which we divested in the third quarter, our Animal Health business, I think we discussed on our third quarter conference call was spun off in a very successful IPO in October and our country operations in Spain, which were divested at the end of December.

Total revenues for the quarter were up about 18% compared to the prior year and totaled $669 million. Total revenues consisted of product sales of $628 million, Alliance and Development revenues of $28 million and other revenue from non-core activities of about $12 million. The total product sales grew to $628 million in the December quarter up about 20% or $104 million compared to the same period last year and that increase was driven primarily by higher generic product sales though proprietary product sales also contributed to the overall increase. Sequentially, total product sales increased about $69 million or 12% as compared to the September quarter driven by higher generic product sales. Sales of our generic product sales were $506 million during the December quarter, up about 19% or $79 million as compared to last year's total of $427 million. Of the $506 million, North American sales accounted for $310 million while the remaining $196 million were recorded in our European and Rest of World markets. Sequentially, generic product sales increased $71 million or 16% as higher sales in both North America and our European and Rest of World product lines contributed to the overall increase.

European and Rest of World sales growth was driven by strong performances in Germany, Poland, and in the U.K. Generic OCs delivered $118 million in the quarter, an increase of about 3%, compared to last year. This year-over-year increase primarily reflects the launch of TriLegest in October and higher sales of Kariva, which more than offset lower sales of other OCs including Balziva, which experienced the year-over-year decline due to strong sales in the fourth quarter last year when we launched the product and sequentially, generic OCs increased slightly primarily due to the TriLegest launch.

Looking at our non-OC generics business, non-OCs in North America totaled $192 million in the December quarter, up about 5% as compared to last year due to higher sales of PLIVA's U.S. product line and of course that reflects a full quarter's activity in the current year. Last year's fourth quarter for all of our line items, revenues and expenses PLIVA was included in our numbers for about 68 days in last year's quarter. So we have a full quarter activity across all the line items in the P&L this year. Sequentially, our non-OC sales in North America increased $29 million due to increased sales of Fentanyl and Claravis, as well as higher sales of Azithromycin in anticipation of the start of the winter cold and flu season. Rest of World sales totaled $196 million in the quarter and were up versus $129 million last year reflecting the full quarter's results. These sales were again driven by our key markets including Russia, Poland, Croatia, and Germany, which contributed a little more than two thirds of those Rest of World sales. Those sales also reflect the addition of product sales through the acquisition of O.R.C.A., a specialty pharmaceutical company in Germany, which we disclosed earlier in the year. Sequentially, the Rest of the World generic product sales increased about $38 million reflecting volume increases across most of our major markets primarily due to normal seasonal increases related to antibiotic and respiratory products across multiple markets.

Turning to our Proprietary Product sales, the sales of Proprietary Products during the December quarter totaled $122 million, up 25% as compared to the same period last year. This increase reflects higher sales of Plan B, higher sales SEASONIQUE, as well as the contribution of products that we acquired from PLIVA. And these increases more than offset the expected decline in sales of SEASONALE, as well as a decline in sales of ADDERALL IR, which we acquired from Shire and launched in the fourth quarter last year. On a sequential basis, Proprietary sales were down slightly as higher sales of Plan B and ParaGard were offset by lower sales of Dex IR and lower sales of SEASONALE.

Alliance and Development revenue totaled about $28 million in the December quarter and declined about $6 million compared to the prior year primarily due to lower profits from Teva on generic Allegra and lower reimbursements from the Department of Defense on our Adenovirus project. These declines more than offset higher development revenues earned into our license and development agreement with Shire.

Turning to the margins. Our… first on the generic product line. Our reported gross margins on generic products for the December quarter was about 47%, up as compared to about 46% in the prior year, while our adjusted margins in the current period was around 52% as compared to 64% in the prior year. The decline in our adjusted margin as compared to last year reflects the income... reflects the impact of the mix of PLIVA products, which accounted for 51% of generic product sales in 2007 versus 41% in 2006 and the inventory adjustment that Bruce mentioned at the beginning of the call, that was... I think Bruce mentioned it is a $10 million adjustment. It was a $12 million adjustment affecting cost of sales in the fourth quarter. Proprietary products. Our reported margins for the proprietary product line for the December quarter was 55% as compared to 66% in the prior year, primarily reflecting the impact of the Cenestin milestone payment that Bruce also mentioned. Our adjusted margins on the proprietary side were about 83%, up 4% compared to prior year, driven primarily by improved sales mix.

The operating expenses, starting with SG&A. SG&A expenses were about $207 million for the December quarter, up about 23% compared to last year's total, reflecting a full quarter of SG&A expense for Europe, as well as higher legal costs supporting increased activity in the U.S. On a sequential basis, reported SG&A increased $16 million, up about 8% primarily due to increased seasonal advertising promotion and other sales and marketing expenses in Europe. Research and development costs in the quarter totaled about $62 million, down about $5 million compared to the same period last year and sequentially, R&D expenses were in line with third quarter levels. The net interest expense for the December quarter was $30 million compared to $23 million of net interest expense in the same quarter last year. On a yearly basis, the net interest expense was $159 million, compared to $7 million last year and the difference of course reflects the impact of the debt we occurred in the PLIVA acquisition. As Bruce mentioned earlier, as of December 31st, we have $1.8 million remaining on the acquisition debt, and total debt is just under $1.1 billion, while our cash and marketable securities totaled around $550 million at the end of the year. For the year, we made about $620 million of principal payments on the acquisition debt.

Moving down to other income and expense, that line item totaled $9 million in the fourth quarter and included a gain of about $3 million related to dissolving the capital insurance fund that we have been part of. That transaction occurred in December and resulted in a $3 million gain for us. Moving to income taxes, the GAAP effective tax rate for the three months ended December was a bit over 28% and was lower than expected primarily due to the impact of some one-time tax-planning strategies that we executed in the fourth quarter and Bruce alluded to those in his opening remarks and on an adjusted basis, the tax rate was just under 28%, again also benefiting from some of these tax-planning strategies. EBITDA for the quarter was about $148 million and little over $600 million for the full-year. We also made some investments in capital spending in the fourth quarter totaled about $41.5 million and brought our annual total on CapEx investment to about $121 million, consistent with the guidance that we had given in the beginning of the year.

I just want to take couple more minutes and just go through a couple of other pieces of the P&L from a guidance perspective. I think Bruce has sort of hit the highlights in terms of the revenue mix, we are looking for about a 10% to 15% increase in our non-OC generics business in the U.S. and about a 10% to 15% decline in our generic OC business in 2008 versus 2007. That decline on the OC side is somewhat higher than the 5% to 10% decline that we typically forecast and primarily reflects the additional generic competition we expect on generic PLIVA later on in the year. The 10% to 15% growth in the non-OC products is expected to be driven by new product launches and that are expected to more than offset declines, anticipated declines in some of our other products based on anticipated competition coming in the second half of the year. Finally, rounding up the generic product side for 2008, our European and Rest of The World sales were expected to grow very nicely in 2007 about 15% to 20% reflecting higher sales in Russia, Poland Germany, and the U.K.

On the Proprietary segment, we're… as Bruce said looking to hit new highs on the Proprietary sides, looking for sales growth there around 20% over the 2007 year driven by year-over-year growth in Plan B, ParaGard, and SEASONIQUE. Alliance and Development revenue expect that total from $122 million in 2007 to increase modestly in 2008 as the amounts received under our development agreement with Shire more than offset expected declines from Allegra and from the Department of Defense reimbursements.

Margins, our reported generic margins for the year, we see it to be up slightly compared to the 2007 results. And we would also expect that that the adjusted margins would also be up slightly. And on the Proprietary side reported margins, again we expect to be up slightly in '08 compared to the reported margins of 68% in 2007 and also expect the adjusted margins on the Proprietary side to be up a bit.

The press release talks about the expected levels of operating expenses of SG&A and R&D so won't need to repeat those. On the net interest expense, we do anticipate a decline of around 20% in the net interest expense line reflecting lower... both lower interest income due to lower cash balances, as well as lower interest expense due to lower debt balances. On a... from a capital spending perspective, we expect the capital spending in 2008 to be up versus 2007 to be in the range of about $150 million to $175 million reflecting increased investments in our biologics capabilities, as well as higher investments in global management systems to support a number of initiatives around the company including quality and other areas and as Bruce mentioned earlier, our financing activities in 2008 that we are currently reflecting in the forecast include the scheduled debt repayments of $200 million on our acquisition debt.

Just a word on our adjustments, Bruce mentioned the difference between '07 and '08 in terms of the treatment of the stock compensation expense. We will again have adjustments in 2008 related to product amortization on both the Barr and the PLIVA side, as well as the same adjustment we had in 2007 related to incremental depreciation of cost arising from purchase accounting adjustments associated with the PLIVA acquisition. We expect that those adjustments would total around $190 million in 2008.

On the income tax side, we estimate that our income tax rate on adjusted earnings will be in the range of about 35% to 38% or 39% in 2008 as compared to the adjusted rate of little under 30% that we realized in 2007. That increase again as Bruce had mentioned earlier primary reflects the fact that there were a certain tax benefits that benefited the 2007 rate that are currently not being forecasted in the 2008 rate and also reflects a shift or change in the proportion of income between 2008 and 2007 between the U.S. and Europe.

And with that, Carol I turn it back over to you.

Carol A. Cox - Senior Vice President, Global Investor Relations and Corporate Communications

Great. Thank you Bill. Gene, if you could just open up to questions and answers please and just remind everyone, if you could please limit your questions to one, so we can get to everyone who has a question we greatly appreciate it.

Question and Answer

Operator

Thank you. [Operator Instructions] And we do have a question from Elliot Wilbur of Oppenheimer. Please go ahead.

Elliot Wilbur - Oppenheimer

Thank you good morning perhaps...

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

Good morning Elliott.

Elliot Wilbur - Oppenheimer

Perhaps one long question, first I guess with respect to, again decision to not including contribution from patent challenges in your guidance obviously getting very difficult to grow the business any more without having some of those opportunities in the mix but may be could you just once again sort of walk us through some of the potential possibilities in terms of what you think may come into play in 2008, obviously we're, well aware of Allegra D and Yasmin and I want to confirm that you also don't have anything included in your guidance for any potential economic benefit from a settlement on TRI-CYCLEN LO but there's also a couple other products, it seems like that could start to may be into the round with a possibility in the later half of the year? Thanks.

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

You are right, that's getting increasingly difficult and I would acknowledge your idea which you can convey to Carol, but perhaps we should consider giving the base estimate and then sort of an incremental estimate of probably waited for our patent challenges. So, you clearly delineate the two. I think that's an idea that we are going to explore. So, I will try and just sort of list the ones that we have now while we think about your suggestion. We have NASACORT coming up. If we don't complete the settlement of TRI-CYCLEN LO we expect that case to go to trial and be decided this year. We are expecting the settlements to occur and we have not included any benefit in '08 for TRI-CYCLEN LO settlement. We have Yasmin, which is a waiting decision and we expect that to be decided literally from the next couple of weeks given some communication between the parties and the court on sort of housekeeping matters. We have with the NASACORT trial coming up. We have the Pramipexole trial coming up, Galantamine and Galantamine extended release opportunities. I am sort of looking across at Fred Killion, that's pretty much the table for 2008 but as you count those up, there are four or five big opportunities there and in my opinion unlikely that we would go through those opportunities without seeing some benefit. And if we don't see benefit in '08, it's because we have reached successful settlements that make sure that we receive benefit in '09, '10 and later years in exchange for settling the case. So I feel very strongly that the portfolio is good, as it has ever been, probably better than it has ever been, we’ve got number of opportunities but we have stuck with our historic practice of not including patent challenges or business development opportunities unless there is a scheduled launch that we can count on. That's the end of the answer.

Carol A. Cox - Senior Vice President, Global Investor Relations and Corporate Communications

Jane, do you have the next question?

Operator

Question is from Adam Greene of J.P. Morgan. Please go ahead.

Adam Greene - J.P. Morgan

Thanks. Good morning everyone.

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

Hi, Adam.

Adam Greene - J.P. Morgan

Hi. Question on your R&D productivity, you kind of alluded to that in your prepared remarks, but over the last eight months or so there has been about a dozen Paragraph IV filings with about half of the things first to file potentially. It seems like a large number of Paragraph IV challenges even for you relative to historical levels. So has anything changed that’s speeding up your timeline there? And also I just wasn't quite sure why there is a 30-month stay on SEASONIQUE, if you could elaborate on that?

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

Because the application forced the... I'll answer the second question first. The ANDA for SEASONIQUE that precipitates the challenge was filed prior to the listing, prior to the issuance and listing of the SEASONIQUE patents. So under the rules of The Hatch Waxman as amended in the Medicaid Modernization Act, it’s not entitled to a 30-month stay. But, that doesn't mean we can't seek and we do plan to seek an injunction to join the launch of the product during the tendency of the case. Back to the first question about the productivity, I do think we're very productive in our R&D efforts. We are projecting probably 40 filings this year and as we have gotten... as time has passed, it turns out that a higher and higher portion of these filings we make end up being paragraph for opportunities. So, what you observed in the fourth quarter and the year, really is just a reflection of a trend that's been ongoing for a long time and fortunately we have a very capable R&D group that makes us first to file on number of opportunities and we have the legal expertise to convert those into sales and profits for the company. So, I don't look at it as a bad thing, I look at as good thing, it’s playing to our strength.

Adam Greene - J.P. Morgan

Great. Thanks.

Operator

The next question comes from Michael Long of Wachovia Securities. Please go ahead.

Michael Tong - Wachovia Securities

It's actually Michael Tong, but...

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

Hi Michael, I know it’s Michael Tong.

Michael Tong - Wachovia Securities

Bruce, or may be this is actually a, Bill question. Looking at the SG&A guidance, looks like you are at about 31.5% of revenue if I just take the midpoint, it seems to be running a little bit higher than what you've done in the 2007 quarters. So, what's behind that, can you shed some light on that please?

William T. McKee - Executive Vice President and Chief Financial Officer

Yeah, Michael I think the short answer is it's higher sales and marketing costs both supporting the proprietary business in the U.S. and higher sales force cost and other promotional market activities in Europe. That’s sort of the short answer as to why we see that going up.

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

In fact, I think the G&A number excluding the sales and marketing number Michael is flat or slightly down year-over-year.

Michael Tong - Wachovia Securities

Okay. All right thanks.

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

Just pointing out one item and adding to Bill's comment, we have about 1,500 sales representatives and marketing staff in Europe and just that the FX effect of the increase in the decline in the value of dollar over the last two years is probably increased the cost per rep by about 30%.

Operator

Next question we have is from Gregg Gilbert of Merrill Lynch. Please go ahead.

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

Good morning, Gregg.

Gregg Gilbert - Merrill Lynch

Morning. Bruce, I just want to clarify for sure whether or not your guidance methodology has changed at all and may be if you are in a good mood today and can give us...

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

I'm always in a good mood.

Gregg Gilbert - Merrill Lynch

May be you could share what those scheduled launches are? And then second part of the question, can you provide a little more color on the Fosamax environment and comment on whether you think Merck's contracting initiatives I guess on the brand made this any different from what has become a normal sort of disappointing generic launch environment? Thanks.

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

I'm making notes, because you exceeded the question number limit. On our guidance, I guess, there are two changes, one, that we've made and how we approach our guidance. The first is the stock comp, which is not being added back into the adjusted earnings as it has in the past year. And the second is a change that was precipitated by the Allegra launch a couple of years ago or the summer, I guess of '06 where at the time of the earnings announcement that normally occurred with our forecast, we knew that within a week we are going to launch Allegra. We have the inventories ready, we had the agreement with Teva, we actually already approached customers. So we delayed our earnings announcement by a week so that we could incorporate what we knew was going to happen into our estimates for the Street.

So the other change that we have made while it is to now include any scheduled launches. Those would be patent settlements that… where we have a scheduled launch and in rarer cases could include a launch at risk, as you know, we have done that rarely but it is possible we would do it again as we did in Allegra. And obviously if we were to do that, we would include the numbers but we would not announce in our guidance what that would be, that would be not to our competitive advantage. Again, I’d emphasize that it would be rare but possible that those events could occur. So we've made that change and specifically in response to the situation that arose when we launched Allegra a few quarters ago. The second was, did the Merck's activities affect the Alendronate market, I would say it did. They probably did have an affect. I wasn't close to the negotiation with the individual customers but obviously they retain business that I would have previously expected to go to one of the generic competitors, and I think that did have an impact although I can't quantify it because I wasn't directly involved in those negotiations.

Gregg Gilbert - Merrill Lynch

Thank you.

Operator

The next question we have is from Frank Pinkerton of Banc of America. Please go ahead.

Frank Pinkerton - Banc of America Securities

Hi, thanks for taking the question. Can you speak to and I don't want to color on any specific litigation process going on but just speak to the difference on the cost side of settling one of these generic issuances that you might you have versus actually going completely through litigation. And as you think about the FTC coming back, looking at this issue again if there were to be change in settlements not allowed, how does that change Barr's go-forward process of the way in which they approach generic launches? Thank you.

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

Well on the cost side, how much cost savings we have depends on at what point in the case you settle, if you settle early on, it could be several millions of dollars, if you settle after the trail it’s virtually zero. So, it's really a function of when the settlement occurs. Normally, I think you see settlements at about the time of the trail and so may be a third of the cost would be saved, a couple of million dollars or so if you settled on the eve of trail versus early in the case or after the case was over. We feel very strongly about legal position on settlements, we prevail in all the cases where we've been challenged. I think for the most part all generic companies prevail in cases where they have been challenged and I'd expect that to continue. If the law were to change, we will have to evaluate our program in light of that change in the law. I think we inevitably resolve in fewer patent challenges than we have now both for Barr and for other companies. And I've made that clear in the testimony that I've given about this subject in the Congress and in the meetings we've had with the FTC and others that I think that the proposal of Senator Cole is wrong headed, that it’s… actually we'll have the un-indented consequence of limiting the number of patent challenges and limiting the number of pre-patent expiry launches costing the consumers lot of money.

Operator

The next question we have is from Ronny Gal of Bernstein. Please go ahead.

Ronny Gal - Sanford C. Bernstein & Company

Hi. Good morning. Just a quick question on the tax rate, you've discussed before the possibility that Barr might be able to overtime reduce it's tax rate from the historical rate which appear to be roughly what you are reporting for a '08. Even without [inaudible] primarily U.S. since that you have back where you were, how should we think about the tax going forward? Is there a significant tax opportunity through diversification in Eastern Europe?

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

Yes. Well Ronny, there is and what you are seeing in this time period '07,'08,'09. You're seeing us invest in R&D in Europe that is expensed in Europe and will ultimately yield products for the U.S. and other markets that are… the sales of which are tax advantage because of the…. the venue in which the application is developed. So, it's a process of insuring that the good products and profitable products are developed and produced in tax advantage venues and we are doing that. And so, if you look at the P&L of say PLIVA internally, you would see that it's carrying a lot of the R&D effort that will ultimately lead to a tax advantages that we see but it's not an overnight opportunity. In '07 as Bill and I have mentioned, we were able to implement some tax-planning strategies that lowered the marginal rate for that year. Those were one-time structural changes that we made. We hope to be able to accomplish similar activities in '08 but those are the things you can't anticipate unless you know about them. We continue to look for them and when we find those opportunities, we'll take those one-off benefits as we get them but long-term it's depended upon our ability to generate products and sales and income in tax advantage venues.

Ronny Gal - Sanford C. Bernstein & Company

Thanks guys.

Operator

Next question we have is from Randall Stanicky of Goldman Sachs.

Randall Stanicky - Goldman Sachs & Co.

Great. Thanks for the question. Bill just a question on generic margin. Can you may be just touch on some of the moving parts? Clearly the OC outlook you have going down and that’s higher margin, there're some adjustments possibly to initial Fosamax assumptions, can you may be just talk about how you're viewing the living parts in the context of what you expect to be and modestly increased generic margins if we look at 2008?

William T. McKee - Executive Vice President and Chief Financial Officer

Yes. Sure Randall. You touched on couples of them. Obviously, the relative contribution of OC, I mean a lot of... not surprisingly it sort of relates to mix. And the pieces that I think about in terms of how the mix changes from period to period or the relative contribution of OCs versus non-OCs the relative contribution of, what I'll call, sort of the European product line to the U.S. product line in terms of the overall total generic sales in a given period because the U.S. product line generally has a higher gross profit margin than the European product line. The timing of new launches clearly has a very significant impact on what can happen to the margin in a given period and competition on sort of important products where we are alone or with a relatively few competitors generally as new competitors come in, the price is dropping and it's negatively affecting the margin. So timing the new competitors, timing the new product launches, the mix between OCs and non-OCs and the mix between U.S. and ex-U.S. sales are I would say most, there is probably still others, but those are most of the various moving parts that go into the thinking around the generic margin.

Randall Stanicky - Goldman Sachs & Co.

I mean, on the timing point that you made, it sounds like new launches are likely part of our big driver of the margin. You guys have given in the past the relative weighting in terms of earnings expectations over the years, will you be thinking about a front or back half weighting in terms of the EPS guidance?

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

Randall, this is Bruce. We did that last year and we're dead wrong. I'm not sure I'm prepared to weight into that again. I don't think we'll see wild swings quarter-to-quarter.

Randall Stanicky - Goldman Sachs & Co.

Okay.

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

Where you see $0.50 in one quarter and $1 in another quarter, I mean that I don't expect to see. So I think it'll be...

William T. McKee - Executive Vice President and Chief Financial Officer

Unless there is a patent challenge.

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

Unless there is a patent. And I...

William T. McKee - Executive Vice President and Chief Financial Officer

And we do hope to see..

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

Yeah, we do hope to see that.

Carol A. Cox - Senior Vice President, Global Investor Relations and Corporate Communications

And the numbers are in here.

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

And I'd point out that the OC guidance excludes earnings contribution, potential contribution from Yasmin, which could overnight change that forecast. And I'll also point out that the OC line, which gets a lot of attention in your reports and in our discussions is obviously a very good product line for us. But in the non-OC category, we also had some very good products that just aren't easy to organize under one label. So, they appear in different therapeutic categories, they're not just in a single unit that you can discuss as one. So I think that what you are seeing in our forecast and what I've been talking about for several years is over time we will see more competition in OCs and the OC sales will decline as all generic products do over time and those revenues and profits will be replaced by new products that we'll launch and currently we have 60 of them pending at the FDA.

Randall Stanicky - Goldman Sachs & Co.

Thanks a lot guys.

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

Okay.

Operator

Next question we have is from Rich Silver of Lehman Brothers. Please go ahead.

Rich Silver - Lehman Brothers

Yeah, good morning. Just remind us of the SG&A, and R&D guidance includes or excludes amortization from the Barr products and the incremental depreciation from PLIVA? And also, second question is, do you have any auction rate securities that are part of cash?

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

No, there are not. We had quiet a significant number of auction rate securities, but we... the rest of those and the auctions prior to the failure of the auctions and I think we're down to something less than $10 million, and I am not even sure we have any left now. And they aren't cash, because they are in...

William T. McKee - Executive Vice President and Chief Financial Officer

Short-term marketable securities. So, the answer Rich is that there is no auction rate securities in the cash balance on the balance sheet. We do have some remaining auction rate securities that are part of our short-term marketable securities. As Bruce mentioned, we… starting in about the middle of January as those auctions came up and reset, we reinvested in other… in other instruments and as of today, I think we're probably around $40 million of remaining auction rate securities down from probably over $350 million at the beginning of the calendar year. So, that's the piece on the auction rate securities. On the question on the amortization Rich, as we think about the forecast for 2008, the amortization and the incremental depreciation only affect the cost of goods line. There were adjustments in 2007, the Ovcon settlement and this Cenestin charge and so forth, which hit the G&A lines, but in terms of the guidance that we have given in both the... for the margins as well as for the individual G&A and R&D line items, there's no amortization charges in either R&D or SG&A.

Rich Silver - Lehman Brothers

Okay, thanks.

Operator

And the next question we have is from Marc Goodman of Credit Suisse. Please go ahead.

Marc Goodman - Credit Suisse

Hi Bruce, I was hoping just for some of the key international markets, you could just give us a flavor for just some of the moving parts, some of the things that are going on in the different areas and your expectations for your growth relative to the market growth and things like that?

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

Well, we have not given country-by-country guidance so, I don't think we will but we do expect double-digit growth in our ex-U.S. business going forward in 2008. If you look at the key markets, I think we have discussed in the past, we have a very high market penetration in Croatia as a Croatian company of long-standing and so it's pretty well saturated and growth opportunity there is really not realistic... a significant growth is not a realistic goal. We continue to grow in Russia very strongly and in Germany very strongly and in Poland. Those are markets that we look at as key markets for us and we put a lot of effort in them and we expect them to continue to grow at double-digits.

Marc Goodman - Credit Suisse

And I guess with respect to Russia for instance are you... is your expectations for growth in the DLO more this year versus last year, Germany, there is a lot of changes going on, where is the incremental business coming from, just help us a little more clarity on this?

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

Well, in Russia the DLO accounts for, I think less than 10% of our business. So that's not the area in which we expect to see growth. We continue to add sales representatives in Russia, we added a group in January giving more coverage and penetration, more products that are available for sale there, and so I guess organic growth in the Russian market. In Germany you mentioned the changes there, the ALK decision, which came out yesterday, we haven't had an opportunity to review that carefully. But I think it's... there will be, I assume a new tender which we will participate in but for the time being it’s status quo, we are very satisfied with our German business and are doing well there.

Operator

And the next question is from Ken Cacciatore of Cowen and Company. Please go ahead.

Ken Cacciatore - Cowen & Co.

Thanks, good morning. Just a quick question on the Biologics division. We've seen some approvals come out I believe from some of your competitors over in Europe. So I just wanted to get a sense what we should be expecting? Are things on plan as it played out in terms of biologic development as you had hoped at the time of acquisition. So just general update in the biologic program? Thank you.

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

We are in clinical trails in Europe with our licensee Hospira, originally named now Hospira is in the clinical trails with our progress from product and we expect that to... is on track and as you'll recall license that product for the U.S. prior to acquiring PLIVA and we have... we are moving forward to secure and approve one in the U.S. It’s true that other people’s have been approved, but we are on the schedule and we anticipate it.

Operator

And the next question we have is from Ricky Goldwasser of UBS. Please go ahead.

Robert Jones - UBS

Yes, this is Bob Jones on for Ricky, thanks for the question. Just to follow up on the SG& guidance. I think it was mentioned before that looks like it was tracking a little bit higher than at least we had anticipated, I was wondering if you bright a little more color into whether that increase is being driven from North America or Europe? And then also if you could… if there was any specific products or marketing of specific products that was driving that guidance slightly higher? Thanks.

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

I just, I can't do more than repeat what Bill said that the increase in SG&A is really two places. One in the U.S. Proprietary business increased sales and marketing activities related to the promoted products, which we believe will convert into 20% sales growth over the course of year. So we are very pleased to make those investments and second in Europe we have increased in part headcount increase in our sales and marketing group particularly in Russia but even more significantly is the FX effect in Europe as we have higher cost in dollar denomination because it declined dollar relative to the Euro.

Operator

Next question we have is from Corey Davis of Natexis. Please go ahead.

Corey Davis - Natexis

Thanks very much. I guess I’ll just ask, are there any geographical orders or strategic gaps in your business that you like to fill in with acquisitions or if you had enough for now and should we think more about in-licensing your business development activities rather than outright acquisitions of companies in the future?

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

Well, I think Corey that, I've said before and I guess I will repeat it here that before we went broader, I think we would look to go deeper in the markets where we are. In Europe we're sound and have a very robust business in four, five markets wherein 20 others we would like to be stronger and have a more significant role in some of those markets and that's where we are concentrating our efforts both from an internal organic growth... a perspective and as we look for business development opportunities. Licensing, you mentioned is always been an important part of the European business not only for Barr but and PLIVA but for all the competitors there it’s a very active in-licensing, out-licensing marketplace and we participate on both sides of that. So, we look to add products in our markets from others by in-licensing and we look to sell our products to others end markets where we aren't... either aren't present or don't have a significant role.

Corey Davis - Natexis

Great. Thanks.

Operator

And the next question we have is from David Buck of Buckingham Research. Please go ahead.

David Buck - Buckingham Research

Yes. Thanks. I've got one question and just ask for a repeat, the question, would sound like against the rule, but on PLIVA, Bruce...

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

You always violate that rule David, we make an exception for you.

David Buck - Buckingham Research

That will be one question. On PLIVA can you just give a sense of how we can assess the value of what you acquired either in synergy confirmation... synergy target confirmation or at least some type of financial metrics of what you're seeing, dilution still or accretion and when that ends and maybe a little bit more color on the international growth opportunity you're seeing. Bill you talked about quite a strong growth outlook for 2008 from ex-US generics and Bruce, can you just repeat the second factor that you mentioned versus analyst models?

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

The two factors mentioned, I don’t know which I'd mentioned first, one was difference in tax rate.

David Buck - Buckingham Research

Right.

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

And the second is the Alendronate projections.

David Buck - Buckingham Research

Okay.

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

Those are the two that, as we went through the various notes and analyst reports and compared them to our projections... those two stood out of being the anomalies.

David Buck - Buckingham Research

And you were cut out so just say what the number was you're projecting?

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

No.

David Buck - Buckingham Research

No, okay.

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

At least we did say in the tax rates in the high 30s.

David Buck - Buckingham Research

Right.

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

Bill gave that exact number I don't have, 38% I think is the estimate. Turning to assessing PLIVA, I guess as time goes on David, we really don't look at it so much as PLIVA and Barr so it’s sort of one operation now and I think we have achieved, we are on target to achieve the kind of synergies we predicted at the acquisition. I mentioned in the closing, these pan over later this year it's been downsized, we’ve completely absorbed and for the most part eliminated the G&A sort of overhead of the PLIVA organization in the U.S. We have made some changes in the way that they do business that I think has been positive. On the other side, what we have done is transfer a lot of the R&D to the European area in order to ultimately capture the benefits of the tax rates in those lower tax jurisdictions. So, it's getting increasingly difficult to separate things and say this is what the synergy or the contribution of what we acquired and I think it's probably about time we stopped talking about it because it's more speculative than it’s realistic. We are an integrated company and that’s how we look at ourselves so that’s far how we do this. You mentioned the double-digit growth, that’s just based on those particular markets. that's our projection. I think remember some of that is FX, but some of it, a significant amount is organic growth, increased sales of existing products and launches of new products.

Operator

And the next question we have is from Tim Chiang of FTN Midwest Securities. Please go ahead.

Tim Chiang - FTN Midwest Securities

Hi Bruce.

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

Hi Tim.

Tim Chiang - FTN Midwest Securities

I had a question about Plan B.I know the product is doing quite well, could you comment a little bit about the patent protection for the product at this point?

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

There isn’t any.

Tim Chiang - FTN Midwest Securities

I mean, I know, well there is three years of exclusivity.

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

Right. Patent, and the exclusivity runs August of '09.

Carol A. Cox - Senior Vice President, Global Investor Relations and Corporate Communications

August '09.

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

August '09.

Tim Chiang - FTN Midwest Securities

But, I mean do you have patents that you in process of getting at the PTO?

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

We have a strategy for I guess, life-cycle management of the product and we haven't disclosed that because it's not in our interest to do it.

Tim Chiang - FTN Midwest Securities

I guess, what are the sort of the barriers could you create to keep competitors out of this market?

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

Well, I'm using all my ideas Tim if you have any new ideas, I’ll let you share with me.

Tim Chiang - FTN Midwest Securities

Okay. And then turning to ACTIQ, I know that product continues to do well for you as well. I mean is that something that, what's the competitive landscape for the product going to be this year you think?

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

We've made assumptions for competition on the product and for our application being approved on the product. I don't think it's... we aren’t going to disclose what we are… we made appropriate assumptions that we think reflect what we are going to confront in the marketplace.

Tim Chiang - FTN Midwest Securities

Okay great. Thanks a lot Bruce.

Operator

And the next question is a follow-up question from Elliot Wilbur of Oppenheimer.

Elliot Wilbur - Oppenheimer

Thanks, want to sneak in two quick follow-up, following on the theme of lifecycle management, I think Bill mentioned in his commentary that the OC forecast does assume… [inaudible] competition in the latter half of the year but is it possible there may be some upside to that based on some strategies that you just haven't disclosed yet. And then Bruce I want to ask a question about patent challenges we haven't talked about in a very long period of time, and I guess based on what has happened or what has not happened. I mean is this something we should still be thinking about in terms of you being able to potentially monetize in some forms or fashion and I'm specifically referring to EVISTA? Thanks.

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

Well turning to the your answer of EVISTA first, I mean it’s obviously a patent challenge is out there. We have... it's an opportunity that it could come to fruition. I'm not predicting when or whether but it’s ... it is something that it could happen and as part of the sort of bundled assets that we have in our portfolio. And the first question was... almost set. We are weeks back from set competition. Did we have a strategy, we have a strategy for extending the brand we set, but we certainly expect and have included in our forecast an expectation of the generic set launch in the patent, which I think is October Fred, the October '08.

Carol A. Cox - Senior Vice President, Global Investor Relations and Corporate Communications

Jeanne we have time for one more question and we will wrap it up.

Operator

And the last question is from… a follow-up from Gregg Gilbert of Merrill Lynch. Please go ahead.

Gregg Gilbert - Merrill Lynch

Thanks. Bruce just to come back to the earrings methodology again in the concept is schedule launches. How will we know if you settled TRI-CYCLEN LO or something like that, that is not already a scheduled launch that is included in your guidance. So can you just provide some perspective as to what types of announcements would represent upside versus those that are already factored into your guidance. It doesn't seem like there's much in your guidance for such things but I wanted to just clarify that? Thanks.

Bruce L. Downey - Chairman of the Board and Chief Executive Officer

I don't think we have a plan to announce that Gregg. I would say again I think it will be rare and I guess the only way you’d know is if there’s… if we have some event and we change our guidance based on the event. We continued to run. I welcome other ideas I mentioned earlier, Elliot suggested and [inaudible] to us recently about how to deal patent challenges. I think I would solicit yours and other people's ideas, it is not an easy thing as it becomes a larger portion of our opportunities it becomes increasingly difficult to give accurate information without making some allowance for patent challenge opportunities. So do you have any ideas give us a call.

Gregg Gilbert - Merrill Lynch

Thanks.

Carol A. Cox - Senior Vice President, Global Investor Relations and Corporate Communications

Thanks Jeanne if you can offer the replay information and thank you everyone.

Operator

Thank you. Ladies and gentlemen, this conference will be made available for replay after 10.30 Eastern Time today until March 5 at midnight. You may access the AT&T Executive Playback service at any time by dialing 1-800-475-6701 and entering the access code 906084. International participants may dial 1-320-365- 3844. Again those are 1-800-475-6701, international number 1-320-365-3844 with the access code 906084. That does conclude our conference today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.

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