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CompanyName:ValeantPharmaceut icalsInternat ionalIncCompanyTicker:VRXSector:HealthCare
Industry:DrugsEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page1of 24
ValeantPharmaceuticals(VRX)EarningsReport:Q42014ConferenceCallTranscriptThefollowingValeantPharmaceuticalsconferencecalltookplaceonFebruary23,2015,08:00AMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
LaurieLittle;Valeant;InvestorRelationsHowardSchiller;Valeant;CFOJ.MichaelPearson;Valeant;Chairman,CEOAriKellen;Valeant;CompanyGroupChairman
OtherPart icipants
IrinaKoffler;CantorFitzgerad;AnalystAnnabelleSamimy;Stifel;AnalystChrisShaw;JPMorgan;AnalystAndrewFinkelstein;SusquehannaFinancialGroup;AnalystDouglasTsao;BarclaysCapital;AnalystDavidRisinger;MorganStanley;AnalystMarcGoodman;UBS;AnalystLouiseChen;Guggenheim;AnalystAlexArfaei;BMO;AnalystDavidAmsellem;PiperJaffray;AnalystCoreyDavis;CanaccordGenuity;AnalystTimChang;CRTCapital;AnalystGreggGilbert;DeutscheBank;AnalystShaneShaw;AlbertFried;AnalystDavidSteinberg;Jefferies;AnalystDouglasMiehm;RBCCapitalMarkets;AnalystDivyaHarikesh;GoldmanSachs;AnalystBrianLombardi;MerrillLynch;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator:
Goodmorning.
Mynameis[Steve],andIwillbeyourconferenceoperatortoday.
Atthistime,IwouldliketowelcomeeveryonetotheValeantPharmaceuticalsQ4andfullyear2014earningsconferencecall.Alllineshavebeenplacedonmutetopreventanybackgroundnoise.Afterthespeakers'remarks,therewillbeaquestionandanswersession.
Ifyouwouldliketoaskaquestionduringthistime,simplypressstar,thenthenumberoneonyourtelephonekeypad.Ifyouwouldliketowithdrawyourquestion,pleasepressthepoundkey.Thankyou.
HeadofInvestorRelations,LaurieLittle,youmaybeginyourconference.
CompanyName:ValeantPharmaceut icalsInternat ionalIncCompanyTicker:VRXSector:HealthCare
Industry:DrugsEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page2of 24
LaurieLit t le (InvestorRelations):
ThanksSteve.
Goodmorningeveryone,andwelcometoValeant'sinvestorconferencecall,wherewewillbediscussingourfourthquarterandfullyear2014financialresults,aswellastheacquisitionofSalixPharmaceuticals.
PresentingonthecalltodayareHowardSchiller,ChiefFinancialOfficer,whowillpresentourfourthquarterresultsandfirstquarterguidance,andJ.MichaelPearson,ChairmanandChiefExecutiveOfficer,whowillcovertherecentlyannouncedacquisitionsofDendreonandSalix.
Dr.AriKellen,CompanyGroupChairmanwillbeavailableforquestionsafterourpreparedremarks.
InadditiontotheliveWebcast,acopyoftoday'sslidepresentationcanbefoundonourWebsiteundertheinvestorrelationssection.
Beforewebegin,ourpresentationtodaycontainsforward-lookinginformation.Wewouldaskthatyoutakeamomenttoreadtheforward-lookingstatementlegendatthebeginningofourpresentation,asitcontainsimportantinformation.
NowpleasenotethatthetenderofferinconnectionwiththeSalixmergerhasnotyetcommenced,andourcommunicationisnotanofferorasolicitationofanoffertopurchaseanysecurities.
Onthecommencementdateoftheoffer,anoffertopurchaseandotherrelateddocumentswillbefiledwiththeSEC,andthetenderofferwillonlybemadepursuanttothosedocuments.
InvestorsandsecurityholdersareurgedtoreadboththetenderofferdocumentsandthesolicitationrecommendationstatementregardingtheofferwhentheybecomeavailableandarefiledwiththeSEC,astheywillcontainimportantinformation.
Inaddition,thispresentationcontainsnon-GAAPfinancialmeasures.Formoreinformationaboutnon-GAAPfinancialmeasures,pleaserefertoslidenumbertwo.
Non-GAAPreconciliationscanbefoundinthepressreleaseissuedearliertodayandpostedonourWebsite.Andwiththat,IwillturnthecallovertoHowardSchiller.
HowardSchiller(CFO):
Thankyou,Laurie.
Goodmorning,everyone.Andthankyouforjoiningus.
Yesterday,weannouncedverystrongfinancialresultsforthefourthquarterandfullyear2014,aswellasouragreementtoacquirealltheoutstandingstockofSalixPharmaceuticals.
Weplantodiscussthreetopicsontoday'scall.First,discussourstrongfourthquarterfinancialresults.Wehavemuchtotalkabouttoday,andwewillnotspendasmuchtimeonourfullyearfinancialresults,butwillfocusourpreparedcommentsonthefourthquarterresults,whichwereverystrongacrossallmetrics,andaheadofourpreviousguidance.
Wehaveprovidedadditionaldetailsofourfinancialperformanceattheendofthispresentationforyoutoreviewatalatertime.
Second,wewillprovideyouwithQ12015guidance.
Andlastly,wewilldiscussourrecentannouncementssurroundingouracquisitionsofDendreonandSalix.
CompanyName:ValeantPharmaceut icalsInternat ionalIncCompanyTicker:VRXSector:HealthCare
Industry:DrugsEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page3of 24
Wearepleasedtoreportexceptionallystrongresultsforthefourthquarter.Forthequarter,ourtotalrevenuewas$2.3billion,anincreaseof10%overtheprioryear,largelydrivenbyexceptionallystronggrowthinmanyofourU.S.businesses,whichmorethanoffsetthenegativeheadwindsfromforeignexchangeinourexU.S.markets.
OurcashEPSwas$2.58ashare,anincreaseof20%overtheprioryear.OurGAAPcashflowsfromoperationsforthequarterwas$816million,anincreaseof191%overtheprioryear.Thisincreaseincludeda$287milliongainfromtheAllerganinvestment,netoffeesandoutofpocketexpenses,whichwerealizedinthequarter.
Adjustedcashflowfromoperationswhichexcludesthisgainwas$624million.
WearepleasedtohaveexceededourQ4guidanceoneverymetric.Ouroriginalforecastsprojectedustodeliverorganicgrowthgreaterthan12%,andwedelivered16%samestoreorganicgrowth.
[Yobshalom]reported8%organicgrowthforthefourthquarterand11%organicgrowthforthefullyear,andweexpectB&Ltocontinuetodeliverdoubledigitgrowthin2015.
Ourtotalrevenuecameinalmost$100milliongreaterthanourguidance,despitesignificant[inaudible]headwinds,andcashEPSwas$2.58versusgreaterthan$2.55cashEPSguidance.
Adjustedcashflowfromoperations,excludingtheAllerganinvestmentgain,was$624million,inlinewithourguidanceofgreaterthan$600million.
Andfinally,ourrestructuringandintegrationchargesforthequartercameinat$47million.
Turningtoorganicgrowth,ouroverallsamestoretotalcompanyorganicgrowth,includinggenerics,was16%forthequarter.IfwehadexcludedgenericsinQ4,totalcompanysamestoreorganicgrowthwouldhavebeen18%.
ManyofourregionscontributedtothestrongtotalcompanyorganicgrowthwithourU.S.businessat28%,totaldevelop--othertotaldevelopedmarketsat20%andouremergingmarketbusinessat6%,samestoreorganicgrowth.
Oursamestoreorganicgrowthfortheyearwas13%,andweexpectcontinued,strong,double-digitsamestoregrowthin2015.
Samestoreorganicgrowthexcludesacquisitionsforoneyearpostclose,andthereforeDendreonandSalixwillnotbeincludedinthiscalculation.
DendreonandSalixhoweverwillbeincludedinourproformaorganicgrowthcalculation.
B&Lcontinueditsstronggrowthperformance,delivering8%organicgrowthinQ4,11%forthefullyear,and10%organicgrowthsincetheacquisitioninAugust2013.
MostoftheBauschandLombbusinessescontinuedtheirconsistentlystronggrowthpatterns.
Oursurgicalbusinesshowever,hadaweakerquarterduetoaflatcataractsurgerymarketoverall,anddecliningsalesofourExcimerlasers.
Inaddition,weswitchedourVictuscommercialmodelfromasalesmodeltoaleasemodel,whichcontributedtolowersalesforthequarter.
IfyouadjustedforthechangeintheVictuscommercialmodel,saleswereflatforthequarter.
Forthequarterandfortheyear,oursurgicalbusinesscontinuedtogainshareinpremiumIOLsandin
CompanyName:ValeantPharmaceut icalsInternat ionalIncCompanyTicker:VRXSector:HealthCare
Industry:DrugsEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page4of 24
Femtosecondlaserreplacement.
Aspromised,wearecontinuingtoshowrevenueforthequarterandtheyearforourtop20products.Weareverypleasedtoreportthatall20productsgrewinthequarterovertheprioryear.ThetwonewadditionstothelistthisquarterareJubliaandCarac.
ItistrulyexcitingtoseethatJubliawasourfourthlargestproductinQ4,andrecentlyreportedweeklyscripttrendsshowed20,000plusscripts.
Caracdeliveredaverystrongquarterbasedon40%growthfromsalesofthebrandandfromthechannelloadoftherecentlylaunchedauthorizedgeneric,whichwemanufacture.
Also,justtopointoutinresponsetoafewquestionsfrominvestors,we'venowincludedWellbutrinsalesonaglobalbasisonthischart.Earlierintheyear,thesalesinourtop20chartwereU.S.only.Asapercentage,ourtop20productsrepresent36%oftotalrevenueinthefourthquarter,withtop20growing28%overthefourthquarterin2013and20%onafullyearbasis.
Ourtop20productscontinuetodemonstratethediversificationofourportfoliowithnoproductmorethan4%ofrevenue.Similartolastquarter,thegrowthofourtotalproductportfoliowasdrivenbyapproximately50-50mixofvolumeandprice.
HighlightsforourU.S.businessandtherestofthe--therestoftheworldarecontainedinthenextfourslides.
Revenuesforourdermatologybusinesswereverystrongandincreased70%yearoveryear.Theoutstandingworkofoursalesteam'simplementationofinnovativemarketingapproaches,greatleadership,aportfolioofgreatproducts,andourfournewlaunchproductshavecontributedtotheturnaroundandtheoutstandingresultsinourdermatologybusinessinQ4in2014.
Coreproductssuchas[Xyclar],Elidel,andthe[ramfranchise]continuedthestronggrowth.And[solodac]grewinQ4,andgrew5%forallof2014,afteratoughyearin2013.
Jubliacontinuesitsrapidgrowthtrajectory,andreportedmorethan20,000weeklyscriptsforthelastreportedweeklysalesreport.Thisyieldsanannualizedrunrateofgreaterthan$250millionfortheproduct.
OurDTCcampaigncontinuestoincreaseawarenesswithpatients,asweareseeingprimarycarephysiciansrepresentingapproximately40%ofthescriptvolume.
IhopethatyouallsawourSuperBowlad,whichreceived1.2billiondigitalimpressions,anditsignificantlyraisedtheawarenessoftheproduct.
LUZUandRetin-AMicro0.08%continuetoperformwell,withscript[showns]up12%,andapproximately200%sequentially.
Ourconsumerbusinessrevenuegrew6%overtheprioryearaswecontinuetoout-pacethemarket.
CeraVeremainsthefastestgrowingmajorskincarebrandwith49%year-over-yeargrowth.PreserVisionalsocontinuesitsstronggrowthtrajectorywith[A-Retin]thenumberonesellingvitaminskew,delivering17%growthinthequarterbasedonconsumption.
Theentirebrandgrew14%year-over-year.
Finally,ourBioTruemultipurposesolutiondelivered7%growthovertheprioryear.
Ourprescriptionophthalmologyrevenuesgrew8%year-over-yearwithcontinuedstrongperformancefrom
CompanyName:ValeantPharmaceut icalsInternat ionalIncCompanyTicker:VRXSector:HealthCare
Industry:DrugsEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page5of 24
ProlensaandtheLotemaxfranchise.
Revenuesforourcontactlensbusinessgrew13%year-over-year,ourthirdstraightquarterofdouble-digitgrowth.
Wecurrentlyhave10%oftheU.S.contactlensmarket,athreepointmarketshareimprovementsinceweacquired[B&L].
Ultra,whilestillnotasignificantcontribute--contributortorevenuesduetoproductioncapacityconstrainthad$4.2millioninrevenuesforthequarter.WeexpectthefirstfullproductionlinetobevalidatedinQ-2,followedbyasecondcommerciallineinQ-4.
Andfinally,werecentlyagreedtoanewstrategicpartnershipwithVisionSource,thelargestdoctoralliancegroupwith3,000locationsacrossallofourcontactlensbrandsandsolutions.
I'vealreadydescribedthereasonsbehindtherevenuedeclineinQ-4foroursurgicalbusiness.ThecataractmarketcontinuestobefineinQ-1,butweexpectthemarkettoreboundtonormalgrowthlevelsofapproximately5%laterthisyear.
AsImentionedearlier,oursurgicalbusinesscontinuedtogainshareinpremiumIOLsand[incentive]secondlaserplacements.
Inaddition,wearebeginningtoconductclinicaltrialsintheU.S.for[Artenio]ExcimerLaser,whichisalreadyapprovedandsellinginEurope,andwillenableustoimproveourcompetitivepositioninginthisimportantmarketsegment.
Withrevenuegrowthat28%forourneuroandotherandgenericsportfolioisdrivenbyproducts,includingXenazine,Wellbutrinand[Virosol],whilegenericsbusinesscontinuestobenefitfromcompetitorstockoutandauthorizedgenericlaunches.
Finally,ourdentalbusinesscontinuesitsdouble-digitgrowthduetotheperformanceofArestininthe2014productlaunchesOnsetandOpticsPlus.
Nowturningtotherestoftheworld.OuremergingmarketsbusinessinCentralandEasternEuropeandtheMiddleEastdeliveredstrongperformancewith9%growthyear-over-year,despitesignificant[inaudible]headwindsfromnegative$60millioninrevenues.
Onalocalcurrencybasis,Russiadelivered13%growthandtheMiddleEastdeliveredmorethan20%growth.
OuracquisitionofMedPharma,abrandandgenericsplatformintheMiddleEastandNorthernAfrica,isofftoagreatstart,andwillaugmentourgrowthinthisimportantregion.
RevenuesforouremergingmarketbusinessinAsiagrew12%versustheprioryear.
Wecontinuetoseestronggrowthinanumberofcountries,including--asChinasaw12%growth,Koreagrew15%,andMalaysiagrew24%,justtomentionafew.
InQ-1ofthisyear,our[BestCome]lenses,whichweacquiredlastyear,werelaunchedinChina,KoreaandJapan.Andgiventheexpecteddemandaroundtheworld,wehaverecentlybeguntoexpandourproductioncapacity.
Arecentacquisitionof[ArmicSindo],abrandofgenericplatforminIndonesia,isalsoperformingwellinitsearlystages.
CompanyName:ValeantPharmaceut icalsInternat ionalIncCompanyTicker:VRXSector:HealthCare
Industry:DrugsEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page6of 24
InLatinAmerica,wesawadeclineof7%year-over-year,whichwasmainlydueto[FX].
Mexicopreformedverywellanddelivereddouble-digitorganicgrowthof11%inthequarter.
Brazilcontinuestostruggletotheslowermarketgrowthandtheweaknessinour[ProBatica]line.
Therestofworlddevelopedmarketsdeclined13%year-over-year,almostentirelyduetoastrengtheningdollaragainsttheEuro,Yen,CanadiandollarandAustraliandollar.
TheunderlyingbusinessesremainstrongwithbothEuropeandJapandeliveringlowsingle-digitorganicgrowth.AndCanadaandAustraliabusinesseswereflat.BothbusinesseshadtheirlastquarterofgenericheadwindsfromWellbutrinXLinCanadaandAlverain[CambaCourt],Australia.
Giventheabsenceofsignificantbusinessdevelopmentactivity,wehavebeenguidingallyeartodecliningrestructuringandintegrationcharges.Thisquarter,restructuringandintegrationchargeswere$47million,inlinewithourestimateoflessthan$50million.
Thereportedchargeswerederivedofapproximately$15millionforBauschandLomb,down--downfrom$36millioninQ-3and$29millionrelatedtodeals--otherdealsclosedin2014.
Only$3millionoftheQ-4chargeswerefromacquisitionsclosedmorethan12monthsago,andwasprimarilyrelatedtotheclosureofanObagifacility.
ExcludingDendreonandSalix,restructuringandintegrationchargeswillcontinuetotrendtowardszero.
Thisquarter,ourGAAPcashflowfromoperationswasveryrobustat$816million,forwhich$287millionwasrelatedtoourgainfromthe[Alegen]investment,netoffeesandout-of-pocketexpenses.
Justthecashflowfromoperations,excludingthe[Alegen]gain,was$624million.
Our[sheets]wereadjustedup.Cashflowfromoperationswasnegativelyimpactedbytheaccelerationofinterestpaymentsintheamountof$33millionfollowingtherepaymentof$945millioninbondsinthe4thquarter,andalargeincreaseinprepaidexpenses.
Theprepaidexpensebalancewillbeabenefittocashflowinfuturequarters.
Atthetimeweannouncedthe[B&L]acquisition,ourdebttopro-formajustEBITDAratiowas4.5times.Andwecommittedtoreducingthatratiotobelowfourtimes.
In2014,wereducedourdebtbymorethan$2billion,andweendedtheyearwitha3.5timesdebttoEBITDAratio.
Ourdaysalesoutstandingremainedinlinewithpastquartersat66days.Andaswehavepreviouslydiscussed,webelievethatcalculatingthe[BFOs]basedongrosssalesandgrossaccountsreceivablesmakessensegiventhefactthatwehaveanumberofolderproducts,andtherearealargeamountofprovisionstogrosssalestogettonetsales.
Asinlastquarter,wehavedisclosedourgrossrevenueinour10Kthatwillallowinvestorstocalculateourdaysalesoutstandingusinggrossquarterlysalesandgrossaccountsreceivable.
Overall,accountsreceivableincreasedby$196millionthisquarter,withanoffsettingincreaseandaccruedliabilitiesofapproximately$123million,primarilyrelatedtorebates,returnsandallowances.
Thisisanetincreaseofapproximately$73million,netoftheaccruedliabilities,comparedtoanincreaseofapproximately$224millioninnetsales.
CompanyName:ValeantPharmaceut icalsInternat ionalIncCompanyTicker:VRXSector:HealthCare
Industry:DrugsEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page7of 24
2015isofftoaverystrongstart.GiventhetimingoftherecentlyannouncedacquisitionsofDendreonandSalix,we'llupdateour2015guidanceonourfirstquarterearningsconferencecall.Untilthen,wethoughtitwouldbehelpfultogiveyouguidanceforQ-1,2015.
InQ-1,weexpecttoseesamescoreorganicgrowthof10%to15%duetoseveralfactors.
ThisincludesthecontributionofcontinuedoutperformanceofmanyofourU.S.businesses,includingdermatology,contactlens,consumerdentistryandObagi,andex-U.S.marketssuchasChina,Thailand,Malaysia,Mexico,MiddleEastandPoland,aswellasthecontinuedmomentumofour2014productlaunchessuchasJublia,Ultra,Retin-A,Micro.08,andthe[Anextin]launchinQ-1thatisofftoagreatstart.
Whilemostofourmarketsareexperiencingrobustgrowth,wedoexpectsomesoftnessinWesternEuropeandRussia,whichwillresultinlowsingle-digitorganicgrowthforourEuropebusinessinitinQ-1.
WeexpectcashEPSofatleast$2.30pershareforthefirstquarterof2015,asthestronggrowthintheU.S.willcontinuetooffsetpotentialcurrencyheadwinds.
Now,IwouldliketoturnthecallovertoMike.
J.MichaelPearson(Chairman,CEO):
Thankyou,Howard,andgoodmorning,everyone.
LetmebrieflytouchonourDendreonacquisitionbeforemovingontosales.
OnJanuary29th,weenteredintoanagreementtoacquireassetsfromDendreon,includingitslead[immune]therapyproduct,PROVENGE.
WeexpecttoclosetheDendreontransactionlatertoday.
Wewouldlike--liketobrieflydiscussthestrategicandfinancialrationaleforthedeal.
First,webelievethatoncologyisaplatformthatfitswellinValeant'sbusinessmodel,withstrongmarketgrowth,aconcentratespecialistsetofprescribers,whererelationshipsreallymatter,afavorablereimbursementregime,andamarketthatotherpharmacompaniesarebeginningtode-emphasize.
Wealsohavetheopportunitytoinvestinlow-risktargetedR&Dprojectsforadditionalindicationsforproductsthatarealreadyapproved.
Dendreonalsofitsourinvestmentcriteriawithadurableasset,PROVENGE.WebelievethatwecanacceleratethegrowthofPROVENGEoverthecomingyears.
Dendreonalsoprovidesusaplatformforadditionaltuck-inacquisitions.Initially,weagreedonapurchasepriceof$400million.Wethenagreedtopayanincremental$15millionforapipelineproductandsizabletaxattributes.Thepricepaidrepresents1.3timeslastyear'ssalesofthecompany.
Inadditiontogrowthopportunities,webelievethisassethasbeenundermanagedasithasaninfrastructureinplacebuiltforabilliondollarproduct.Weexpecttobeabletoextractsynergiesofover$130million,includingmanufacturingsavings,andthisdoesnotincludethebenefitofourcorporatestructure.
Wehave--webelievethatwehavetheabilitytoraisethegrossmarginsofthisbusinesstomorethan65%bytheendof2015andtoreach80%grossmarginsinthelongerterm.
Finally,thetransactionwillresultinanIRRofapproximately30%atstatutorytaxratesandwithacashpaybackperiodoflessthanfiveyears.
CompanyName:ValeantPharmaceut icalsInternat ionalIncCompanyTicker:VRXSector:HealthCare
Industry:DrugsEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page8 of 24
Now,turningtoSalix.Yesterday,weannouncedthatwewillbeacquiringalltheoutstandingsharesofSalixfor$158pershareincash--incash.Thetotaltransactionisvaluedatapproximately$14.5billionandwehavefullycommittedfinancing.Weexpectthetransactiontocloseinthesecondquarterof2015.
Thistransactioncreatesanexcitingnewspecialtyplatformforfuturegrowth.Salixhasastrongproductportfoliowithkeypromotedproductsdeliveringdouble-digitvolumegrowthfarexceedingthemarketgrowthrateof5%.
Thenear-termexpectedapprovaloftheIBS-DindicationofXifaxinprovidesanadditionalcatalystforgrowth,asdothelaunchesofUcerisFoamandtheapprovalofRelistorOralandthepotentialapprovalsofotherkeypipelineassets.WealsobelievethatthistransactionwilloffercompellingreturnsforValeantshareholders.
Inourbasecasemodel,weassumeSalixwillspend$750millioninOPEXin2015.OPEXincludesSG&AandR&D.Thisisapre-synergynumber.Weexpecttoachieverunratesynergiesofmorethan$500millionacrossthecombinedcompanies'OPEX,$750millionOPEXfromSalixandValeant'sbudgetedOPEXfor2015.Weexpecttocapturethesecostsavingswithinsixmonthsofclosing.
Wedidnotincludeanybenefitsfromourcorporate--ourcorporatestructureinoursynergytargets.Therefore,inadditiontothe$500millionincostsavings,weexpectthecombinedcompany'staxratewillbeapproximately5%.WedonotplananyreductiontoSalix'sspecialtysalesforcesoritshospital,keyaccountandfieldreimbursementteams.WebelieveSalix'ssalesforceis,byfar,thestrongestintheGIspaceandithasbeenakeypartoftheirsuccess.
Wehavenothadthetimetofullydeterminetheoptimalsizeoftheprimarycaresalesforce,butwilldosobetweensigningandclosing.WeexpectanIRRandcashpaybackinlinewithourotherlargetransactions.
Slide23showsyouthecriteriathatwelookforinatherapeuticarea,andSalixchecksalltheboxes.Fromamarketperspective,theyhaveaconcentratedspecialprescriberpopulationandimportantfieldforceprescriberrelationships.
GIisalowerpriorityformostotherpharmaceuticalcompanies.Theproductshaveafavorablereimbursementstatuswithpayers.WealsobelieveSalix'sproductsandtheentireGItherapeuticareaprovideanopportunityforlow-riskinnovation.GIhasabove-averageprescriptiongrowthratecomparedtoothertherapeuticareas.Salixhasastrongunderlyingvolumegrowthwellabovethemarketandanattractivenear-termpipeline.
Inaddition,thereissignificantopportunitytoapplyValeant'soperatingmodelanddeliverfinanciallycompellingreturnswhilesettingupaplatformforvalue-addedtuck-inacquisitions.
Asmentionedpreviously,theGIspacehasveryattractiveunderlyingmarketfundamentals.Itisagrowingmarketwithattractivesubsegments,adiseasestatethatistypicallychronic,damagingtosomeone'squalityoflifeandissignificantlyundertreateed.WebelievewecanexpandtheIBS-DmarketthroughDTCandothercommerciallevers.Finally,theopportunitytoexpandintootherundeservedindicationprovidesadditionalavenuesofgrowth.
ManyofyouarefamiliarwithSalixanditsportfolio,butforthoseofyouwhoarenot,wewantedtoprovideanoverviewoftheirproductportfolio.Salixisamid-sizedpharmaceuticalcompanythathasasignificantleadershippositionintheGImarket.ItssalesforcehasbeenrankedasthenumberonesalesforceinitsspacebyIMSforthreeofthepastfouryears.
Salixhas22totalproducts,ofwhichtheyactivelypromote13.Xifaxinrepresentsroughly50%oftotalrevenueandhasbeenapprovedforHEandtraveler'sdiarrhea.SalixiscurrentlywaitingforaPDUFAdateinMayforadditionalindicationsofIBS-D,irritablebowelsyndrome-diarrhea.
OthermajorproductsincludeApriso,UcerisandRelistorthatallhaveattractivegrowthprospects.Salixhasa
CompanyName:ValeantPharmaceut icalsInternat ionalIncCompanyTicker:VRXSector:HealthCare
Industry:DrugsEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page9of 24
low-risk,short-termpipelinewithadditionalindicationsforcurrentlyapprovedproductsthatwebelievehavestrongfuturepotential.
Slide27showstherecent[script]trendsfromSalix'smajorproducts,allwhicharetrendingintheright--inapositivedirection.TheacquisitionofSalixfurtherdiversifiesourU.S.productportfolio.IncludingSalix,30%ofourportfoliowillcomefromourneuroandotherdentalandgenericportfolios,24%fromGI,22%fromdermatology,12%fromeyehealthandthenconsumerandoncologyat8and4%respectively.OurtotalU.S.revenuewillrepresentapproximately65%oftotalrevenue.Wedobelieveovertimethisratiowillreturntoroughly50-50.
OnNovember6th,2014,Salixreportedfive-tonine-monthwholesalerinventorylevelsforitstopfourproducts.WehaveconductedextensiveduediligenceonSalix'sinventoryestimates,itsstandaloneinventoryremediationplanaswellastheassociatedpotentiallitigationandregulatoryexposure.WhileSalixhasmadestridesinexecutingtheirplan,weexpecttobeabletoworkdowntheinventorytoapproximatelytwomonthsorlessbytheendoftheyear.Thenetimpactonthis--ofthison2015revenuesisexpectedtobegreaterthan$500million.
Onthenextslide,welisteachofSalix'ssignificantproductswiththeirprojected2015demand-basedrevenueandour2015volume-basedgrowthassumptionsandpatentexpirydates.Wedonothavethetimetodiscusseachproduct,butwantedtoprovideyouwiththisinformationforyourreviewlater.
Asinallourpastacquisitions,wehaveacarefulplantoachievecostsynergiesfromthecombinedproducts.Aswementionedearlier,weassumeda$750million,exG&AandR&D,forourbase2015Salixbusinessplan.ThisnumberifdifferentthanwhatGAAP--thatSalixhasreportedonanon-GAAPbasis.Forexample,depreciationandstock-basedcostshavenotbeenhistoricallyreportedinSalix'snon-GAAPoperatingexpenses,whereasValeantincludesthesenumbersinournon-GAAPnumbers.Post-close,wewillconformSalix'smethodologytoourmethodologyinournon-GAAPdisclosures.
Wehavetargetedmorethan$500millioninsynergiesonacombinedcompanybasis,butwedonotplananyreductionstoSalix'sspecialtysalesforcesorhospital,keyaccountandfieldreimbursementteams,aswebelievethesecustomer-facingroleshaveplayedandwillplayahugeroleinthesuccessofthecompany.
Asmentionedearlier,wewilldeterminetheoptimalsizeoftheprimarycaresalesforce.Onarunratebasis,weexpecttoachievethesesynergieswithinsixmonths,andbelievethatitwillcostlessthan65%ofthetotalannualsynergiestoachievethesesynergies.WealsohaveadditionalopportunitiesthroughimprovedcombinedproductportfolioformularystatusandleveragingthehospitalsalesforceforValeantproductsthatwe'venotbuiltintoourdealmodel.
Lastly,thetransactionwillbeanall-cashdealthatwillbefinancedwithacombinationofbankdebtandbonds.Weexpecttheinterestrateonournewdebttobebetween5.5to6%.Ourproformainterestratesforthecombinedcompanypostthistransactionwillbeapproximately5.5%.Wehavecommittedfinancingof$22.2billionindebtconsistingof$15billionforthetransactionanda$7.5billionbackstop--tobackstopValeant'sexistingsecureddebtwhileweseekamendmentstoourcurrentcreditagreement.
Wearelaunchingtheamendmenttoday,andwhenwereceivethisamendment,the$7.5billionbackstopwillfallaway.
Wefullyexpecttosecureanamendmenttoourcurrentcreditagreementwithinthenexttwoweeks.OurnetdebttoproformaadjustedEBITDAwillberoughly5.6timesaswewillbenegativelyimpactedby[self]toitsartificiallylowEBITDA,dueto[it'sfine]toreducewholesaleorinventorylevels.
Wehaveanattractive,deleveragingprofile,asweexpecttogetbelowfourtimesleveragebythesecondhalfof2016.SimilartoourB&Lacquisition,wearecommittedtoreduceourleveragetounderfourtimesin
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Industry:DrugsEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page10of 24
thetimeframe.
In2016,weexpecttohaveproformaEBITDAinexcessof$7.5billionandfreecashflowinexcessof$4billionbeforeanymandatoryrepayments.
Inthenearterm,wewouldexpectthatourcombinedcompanytaxratewouldbeapproximately5%.
Finally,ouraccretionshouldbemorethan20%in2016,whilebeingmodestlyaccretivein2015duetotheclientwholesaleinventoryreductions.
Wehavehadquiteafewquestionspostthedealannouncementaboutthe$14.5billionvaluationversustheequitycomponentofthedeal.Onthispage,weshowthebridgebetweenthe$10.4billionequityvalueandtheapproximately$14.5billionenterprisevalue.
Theprimaryadditionalcostscomesfromtheretirementofthe2015and2019converts,therepaymentoftheirtermloanandtheretirementoftheirbond.
Inclosing,weareverypleasedaboutthestrongperformanceoftheValeantoperationsandtheexcitingopportunitiesthatweexpecttorealizefromtheacquisitionsofDendreonandSalix.
WewillreportSalixandDendreongoingforwardastwoU.S.businessunits,includingrevenueandrestructuringandintegrationcharges,asthiswillenableinvestorstocontinuetoseethestrong,organicgrowthperformanceofourbasebusinessandseetherestructuringchargesagainturningtozero.
Welookforwardtoupdatingyouonourfinancialandoperationalprogressandsharingourupdatedguidancefor2015onourfirstquartercallinApril.
Withthat,wewillnowopenthecallforquestions.
QUESTIONS&ANSWERS
Operator:
Thankyou.
(OperatorInstructions)
[IrmaRaffit],EvercoreISI.
Unident if iedPart icipant :
Higuys.
Thanksfortakingmyquestion.
FirstonemaybeonXifaxin.SoSalixhasreportedquarterlyrevenuesinthelastfewquartersthathaveannualizedanywherebetween$460millionand$700million.
Andpresumablythatincludedaninventorybuild.AndIsawyouguysreportedanormalizedSalix,Xifaxinrunrateofaround$900million,sojustwantedtounderstandthatandalsoquickoneforHoward.
Howard,IsawcashflowconversionsonGAAP-freecashflowsisabout60%ifyouadjustfortheAllerganpayment.
Sojustwantedtounderstand,workingcapitaloranyotherimportantleversthere.Thankyou.
HowardSchiller(CFO):
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Thanks,[Irma].
Onthefirstone,we'vebuiltupour--our2015numberbasedonscriptdemandandananalysisofnetpricing.Youhavetorecallthatwhileforsomeperiodoftime,wedon'tknowexactlyhowlong,thatthisinventorywasfillingupunderSalix'smanagement,thatinordertoaccomplishthat,theyhadtotakeheavydiscountsto--toincentdistributorstocontinuetobuildupinventoryinthechannel.Sofromanetpricingstandpoint,therewillbeanautomaticpriceincreaseondayone,whenwestopdiscountingtheseproductssoheavily.
Coupledwiththisthispartcontinuestogrowquiterapidly.
Soagain,wetookabottomsupapproachtowhatwebelievewillbesoldinthisyear,coupledwithadjustingthepriceforthatandotherthingsthatwecandotoreducesortofgrosstonet.
Unident if iedPart icipant :
Andon--ontheworkingcapitalpoint,wewerejustabout90%conversionfortheyeariswhatwe--wehadtalkedaboutallyear.Forthequarter,wesetup[grunt]couldbeinexcessof$600million.
Weareat$624million.Wepaid$33millionofinterestearlythisquarterwhenwecalledthebonds.Wewould'venormallypaidourinterestinFebruary,butwhenwecalledthebonds,wehadtoacceleratethepaymentofinterestthatweaccruedforthebonds.Sothatwas--thatwasoneimpact.
Thesecondwasasignificantincreaseinprepaidexpenses,alotofwhichhadtodowiththeaccounting--thepaymentupfrontfor--relatedtoanumberofDTCcampaignsforsomeofthelaunchproductsthatwe--thatwewillthengetthebenefitofin2015.Sothatwillworkitswaydownandwillbenefitfuturequarters.
Andthenthirdpoint,andthisiswhyweguidedtoalowernumberinQ4wasjustthetimingoffourthquartersalestendedtobe--tendtobemoretowardsthe--theendofthequarter.
Sowe--we--wehadadjustedourviewson--oncashflow.Wecontinuedtofocusonbeating90%conversion,and--andlikeyousawinthechart,ourday'ssalesoutstandingandourA.R.balanceis--hasbeenprettyflat.Ourinventorieswerewell--werewellincheck.
So,youknow,we'relaserfocusedonthis,andyouknow,wewanttodobettergoingforward,butweachieveda90%goalfortheyearthatwehadsetout.
Operator:
Wellthankyou.
IrinaKoffler,CantorFitzgerald.
IrinaKof f ler(Analyst-CantorFitzgerad):
Hi,thanksfortakingthecall.
Justwantedtogetalittledeeperintohowyou'rethinkingaboutprimarycarepromotionofSalix'sassetsandyouknow,notstarvingthisbrand,whichneedsprimarycare,asisseenbyheavyinvestmentbyothercompaniesinIBS.
Thanks.
Unident if iedCompanyRepresentat ive :
Sure,thanksforthequestion.
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Well,well--hopefully,givenourbasebusiness,youcanseethatwehavenointentionofstarvingourbrands.Ithinkourorganicgrowthacrossourbusinessesis--isfarbetterthanmostpharmaceuticalcompanies.
ThequestionintermsofoncewegettheIBSDindication,what'sthebestway,what--whatcombinationof--ofcommercialleversisthebestwaytogrowthebrandinprimarycare?
Rightnow,theSalixhadplanstoincreasetheirprimarycaresalesforcefromatacurrent160toIthinkitwas240,250.
Wearegoingtoevaluatethat,butwe'realsogoingtolookatotherapproaches,includingDTC,likewe'vedonewithJublia.Ithinkdiarrhea,justlike[onacomicosis]isadiseasethatpeoplecanself-diagnose.AndwejusthavetofigureoutwhatsetofinvestmentshasthehighestROI.
Butyoucanbeassuredthatwe--wewillbefocusedon--ongrowingthisproductasquicklyaswecanoncewegetthatapproval.
Operator:
Thankyou.
AnnabelleSamimy,Stifle.
AnnabelleSamimy(Analyst-Stifel):
Hi,thanksfortakingmyquestion.
Iwaswonderingifyoucanhelpuswiththebreakdownofthe500millionsynergies,andthisgoesalongthelinesof--ofthepriorquestion,specialtyversusprimarycare.
Youknow,Salixhadlostsome--someoftheirprimarycaresalesalreadywith[Santeris]--followingthe[Santeris]acquisition.Somaybeyoucanhelpusunderstandwherethe$500millioniscomingfrom.Ifit's--youknow,theyhadaboutyouknow,$175millionto$200millioninR&Dandtherestofitwas[SJNA],somaybeifyoucanjusthelpusthere.
AndIunderstandthatbreaksdownto500.
HowardSchiller(CFO):
Sure,wellfirst,whenwetalkaboutthe$500millioninsavings,again,wedidthismorebottomsup.
WhatarethecoststhatwewouldneedtorunSalixandwhatweresomeoftheopportunitiesacrossboththecombinedcompaniestogetsynergies?
Sothefirstpointisnotall$500millionwillcomefromSalix.PartofthatwillcomefromValeant,becauseaswegetlarger,there'salwaysopportunitytostreamlineouroperations.
Secondisthemostobviousarea,there'ssortofthebackofficefunctions,thecorporatefunctionstheyhave,I.T.andfinanceand--andthose--thosetypesofareas,they'llbealsosignificantpurchasingsavingsacrossthetwocompanies.
Again,weplantokeeptheircommercialactivitiesandspendinginplacesubjecttomoreworkontheprimarycareside,whichwejustdon'thavethefinalanswerforyoutoday.Andinfact,Iwouldnotbesurprised,similartoBauschandLomb,thatoncewereallystarttounderstandthebusiness,weactuallyspendmore--weexpandedsalesforces.
OurcontactlenssalesforceintheUnitedStatesis50%largerthanitwaswhenweacquiredthecompany.
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Wehave--wehavebuiltupanO.D.salesforceinthepharmaceuticalspace.WehavemoresurgicalrepsthanwehadwhenweacquiredBauschandLomb.
So,wewillthoughtfullyintegratethesetwocompanies,andwhetherweneedtoanddetermine,youknow,whereweshouldbespending--spendingthemoney.
Allthatbeingsaid,wearecomfortablewithour$500millionestimate,andeverytransactionwe'vedonetodate,we'veactuallyover-deliveredintermsofcostsynergiesandIsuspectwewilldosoagain.
Operator:
Thankyou.
ChrisShaw,JPMorgan.
ChrisShaw(Analyst-JPMorgan):
Great,thanksverymuch.
Justa--justafewhere.
First,canyoujusttalkaboutyourconfidenceintotheXifaxin[IDST]PDUFAandjusthowyouthoughtaboutrisksheadingintothatevent.
SecondquestionisontheIBSC,thesizeofthatopportunity.IbelieveSalixhasmadesomecommentsonthe--onthepeakopportunitythere.JusthowwereyouthinkingaboutpeakcommercialpotentialforXifaxinandIBS-D?
Andthenfinallyonthemanagementstructurethatyou'llbeaddingwithSalix,Iguess,who'sgoingtobeleadingthispartoftheorganization?Iknowthere'sbeensometransitionthere,butjusthowdowethinkabouttheleadershipteamat--atSalix?
Thanksverymuch.
J.MichaelPearson(Chairman,CEO):
Sure,ThanksChris.
IntermsoftheIBSDsubmission,we'vehadtheopportunityinduediligencetoreviewallthematerials,lookthroughalltheclinicalstudies,thesafety,efficacyprofiles.We'vealsohadthechancetoreviewFDSAcorrespondenceandhave--havelongconversations.It'sobviouslyakeypartofthisacquisition.
Netnet,I'dsaywefeelquitecomfortablethatthisindicationwillbeapproved.Intermsoftiming,wearecertainlyhopefulthatit'sthisspring,butifit'snot,we--werunanumberofscenarioswhenwe'veanalyzedthefinancialsintermsofwhatimpactthatwouldhaveontheacquisition.So,maybethebestwaytosayitis--iswearehopefulitgetsapprovedthisspring,butweareconfidentthatitwillbeapprovedoverthenext,youknow,inareasonableshort--reasonabletimeframe.
IntermsoftheIBS-Dsize,wehaveseentheirestimatesintermsofpeaksales.Ithinkour--ourpeaksalesestimateswouldbelower.Butagain,we--justannouncedthisdealyesterday,soIdon'twant--wanttodisclosewhat--whatourbasephasepeaksalesareforXifaxin.There'sstill--stillsizablebutsignificantlylowerthanthemanagementprojections.Intermsofleadershipofthe--ofthisarea,wehavenotmadethatdecisionyet,butobviouslywe'll--we'lldosobeforewecompletethetransaction.
Unident if iedCompanyRepresentat ive :
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AndMike,justonChris'squestionabouttherelativesize,IthinkweseetheIBSDopportunityassignificantlylargerthanthecurrentA.G.intravelerdiarrheaindications.
LaurieLit t le (InvestorRelations):
Nextquestion,please.
Operator:
Thankyou.
AndrewFinkelstein,SesquehannaFinancial.
AndrewFinkelstein(Analyst-SusquehannaFinancialGroup):
Hi,thanksverymuchfortakingthequestion.
Iwashopingyoucouldtalkalittlebitmoreonyourthinkingbehindthefinancingforthedeal.It'sobviously--youhavetheabilitytotakeuptheleverageratioquitesignificantlyintheshortterm,butdidheconsider,youknow,theopportunitytodoanequitysecondary?Andwheredoyouthinkthisputsyouintermsofthecapacityfor[tuck-ins]inthenearterm,particularly,youknow,whatopportunitiesyouseeinG.I.andoncologyandhowactionablethosemightbe.
Andasyoulooktodosomeofthose,whetherit'smorelikelytobeonmarketassets,youknow,orpipelineproducts.AndthenonthevalueyouseeintheSalixpipelinebeyondtheIBSindication,youknow,anysenseofwhatseemspromisingtoyouandnot,givenyouknow,itseemslikeyournetR&Dbudgetisonlyabout$50millionhigherthanitwasonthestandalonebasis?Thanks.
J.MichaelPearson(Chairman,CEO):
Sure.
Onthe--thefinancing,asyou'dexpect,welookatarangeof--ofoptions.Attheendofthedaywechosetogoallcash.
Andyouknow,aswe'vementionedtoyouallquiteoften,youknow,we--we--lastresortistouseourshare.Soit'sourinvestors.Thosebelongtoourinvestors.Wehave--wehope--webelievewe'resignificantlyundervalued,andwe'renotlookingtodilutetheownershipinterestsofourholdersunlesstherelativevalueofwhatwe'reswappingforissocompellingorandthat'dreallybethesituation.
So--sohere,webelievethatwe'redelivering.Wehaveaprudentcapitalstructure.We'vegotatremendousdeleveringstory.Wehavenorthof$7.5billionin2016inEBITDAand--andthisstructureisgoingtogiveall--giveourcurrentshareholdersalltheupsideof--fromtheSalixtransaction,whichwethinkis--isquitecompelling.
We'llstillhavetheabilitytodosmall[tuck-ins].Ithinkifyoulookatthepost[D&L]periodasa--asablueprint,weweresignificantlyabovefourtimes.Wehavemadethesamekindofcommitmentsandwe're3.5times,3.5timesnow.
We'restillabletodosomeimportant,albeitsmallertransactionswhilewe--whilewe'redelevering.
So,youcanneversaythere'snoopportunitycoststohavingthehigherleverage.It'satrade-off,butwethoughtthebenefitstoourshareholdersoutweighedissuingequityat--atthecurrentpriceatthecurrenttime.
Unident if iedCompanyRepresentat ive :
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Intermsoffillingthepipeline,product,theearlierstagepipelineproducts,we'vehada--achancetogetafirstglimpseofthose.Wedidnotbuildthoseintoourassumptionsthattheywouldendupasapprovedproductsintermsofourbasecase,andthat'sourpolicy.Butthatdoesnotmeanthatwewon'tpursuethose--thoseprograms.
Andwhenwedo--whenwelookacrossourentireR&Dportfolio,wedothatacrossallofourprogramsindermatologyandopthamologyandnowinG.I..
Andifsomeoftheirprogramshaveabetterprofilethansomethatwe'recurrentlyworkingon,wemayendupspendingalotmorethanthe$50milliononG.I.programsthatyou'recalculating.
AndI' llalsoremindyouthatwedodoR&Dinalowercostwaythanmostcompanies.AndIthinkwe'vementionedthatwelaunched--thetotalspendforJubliafromstarttolaunchwas$38million.
Soourbudgets,wetendtobeabletodoalotmorethanmostcompaniesandstillcomeoutwithhighqualityproducts.
Operator:
Thankyou.
DouglasTsao,Barclays.
Yourlineisopen.
DouglasTsao (Analyst-BarclaysCapital):
Hi,thanksfortakingthequestions.
JustmaybeswitchinggearsalittlebittothinkingabouttheDendreonacquisition.Imean,yousortofgavearangeof--ofgrossmargins.I'mjustcurious,intermsofwhattheswingfactorsthereare,inparticularontherevenuebase,itcertainlysoundslikeyouthinkthat--thatyoucangrowtherevenuebasefromthecurrentproductrunrateandsortofwhatthekeydriverswouldbethere.
Unident if iedCompanyRepresentat ive :
Ithinktherewereacouplequestionsthere.Onearoundgrossmargins,onearoundrevenue.
Intermsofrevenues,Dendreoniscurrently,probablybecausetheywereinbankruptcyorwhateverreason,havebeenprimarilyjusttargetingpositionsthatcurrentlyusethedrug,andthere'sstillahighquartilefirst,second,third,or[deathaisle]doctors.First,second,third,fourth[dethtile]doctorsthatarenotusingthedrugandaren'tbeingcalledon.
So,wethinkwe--youknow,Ithinkthatjustcallingonpeoplethatareusingaproductis--isnotprobablythebeststrategy.It'salmost,bydefinition,you'regoingto--you'regoingtolosesalesovertime.
So,we'regoingtobroaden,broadenthedoctorsthatwecallon.We'vehad--Ithinkwehavesomegoodideasintermsofsome--somenewpromotionalcampaigns,andalsosome--someotherstudiesthatwecandothatcombinationstudiesandotherstudiesthatwecandothatwillallowustobroaden--broadentheusageofthedrug.
Intermsofgrossmargin,again,wemayhavetwonumbers.One,webelievewecan--we'llgetitto65%grossmarginbytheendoftheyear,andhavedevelopedplanstodoso,andwe--andweseeapathtothe80%thatwilltakelonger--alongertimeperiodthanjustthenextsixmonths.
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Operator:
Andthankyou.
DavidRisinger,MorganStanley.
DavidRisinger(Analyst-MorganStanley):
Thanksverymuch,andcongratsagainonboththeDendreonandSalixdeals.Myquestionisonreturnoninvestedcapital.Couldyoupleaseremindus,Howard,ofValeant'shurdles?AndobviouslytheDendreondealwillfarexceedyourhurdles.ButcanyoujusttalkaboutyourexpectedROICfortheSalixtransaction?Thankyou.
HowardSchiller(CFO):
Sure.Aswe'veconsistentlystatedwhenwelookatacquisitions,we'relookingata20%IRR.Andthat'sunleveredIRRthatisassumingstatutorytaxrates.Wealsofocus,laserfocusonourpaybackperiods,whichwebelieveisastronggovernoragainstoverlyoptimisticforecastsinthelateryearsandoverlyoptimisticterminalvalueassumptions.Andwetargetedsixyearsorless.
AndIthinkforsureonsmall-andmedium-sizeddeals,weconsistentlybeen--ourmodelshaveconsistentlydeliveredthosekindsofreturns.Mostofthetimeinrealitywe'vedonethataswell,althoughwecan'tsaythatwehaveanunblemishedandperfectrecord.ButI'dstackitupasaprettygoodrecord.
Onthelargerdeals,we'vealsosaidthatwehavedonetransactionswhenyouthinkaboutMedicisandB&Lthathavereturncharacteristicsthatareslightlybelowthat.Andwerunmultiplescenariosthroughtheselargerdeals.There'smultiplelevers,variablesthatdrivereturns.
Soyouknowonourlargerdealswehavescenariosthatareabovethosecriteriaandsomethatareslightlybelowthat--thosecriteria.Andwe'vetendedtohavepaybackperiodsthatarealittlebighigher,highersingledigitsversusthesixyears.AndasMikepointedout,thatthistransactionwillbea--isveryconsistentwithwhatwetalkedaboutasrelatestoB&L,forinstance.
Operator:
Thankyou.MarcGoodman,UBS.
MarcGoodman(Analyst-UBS):
Goodmorning.SofirstonSalix[opex]youhadmentionedthatyouwerepointingto[750].Butthenon-GAAPthattheyhadbeentalkingaboutwas[625]to[650].SoI'mtryingtounderstand.Youmentioneddepreciation.Youmentionedstockbasedcompensation.Isthatit?Oraretheresomeotherthingsthere?That'sthefirstquestion.
Secondquestionisdermatologysaleswere$273millioninthethirdquarterand$425millioninthefourthquarter.ObviouslyIseethattherampinJubliaandacoupleotherproducts.Butthat'samassiveramp.Arethereotherproductsinthere?Werethereanyotherlaunchesthatwe'remissing?
Andthenjustthird,acquisitions.CanyoujusttellusfromtheacquisitionswhatkindofsalesthatyouhaddonethatyoumentionedoneacquisitioninAsia?Whatkindsofsaleswereadded?Andiftherewereanyothersthatwerenotmentioned?Thanks.
J.MichaelPearson(Chairman,CEO):
Yes.First,intermsoftheOpExforSalix,wehave--workingwithSalixmanagementoverthelasttwo,three
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weeksanddoingduediligencetogethercameupwithsortofwhatthebudgetorwhattheplannedspendwasinthisyear.SoIcan'tspeaktoothernumbersthathavebeenspokenabout.YouhavetoremembermanagementhaschangedalotatSalixoverthelastsixmonthsandthere'sreallyanewteamthere.SothebudgetthatwasgoingtobespentatstandaloneSalixwasgoingtobe$750million,andthat'swhatwebasedallourworkoffof.Probably--Idon'tthinkit'sactuallythatusefultotrytoreconcileittothingspreviouslysaid,giventheturmoil.
Intermsofdermatology,Jubliawasbyfarthelargestsinglecontributor.Butwehadstronggrowthinmanyoftheother[brands]Howardmentioned,Elidel,[Foligi],Zyclara.Butnoneofthemweresinglystoodout.YoualsohavetorememberthatQ4isalwaysalittlebithigherasthequarter.It'salwaysthestrongestquarteroftheyear.
Butquitefrankly,businessisjustdoingvery,verywell.YouknowwillIthinkit--youknowit'ssortoffiringonallcylinders.Wedon'tcontinuetothinkthatit' llfireonallcylindersforever.Butrightnow,thedermabusinessisdoingextremelywell.IwillsaythatwejustlaunchedONEXTONandtheramponONEXTONrightnowit'searlydays.Ithinkweonlyhadfourweeks.Butit'stheexactsamerampthatwehadonJublia.Sowe'recautiouslyoptimisticonONEXTONaswell.
Acquisitions,thosewereallmadepreviouslyweren'tthey,Howard?
HowardSchiller(CFO):
Yes.Wetalkedaboutthempreviously[attheRMXbeennodealforearnings]inIndonesiawasabouta$17milliondeal.[S-Con]wasmuchsmallerthanthat.Sothese--whenyouaddthemallup,itwasareasonablenumberindividuallynoneofthemworkwithatlarge.
Operator:
Andthankyou.YournextquestioncomesfromthelineofLouiseChenwithGuggenheim.Yourlineisopen.
LouiseChen(Analyst-Guggenheim):
Hi.Thanksfortakingmyquestions.SothefirstquestionIhadwashistoricallyValeanthasnotbeenasinterestedincompanieswithmultiplebidders,andwantedtoseeifyoucouldgivemorecolorontheSalixsalesprocessandhowyouwereabletowintheasset.
Andthensecondly,withDendreonandSalixyouwillnowhavetwonewverticals.Andjustinterestedtounderstandgoingforwardareyougoingtodivedeeperintotheestablishedverticalsorcontinuetobeopportunistic?Iknowinthepastyouhadtalkedaboutadditionalophthalmologyassets,animalhealthorconsumerhealthcareassets,justcuriousthatyou'restillinterestedinthoseareas.Thanks.
J.MichaelPearson(Chairman,CEO):
Sowedon'texactlyknowwhatthesalesprocesswas.WewerejustinteractingwithSalixandtheirbankers.Soyou'dhavetoaskSalixabouthowthathappened.
Intermsofwherewewanttoinvestcapital,we--again,we'reprobablymoreopportunisticthan--we'renotacompanythatsitsinaroomandsaysforthenextyearwe'rejustgoingtofocuson[ecology]andwe'regoingtobuya(inaudible)fillthatup.Becausesomuchofwhatwedoisgovernedbytheeconomicsideofthings.Sowe'lllookat--whatitdoesdoisexpandthenumberofopportunitiesavailabletothecompany.
Sowenowhavetwonewimportanttherapeuticareaswherewe'vereallynotpaidalotoftimeorattentiontowhatarealltheopportunitiesthere.Sowhatwecontinuetodobyaddingmoreverticalsiscontinuetoincreaseinasensethenumberoftargetsoutthere.SoovertimeI'msurewe'llcontinuetobuildtheoncology
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andGIspace.Butwe'llcontinuetobuildthedermatologyandophthalmologyspaceaswell.
Operator:
AlexArfaei,BMO.
AlexArfaei(Analyst-BMO):
Goodmorning,folks,andcongratulationsonastrongfinancial2014andadeal.Couldyouprovidemorecoloronanytax-relatedNOLsthatyougotfromDendreonandSalix?IthinkyoumentionedyougottaxattributesfromDendreon,whichissurprisinggiventhatIthinkitwasanassetsale.And,Howard,tousitlookslikeSaliximprovesyourgrossmarginby1%andoperatingmarginbyatleast2%.Isthatinlinewithwhatyousee?Andisthereanypotentialforgrossmarginsynergies?Thankyou.
HowardSchiller(CFO):
Well,intermsofthetaxattribute,SalixdidhavesomeNOLs.Ibelievethereweresomearound$500millionthatwe'llbeabletoutilize.Dendreon,you'reright.It'sanassetdeal.Butthewayitwasstructuredinthebankruptcycourtallowedustogetaccess.Butthensortof--asMikesaid,there'sconsiderableamountofNOLs.Undertherulesyou'relimitedtohowmuchyoucantakeonanannualbasis.Buttherewillbesomethere.Andwetalkedaboutthefactthatwepaid$15millionforthepipelineassetplusaccesstotheNOLs.You'reright.Salix'sgrossmarginswerearound80%.Sothatwillhelp.
Dendreon,ontheotherhand,at--youknowwe'llgetinthe65%,asMikementioned,willpullitdownalittlebit.Dendreon,asMikementioned,we'vetakenalookatthemanufacturingprocessesandhaveidentifiedsomeopportunities.Atthispoint,we'venotreallytakenanysynergies.Wehaven'ttakenanyfromthemanufacturingprocess.
Salix(inaudible)CMOswe'llhavetolookatthewholesupplychain.Buttypicalwithmostofouracquisitions,wetakeourtimeanddothatatalaterdate.Sofornowyoushouldassumethegrossmarginsarewhattheyare.They'llgoupalittlebitasthegross-to-netsimprove.AndthenDendreonyou'llseetheimprovement,asMikearticulated.
Operator:
Thankyou.DavidAmsellem,PiperJaffray.
DavidAmsellem(Analyst-PiperJaffray):
Thanks.So,questiononXifaxan.Doyouthinkthere'spricingpowerfortheasset?Particularlyistherepricingpowerhereifwedon'tseeanapprovalinIBSandthelabelismorelimited?AndjustIguessinavacuum,evenifwedoseeapproval,isthisanassetwhereyouthinkthereissignificantpricingpower?Andisthatoneofthereasonswhyyou'retakingamoremodestviewoftheIBSsalespotentialvis-à-visSalix'smanagementinternalprojections?Thanks.
J.MichaelPearson(Chairman,CEO):
IcansaythatwetookaveryconservativeviewonpricewhenwebuiltourmodelsforSalix.Andoncewegettoknowtheproductbetterandthecustomerbaseandthepayerenvironmentwecanchangethatassumption.Butwetookverymodestviewsonpricingopportunities.
Operator:
Thankyou.CoreyDaviswithCanaccordGenuity.
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CoreyDavis (Analyst-CanaccordGenuity):
Thanksverymuch.Thefirstone,canyoujustclarifyifthe20%accretionin2016isrelativetoyour,Ithinkitwasaround$12ashareEPSthatyouputoutinNovemberasyourestimate?
Andsecondly,justafewyearsagoBrazilwasoneofthehottestemergingpharmamarketsandnowseemstobeslowing.CanyouelaborateonBrazilandLatinAmericaingeneral,andhowweshouldthinkaboutthatcomponentofyourbusinessforthenextcoupleyears?Isthatsomethingthatyoumightthinktodivestifitcontinuestostruggle?Orisitstillprofitableenoughandstrategicenoughthatwarrantskeepingit?
J.MichaelPearson(Chairman,CEO):
Allright,Corey.Yes,intermsof--Ithinkthelastoutlookwehadfor2016wasinthepresentationthatwasdoneatISSintheNovembertimeframe.Ithinkitwasarangeofsortofnodealsde-levering,whichwasabout12…
LaurieLit t le (InvestorRelations):
05.
J.MichaelPearson(Chairman,CEO):
$12.05rangeouttolike$14.50ifwedidanumberofdeals.Sosincethattimeanumberofotherthingshavebeenbuiltintoourthinkingon2016.Oneisthebusinesscontinuestooutperform.SecondiswedidtheMarathondeal,whichwaswetalkedaboutlastquarterorearlier.AndthenwealsohavedoneaDendreondeal.Soifyouaddthoseintothebaseat2016thatgivesyouanew2016.Andthenyou--andthenwhatwe'resayingisthiswillbeatleast20%accretiveonthat.
AndintermsofBrazil,themarkethassloweddown.There'sbeen--thewholeeconomyhassloweddown,asyouknow.Andsothegrowthratewas--asyousaid,itwasastrongmarket.Andthenourperformance--wellactuallyinB&Lit'sbeenquitestrong.Wecontinuetohavestrongorganicgrowth.AndourbiggestissuedownthereisProbiotica,whichisabusinessthatweboughtthreeyearsago,fouryearsago,whichisinthenutritionareaintermsofnutritionalsupplements.Andfromthatstandpointthe--youknow,we'veactuallydeclinedasamarket.
It'sinterestingtonotethatouractualprofitabilityinBrazilhasimprovedyear-on-year.Sofromacashflowstandpointitcontinuestogrowforus.Butfromatoplinestandpoint,withFX,coupledwithlosingsomeshareinthenutritionalarea,ourtoplinehasnotbeenstrong.
Operator:
Thankyou.TimChangwithCRTCapital.
TimChang(Analyst-CRTCapital):
Hi,Mike.Congratsonthesetwodeals.YouknowonDendreonIlookbackatsomeoftheirfinancials.Ithinktheirgrossmarginsaresomewhereinthelow50satbest.AndyouknowisthereanythingyoucouldtalkaboutintermsofhowyouguyswillgetthemarginsontheProvengeproductintothemid-60sbyyearend?Itseemslikeit'sasortofauniqueproductinitself.
J.MichaelPearson(Chairman,CEO):
Yes.Sowhenwe--yes,theyhavebeenaround50%historically.ThereisanawfullotofabovetheplantcostsinDendreonintermsof--sowe'renotreallygoingtotouchthemanufacturingfacilityatall.There'sactuallytwoofthem.OneisinSealBeachandoneisinAtlanta,Georgia.Sotheactualmanufacturingsites,you
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Industry:DrugsEventDescription:Q4 2014 EarningsCall
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knowweplannottomakereallymuchchangeatall.Whattherewasalargeinfrastructure,techopsandothertypesofinfrastructureabovetheplantlevel.Wehavemanyofthosefunctionsourselves.Sowedon'tneedadditionalfunctionsinthatarea.
Andthenaswewerementioningbefore,thisthingwasbuilttobeabillion-dollarcompanyatleast.Andthey'vespentaheadofdemand,andtheyneverreallyright-sizedthisbusinesswhentheproductdidnotcomeoutandbecomeabillion-dollarproduct.Soit'sjustbasicthingsthatyoucangoanddo.Sothatrepresentsgainsat65%.Ithinkthe80%willtakealittlebitmorework,probablysomeinvestmentintermsofdoingthingsalittlebitdifferent.But65%isjusteliminatingthingsthatanyoneofyouwhowalkedintotheorganizationwouldimmediatelysee.
Operator:
Thankyou.GreggGilbertwithDeutscheBank.
GreggGilbert (Analyst-DeutscheBank):
Thanks,guys.CanyoudiscussthedurationoftheXifaxanassetthatyouuseinyourbasecase,andmaybetalkaboutthelegalandregulatorydiligencyonXifaxanandhowthatinformedwhatyourbasecaseassumptionis?Thanks.
J.MichaelPearson(Chairman,CEO):
Yes.Well,wedid--asyoucanimaginegiventhesizeandthepotentialoftheproduct,we'vespentanawfullotoftime.MultipleofferingswehiredtolookattheIPsituation.AndI'mnotsurewewanttodisclose--I'mnotsurewehadabasecaseperse.
Wehadallsortsofscenariosintermsofwhenthispatentcouldexpire.Notbecausewethoughtitwouldbutwejustwanted--it'seasytorunthesensitivitiesforthemodels.Andwefeelquitecomfortablethat--wefeelquitecomfortablethateveninthemost--theworstcasescenarioswe'llstillearnareturnforourshareholders.Itwillnotbeourhistoricreturn.Butwealsofeltquitecomfortablethatthisisastrongsetofmultiplepatents.Andweputthisproportioneffortinlookingatit.
Operator:
Thankyou.ShaneShawwithAlbertFried.
ShaneShaw(Analyst-AlbertFried):
Hey.Goodmorning.Congratulationsonthedeal,guys.Sojusthadaquickquestionasfaraswhatweneedfordealcompletion.IsitjusttheHSRandthetenderingofshares?Andanyideawhenyou'regoingtobelaunchingthetenderoffer?Andifthat'sthecase,ifit'sjustHSR,canweexpectthedealtoclosemaybekindofearlytomid-Apriltimeframe?
J.MichaelPearson(Chairman,CEO):
You'rerightintermsofthe--intermsofclosing.HSRisreallyit.We'llfilethetenderoffer,launchtenderofferwithintwoweeks,thenhopefullysoonerratherthanlater.AndIdon'tthinkwewanttopredictwhenwe'regoingtogetHSR.Butthere'snooverlap.Soitshouldbehopefullyasmoothprocess.
Operator:
Thankyou.DavidSteinbergwithJefferies.
DavidSteinberg(Analyst-Jefferies):
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Thanks.Iknowinpreviousacquisitionswherethere'sbeenoutstandinglitigationyouknowthecompaniesmoveddecisivelytoresolvethat.Andinyourcommentsyou'dmentionedyou'ddoneduediligenceonassociatedpotentiallitigationexposure.Curious,particularlygiventheinventoryrevelationsofNovemberwhatyourviewonpotentiallitigationexposurethereis,ifany.
Andthensecondly,justcuriousonwhatyourbreakupinthistransactionmightbe?
J.MichaelPearson(Chairman,CEO):
We'renotgoingtocommentonlitigationexposureotherthanwetookahardlookatitanditwasstillpinnedtoourthinking.Thebreak-upfee?
HowardSchiller(CFO):
Thebreak-upfeeis$355millionplusexpenses.
Operator:
Thankyou.YournextquestioncomesfromthelineofDouglasMiehm,RBCCapitalMarkets.
DouglasMiehm(Analyst-RBCCapitalMarkets):
Well,congratulationsfrommeaswell.Mike,withrespecttotheoutlookforthisyearslightlyaccretiveandthenover20%nextyear,canyouspeaktothenecessityforanapprovalinMayforIBS-D?Andthenperhapsyoucouldjustgointoalittlebitmoredetailintermsoftheduediligencethatone'sactuallydoneontheinventories.
AndthenforHoward,justcouldyouspeaktothedifferencebetweenthe$7.5billioninEBITDAandthe$4billioninfreecashflow?Weknowit'sinpartofitsinterest,butmaybesomeoftheotherdifferences?AndI' llleaveitthere.Thankyou.
J.MichaelPearson(Chairman,CEO):
Doug,justone--toclarify,the--youwantourviewonwillitbeapprovedin…?
DouglasMiehm(Analyst-RBCCapitalMarkets):
No.JustIwanttogetasenseforhowcontingentistheoutlookonanIBS-Dapproval,sayMay?Isitnotatall?Andyoucanbeslightlyaccretivethisyear?OrisaMayapprovalneededtobeslightlyaccretivethisyearandover20%nextyear,justintermsofhowyou'dexpecttolaunchtheproductandseeitkickoff?
J.MichaelPearson(Chairman,CEO):
Igotit.Thankyoufortheclarification.No,we'renotdependentonaMayapprovaltomeetthenumbers.Weareassumingthatweactuallydogettheapprovalintermsofthemodelswebuildandhowwevaluedthecompany.
Intermsofourinventories,wefeelverygoodabouttheduediligencewedid.Itwasactuallyprettystraightforward.Youknowwewentinandweactuallygotourfinancing,gotthewholesalerreports.Weknowpreciselyhowmuchofeachproduct,eachSKUisinthechannelindetail.AndsoIdon'twanttosaywehaveperfectinformation,butaboutasclosetoperfectinformationyoucouldhaveintermsofwhattheinventorysituationis.
HowardSchiller(CFO):
Yes.AndthentheresultsbetweenEBITDAandfreecashflow,youpointedoutbyfarthebiggestitemiscash
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interestexpense.Thentaxesand[CapEx]andobviouslyworkinvestmentsandworkingcapital.Butinterestexpenseisbyfarthebiggestcomponent.
Operator:
Thankyou.[EmilKisina],MitsubishiSecurities.
Unident if iedPart icipant :
Goodmorning.AtthispointIonlyhaveamechanicalquestion.OnyourEnterpriseValueslideyoushowtheSalixseniornoteswithabreakagefee.Howarewethinkingofthat?Isthatcontemplatedtooccuratclosing?Isitaconditiontoclosing?Howexactlyareyouthinkingaboutthat,please?
J.MichaelPearson(Chairman,CEO):
Well,there'samake-wholeposition.It' lloccuratclosing.Andthere'samake-wholeprovision.Youknowwewishtherewasn't,butthereis.Andsowehadtoaccountforit.
Operator:
Thankyou.GaryNachman,GoldmanSachs.
DivyaHarikesh(Analyst-GoldmanSachs):
Goodmorning.ThisisDivyaHarikeshonbehalfofGaryNachman.Congratulationsonastrongquarterandgoodday.Ijustwantedtounderstandiftherewillbemeaningfulrevenuesynergiesthatyoucanexpect.AndwillyoubeabletotakeXifaxanandotherproductsoutsidetheU.S.?
Andsecondly,doyoufactorthedebtpaydownwhenyoutalkaboutyour20%accretionin2016?
J.MichaelPearson(Chairman,CEO):
IntermsoftakingtherevenuesynergiesoutsidetheU.S.,weassumenothinginourmodel.They'vegivenawaymostoftherights.IthinktheydohavesomerightsinCanada,maybeafewothercountriestosomeotherproducts.That'snotbuiltintoourbasecase.Butthatalsodoesn'tassume--it' llbeincremental.Itwillnotbe[productive].
HowardSchiller(CFO):
Yes.Andwedoassumethatwe'regoingtobepayingdowndebtbecausethat'swhatwe'retellingyouwe'regoingtobedoing.Sowetookintoconsiderationwhenwetalkedabouttheaccretion.
Operator:
Thankyou.BrianLombardiwithMerrillLynch.
BrianLombardi(Analyst-MerrillLynch):
Goodmorning.Ijustwantedtodigintothesynergyassumptionsalittlebitmore.IthinkifIheardcorrectlyitsoundslikethe$500millioninsynergiesaren'tentirelycomingoutofSalix.Whatportionisitcomingfromthen?
J.MichaelPearson(Chairman,CEO):
We'renotgoingtocommentontheproportion.Thankyou.
Operator:
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Industry:DrugsEventDescription:Q4 2014 EarningsCall
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AndyournextquestioncomesfromthelineofShaneShawwithAlbertFried.Yourlineisopen.
ShaneShaw(Analyst-AlbertFried):
Hiagain.Sojustwantedtofindout,areyouexpectedtolaunchamarketingperiod?Areyougoingtodothatbeforethetenderofferexpires?Orareyougoingtodoitafterwards?Justcurioustofindout--Iknowyouhavecommitmentsinplace.Isawthecommitmentletter,butjustcuriousasfarasthe[syndication].
J.MichaelPearson(Chairman,CEO):
Thereisamarketingperiodbuiltintotheagreementthatwouldoccurpre-closing.Sowewouldexpecttoputinplacethepermanentfinancingbeforeweclose.
Operator:
Thankyou.AndyourlastquestioncomesfromthelineofDavidSteinbergwithJefferies.Yourlineisopen.
DavidSteinberg(Analyst-Jefferies):
Yes.JustquickquestiononJublia,Iknowthatit'sbeenalmostsixmonthssinceitwasonthemarketandit'sexceededallexpectation.Iwascurious,aroundthistimetypicallythere'ssomeviewoncontractofManagedCare.AndIwascuriousyouknowwherethatstands.Andgoingforwarddoyoustillsee50%growthinthat?Orwoulditamelioratebacktothemorenormalized30%level?Thanks.
J.MichaelPearson(Chairman,CEO):
Sure.We'reindiscussionswithManagedCareaswespeak,andhopetohavethosewrappedupinthefirsthalfofthisyear.Andwealsoareofferingazeroco-payonthisproductatthispoint,bothintermsoftheinitialaswellasrefills.Andsothatalsoishavinganimpactonourgross-to-net.
Butaswementionedlasttime,aslongas--obviouslywe'llgettheManagedCarecontractsinplace,andthatwillprobablyhelpabit.Butaslongasthisproductcontinuestogrowandaccelerate,we'llcontinuetomakesureit'savailabletoeverypatientandkeepthatgrowthtrajectory.Butoverthelongerterm,thegross-to-netsituationshouldimprove.
Allright.Well,Ithinkwe'verunalittlebitover.Butanyway,thankyouforallyourinterest.Andwe'lltalkagainnextquarter.Thankyou.
Operator:
Thisconcludestoday'sconferencecall.Youmaynowdisconnect.
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