Bausch Health Companies Inc.
Q3 2012 Earnings Call Transcript

Published: 2 Nov 2012

[Operator:]

Good morning. My name is Brandy and I will be your conference operator today. At this time I would like to welcome everyone to the Valeant Pharmaceuticals Third Quarter 2012 Financial Results Conference call. All lines have been place on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. I would now like to turn the call over to Laurie Little, Vice President of Investor Relations. Please go ahead.

[Laurie Little:]

Thank you, Brandy. Good morning, everyone, and welcome to Valeant’s third quarter 2012 financial results conference call. We appreciate everyone’s flexibility in the rescheduling of this event due to the impact of Hurricane Sandy earlier this week. Both of our offices in New Jersey were affected by this powerful storm and most of our New Jersey-based employees were unable to work this week. Presenting on today’s call are J Michael Pearson, Chairman and Chief Executive Officer, and Howard Schiller, Chief Financial Officer. Rajiv De Silva, President and Chief Operating Officer of Specialty Pharmaceuticals, is also with us and will be available during the Q&A session. In addition to a live webcast, a copy of today’s slide presentation can be found on our website under the Investor Relations section. Certain statements made in this presentation may constitute forward-looking statements. Please see slide #1 for important information regarding these forward-looking statements and associated risks and uncertainties. Readers are cautioned not to place undue reliance on any of these forward-looking statements. The company undertakes no obligation to update any of these forward-looking statements to reflect events or circumstances after the date of this presentation or to reflect actual outcomes. In addition, this presentation contains non-GAAP financial measures. For more information about non-GAAP financial measures, please refer to slide 21. Non-GAAP reconciliations can be found in the press release issued earlier today and posted on our website. Finally, the financial guidance in this presentation is effective as of today, November 2, 2012. It is our policy to update our firm guidance only through broadly disseminated public disclosure. And with that, I’d like to turn the call over to Mike Pearson.

[Mike Pearson:]

Thank you, Laurie. Good morning, everyone, and thank you for joining us. We hope all of you and your families in the areas affected by Hurricane Sandy have come through safely. We suspect that many of you, like all of us, are continuing to operate with no power. We appreciate you making the effort to join us today. On today’s call we will cover the following topics

[Howard Schiller:]

Thank you, Mike. Today we reported our third quarter 2012 results. Mike already touched upon our very strong top-line performance where we added more than $100 million of product sales versus our Q2 results. Our cost of goods sold for the third quarter was 23% compared to 20% in the third quarter of 2011. While we are making progress on our COGS initiatives, including our plant consolidations in Brazil, Mexico, Europe and Canada, the improvement versus Q2, 2012 was primarily driven by the outperformance in our Dermatology segment, which enjoys a higher gross margin than other divisions. While we expect that gross margins will continue to improve over time, you should not expect this progress to be linear. SG&A expenses declined as a percentage of sales this quarter to 20% of revenue. This percentage will fluctuate from quarter-to-quarter due to factors such as timing of synergy capture and sales activity. We expect SG&A as a percentage of sales to remain in the 20% range over time. R&D expenses was $19 million for the quarter, or about 2% of revenue. Similar to SG&A, we expect our R&D expenses to fluctuate from quarter-to-quarter, but stay in this relative percentage for the remainder of the year. Operating margin improved to 54% of revenue in line with our performance earlier in the year. Bottom line, we achieved cash EPS of $1.15 and adjusted cash flow from operations of $241 million. We had no one-time items to report this quarter and I will provide more analysis on our cash flow in just a moment. We are continuing our practice of showing you the slides provides greater detail to our reported results and breaks out past one-time items so that it is very clear as to how the underlying business is performing. Our revenue year-to-date grew 44% compared to the first nine months of 2011. In addition, our cash EPS has increased greater than 60% quarter-over-the-prior-year-quarter for the past five quarters, with an increase of 75% this quarter. We reported adjusted cash flow from operations of $241 million in the third quarter, as compared to $212 million in the third quarter of 2011. Given our strong operating performance this quarter, GAAP cash flow from operations was lower than could be expected due to several factors. First, while the cash paid out for restructuring integration cost was lower than in Q1 and Q2, we still paid out $34 million for these expenses. Second, we paid out $38 million to settle the Wellbutrin litigation cost, as we noted on our last call and finally, our working capital increased by about $128 million, including an increase in accounts receivable of $183 million, due to strong Q3 sales in general and exceptionally strong sales in the month of September. As Mike mentioned before, we experienced a stockout of Zovirax cream and ointment early in the quarter, resulting in a large percentage of this quarter’s Zovirax sales in September. We also had a very strong back-to-school acne season in September and a strong post summer holiday sales in our European operations. We would expect to collect all of these receivables in Q4. In the U.S., for example, we’ve already collected over $200 million of the $346 million accounts receivable balance that was outstanding at the end of the third quarter. And finally, our current cash balance is approximately $580 million. We have lowered our guidance on adjusted cash flow from operations from greater than $1.4 billion, to $1.2 billion to $1.3 billion for 2012. This implies that our adjusted cash flow from operations should be in the range of $330 million to $430 million for the fourth quarter. Our full year guidance was impacted by the strong growth in our Emerging Markets businesses, which are more working capital intensive and working capital increases through the acquisition of businesses were either we did not acquire the accounts receivable and therefore needed to invest, or we acquired businesses where we needed to invest for growth. Finally, as we move forward with several plant consolidations, including Puerto Rico and Montreal, which were not contemplated at the beginning of the year, we needed to build up a certain amount of safety stock ahead of these activities. This chart breaks down acquisition integration and restructuring costs into broad buckets. The more detailed presentation can be found in our press tables issued earlier today. As you can see, this number has decreased from $87 million we recorded in Q1 and $48 million in Q2. As we have previously disclosed, most of our deals in 2012 have been asset deals that have not included plants and or plants and people. While these quants are added back to cash EPS, they still represent cash outflows and we continue to closely monitor them. And obviously we will incur significant restructuring and integration expenses related to our transaction with Medicis once closed. Just to recap all of our recent financings, I’d like to start on the financing related to the Medicis transaction. We raised $1 billion in Term Loan B with a seven-year term and a rate of LIBOR plus 3.25% to 1% LIBOR floor. While this transaction will fund it at close, we will pay the LIBOR spread until close. We also raised $1.75 billion in unsecured, high-yield notes at a rate of 6-3/8%. This portion of the financing was funded into escrow in early October and will be released upon closing. In addition, we also raised an additional $500 million in high-yield notes at the same rate, which were not tied to the Medicis deal and will go to fund other transactions that were already under consideration. The fourth quarter 2012 impact from all of these financings will be approximately $44 million in additional interest expense or $0.15 cash EPS, of which $0.12 is attributable to the Medicis-related financing. Only the interest expense associated with the Medicis deal was excluded from the guidance in the press release issued earlier today. Once the transaction with Medicis closes, we will have approximately $10.9 billion in total debt and a debt to pro forma EBITDA of approximately 4.2 times. We have committed to getting this ratio below four times, within 12 months of the close of the Medicis deal. In summary, we have tightened the range of our 2012 cash EPS guidance to $4.60 to $4.65, which equates to $1.30 to $1.35 cash EPS for the fourth quarter, excluding the additional interest expense related to the Medicis transaction. Once the additional interest expense impact of $0.12 from the Medicis-related financing is included, we expect cash EPS for 2012 to be $4.48 to $4.53, and $1.18 to $1.23 for the fourth quarter of 2012. As mentioned earlier, Valeant is adjusting 2012 adjusted cash flow from operations expectations from greater than $1.4 billion, to $1.2 billion to $1.3 billion, and our guidance for revenue remains the same, at $3.4 billion to $3.6 billion. With that, we’ll now open up the call for questions. Operator, may we have the question, please?

[Operator:]

(Operator Instructions) Your first question comes from the line of Chris Schott with JP Morgan.

[Chris Schott:]

Thanks very much. Just a couple questions here. Maybe first, can you talk about your expectations for the Derm business in the fourth quarter? And specifically should we think about a step-down from these very strong 3Q levels? And maybe as part of that, can you also quantify the inventory impact in 3Q as a result of the Zovirax stock-out? I just had a follow-up question after that.

[Mike Pearson:]

Sure. Let me take – this is Mike. I’ll take the first one and I’ll let Howard take the second one. I think you’ve seen quite a bit of fluctuation in terms of our Derm organic growth, but it’s been consistently sort of plus 20% for the year, which we would expect to continue. So I’m not sure we’ll get the 60% we got this quarter, but we would continue to expect strong Dermatology segment growth in the fourth quarter.

[Howard Schiller:]

Yeah, in terms of inventory, I assume you’re talking about inventory in the channel, which as Mike referenced before, because of the strong end-of-quarter sales and we believe the wholesalers wanted to protect themselves from any potential future disruptions, they were a little bit higher than what we experienced earlier in the year, but those levels have held. And as Mike mentioned, the sales have held up and so I don’t think we view it as having an excessive amount of inventory in the channel.

[Chris Schott:]

Okay, maybe just a follow-up on that. I’m just trying to get a sense of if we were to – not assuming those inventories initially come down this quarter, but just to strip those out, just trying to get a sense of what the 3Q numbers would have been without that inventory build. Is that something you could provide?

[Mike Pearson:]

I think in terms of Zovirax we tried to calculate it every possible way and worst case, I think we came out with six days of potentially over – extra inventory in the fourth quarter. But, again, reiterating what we said, actual sales of Zovirax in the fourth quarter – we’re a third of the way through – continue to be actually above plan.

[Chris Schott:]

Okay. Great. Thanks for that. And then just my follow-up question was just on the updated synergy commentary for Medicis. Should we read the commentary that the peak synergies are going to be above your prior forecast? Or is this an issue that just the timing of synergies may be faster due to the progress you’ve made with planning so far? Thanks.

[Mike Pearson:]

We were referring to the peak synergies. The timing has remained the same. We expect to get the synergies out in six months. But we’ve had a lot more over the course of the last month as we’ve worked very closely with the Medicis team.

[Chris Schott:]

Great. Thanks very much.

[Operator:]

Your next question comes from the line of Gary Nachman with Susquehanna Financial.

[Gary Nachman:]

Hi, Mike. What’s your comfort level with this minimum...

[Mike Pearson:]

Hello?

[Operator:]

Hold one moment, sir.

[Mike Pearson:]

I’m sorry? Operator? Was that – did we lose Gary or did he lose us?

[Operator:]

Okay, his line is open.

[Gary Nachman:]

Okay, Mike, can you hear me?

[Mike Pearson:]

Yes, I can.

[Gary Nachman:]

Okay.

[Mike Pearson:]

Sorry.

[Gary Nachman:]

Okay. So first, what’s your comfort level if there’s minimum disruption in the Medicis sales force, as you’re going through the transition? And then just on the synergies, could you just explain a little bit what is it that you’re seeing that’s better than what you expected? And maybe if you could quantify that, that would be helpful.

[Mike Pearson:]

Sure. In terms of – on the second question, I – we’re not going to quantify it at this point in time. But I think that – what’s been very positive is individuals -management teams from both sides have pointed to areas that we can save more money than we thought. I will comment that the areas where we’re – will not be sales and marketing necessarily. In fact, we may end up spending a little bit more money there than we originally anticipated, but it’s primarily in the support functions. And the first question again?

[Gary Nachman:]

Yeah, just your comfort level if there minimum disruption in the Medicis sales force as you’re going through the transition and the process. I’m sure for some of the sales reps, it’s a little concerning.

[Mike Pearson:]

Well, it certainly is. It’s concerning obviously for individuals of both the Medicis team, as well as on the Valeant team. But we have done a couple things. One is, both companies ascribe to the philosophy of sort of pay-for-performance and best-of-the-best, so it will be a merit-based decision process. The second is, we’ve put in place an extra bonus system in the fourth quarter that again will reward the top performers, so that it creates a nice retention vehicle there. And we’ve been able to basically, on both sides, reassure our top performers that they’re going to have a job at the end of this, as long as they perform well. So again, we’ve done this a number of times. This was not our first acquisition and we actually feel quite good. If you look at the departure rates of top performers on both sides, they’re staying at the same level as they had been pre-merger.

[Gary Nachman:]

Okay. That’s helpful. And then just one more. In Europe, I know it’s a little challenging there. Could you just quantify how much better you’re doing than the market and just what the outlook is, I guess, for the market overall in some of these countries where it’s been a little bit more challenge like Poland? Thanks.

[Mike Pearson:]

Let’s take Poland. We were there I think last – a week before last where we were doing our budget meeting for next year. We looked at a chart that had the 20 top pharma companies in Poland. I think we’re now about tenth. You can include the branded players as well. The overall market has actually declined about – year-to-date about 4% due to the pricing actions taken earlier in the year. There were only two companies that grew, us and Polpharma. We grew the most, 3.5%, and I think Polpharma was about 1.5%. So that sort of dimensionalizes that we’re sort of out-performing the market by 6%, 7%. We do expect, though, that next year the market will turn back to positive growth and we, ourselves, are forecasting and our team there is forecasting double-digit growth for us next year.

[Gary Nachman:]

Okay. Thanks a lot.

[Operator:]

Your next question comes from the line of Gregg Gilbert with Bank of America Merrill Lynch.

[Mike Pearson:]

Operator?

[Operator:]

Mr. Gilbert, is your line on mute?

[Gregg Gilbert:]

Can you guys hear me all right?

[Mike Pearson:]

Now we can.

[Gregg Gilbert:]

Okay. Couple for Howard. Can you share the volume versus price breakdown within the 62% same-store growth for Derm in the quarter? And then I have a couple follow-ups.

[Howard Schiller:]

Within – when you say the price versus volume – oh, for the quarter, it’s going to be a little bit more price. We’ve not disclosed the precise numbers for the quarter. When we looked at it, it’s a little bit more price, but it’s still more volume, much more volume than price for the quarter driven by the products that Mike had outlined.

[Gregg Gilbert:]

I’m sorry. You said it’s more price than volume or more volume than price in the quarter?

[Howard Schiller:]

More price that is showing in the quarter-to-date.

[Gregg Gilbert:]

Right.

[Howard Schiller:]

But it was still more volume than price driven.

[Gregg Gilbert:]

Okay. My second question, Howard is, in light of the lowering of the cash flow guidance, is it fair to say that the conversion of net income to cash for you business model is less robust than you previously thought? Or the sort of – in your mind one-time timing related issues that led to lowering in the cash flow guidance?

[Howard Schiller:]

I don’t think it’s a reflection at all of our net income to cash conversion of the model. I think it does point out the complexity of projecting cash flows and specifically changes in working capital when you’re making as many acquisitions as we are. As we mentioned, a number of the acquisitions – almost all of our acquisitions this year were asset deals and of all the major ones, they were all asset deals outside of Medicis. Natur Produkt, which hasn’t closed would be a stock deal as well, and in those cases, most of the time, we didn’t acquire any of the accounts receivables. So projecting that ahead of time, and obviously if we don’t acquire the accounts receivables, we then have to build up those accounts receivables, invest in accounts receivables short-term and that’s impossible to project. In addition, we’ve also acquired some businesses where we were investing in them to grow versus the prior owner, which takes working capital as well. I think that’s – that and the safety stock build-up for the plants, some of what as we’ve talked about before, some of the consolidations, just specifically in Latin America, have been delayed a bit. Europe, some of it’s taken a little bit more time, and then Montreal, the Bourdon facility and – having to move out of the legacy Valeant facility in Puerto Rico, were not contemplated at the beginning of the year, so there was additional safety stock required for those facilities. So I think it’s a complex business model to project changes in working capital. We’re very focused on it but it’s that as opposed to the model.

[Gregg Gilbert:]

Okay, and then two more. One for Mike. What is the cash cost tied to your Medicis cost synergies, if you assume all of the monies you need to lay out to take management out of compensation and synergy – I’m sorry – severance structures, et cetera? And lastly, for Rajiv, congrats on your good ride at the company, can you share the thinking behind your decision to leave? Thanks, guys.

[Mike Pearson:]

In our deal model, we made an assumption that the cash costs of Medicis in terms of the restructuring was 50% of total synergy value. Now based on our prior experience, that will – we will see whether we’re within that or not. The actual total cost will be higher, but there’ll be a number of non-cash items – whenever you do these public company transactions, there’ll be a number of non-cash items as well.

[Rajiv De Silva:]

Gregg, this is Rajiv. Thank you for the question, and frankly my decision to leave and the thinking behind it is very simple. I’ve had the benefit of knowing Mike for a very long, even before I joined Valeant, and when I did, we had a discussion in the very beginning that said that I have my own aspirations of running a company one day. And what Mike and I decided was that this opportunity with Valeant was great, which is why I came, but if it came to a point where I wanted to explore something else, that we would have that discussion once we were into this for a three- to four-year period. And it is that time. And Mike and I have had this dialogue for a while. It’s been a very, very constructive dialogue and I have to thank Mike as well as our Board for the support that they have shown me in this process. And at this particular point in time, particularly with the Medicis transaction, it just allows us a very good timing for this transition. The company’s doing extraordinarily well, particularly with the U.S. businesses, as you saw with our results of the third quarter, are doing extremely well. And I’m proud of the team that I’ve assembled as well as the business that I’ve helped Mike, Howard and others build. And it allows a very good timing for the decision. So that’s the very simple story and both Mike and I have been friends for a very long time and will continue to be good friends.

[Gregg Gilbert:]

Thanks for the color and good luck.

[Mike Pearson:]

Thank you.

[Operator:]

Your next question comes from the line of Corey Davis with Jefferies.

[Corey Davis:]

Thanks very much. Two questions. First on Zovirax. The IMS prescription data shows your product to be declining still year-over-year. And I think now we’ve annualized the launch of the new tube size so that can’t be an explanation anymore. So simple question is, is IMS wrong and the volumes that you’re actually selling are growing, or is there some other disconnect we’re not seeing?

[Mike Pearson:]

Well, Corey, you know as well as we do the limitations of IMS. It certainly is accurate in terms of the channels it covers but there’s many channels it doesn’t cover, including Wal-Mart, which is increasing its pharmacy business significantly, mail order, and stack model HMOs, those types of places. So we get – well, actually we don’t get the IMS data. We usually get it from people like yourself. We’ve chosen not to invest in IMS. We use Volter Scores because it’s a much better tracker for the Dermatology business in particular, which is our main focus. But in terms of do we continue to see growth in orders, the answer’s yes. So I can’t say the IMS data is wrong, but I can say what’s being ordering is growing.

[Corey Davis:]

Okay. And next question on IDP-108. Do you expect a panel meeting for that, and if you get final approval in May on the PDUFA date, how soon after that would you be able to launch and any new thinking on plans for how you would address the general practitioner market with that product?

[Mike Pearson:]

Sure. We are not expecting a panel. I don’t think – we don’t think this drug is controversial in any way. The safety data is very clean. So we don’t expect a panel. We would expect to launch soon thereafter where, from a manufacturing standpoint, we are all geared up. So we’d be ready to go. So if we got approval we’d certainly be launching in the second half of the year at the latest. And in terms of the GP community, we prefer not to comment on that specifically right now, but we do intend to control this product in the United States.

[Corey Davis:]

Thanks. Actually, one more on gross margin. Howard, your comments not to expect gross margin to be linear, does that imply that 2013 is going to be roughly the same as 2012 and it’ll take longer to see you approach that 80%?

[Howard Schiller:]

No, I mean, I think we had improvement – clearly we had improvement Q3 this year versus Q3 last year, 23% versus 28%. And I think you can look at that and say that a lot of our COGS initiatives over the last year are paying dividends. When you look at the increase from Q2 to Q3, you know there, when you analyze it, it is primarily being driven by the out-performance in our Dermatology segment, which has the highest gross margins in the company. And that’s really the point. We’re going through our budgeting process this year for next year right now, so I don’t have a specific view on gross margins. We certainly should see an improvement in a number of our business units, but it’s really a Q3 to Q4 commentary more so than next year at this point.

[Corey Davis:]

Okay. Great. That helps. Thanks.

[Operator:]

Your next question comes from the line of David Amsellem with Piper Jaffray.

[David Amsellem:]

Thanks. Just a couple. Just maybe could you elaborate on the generic businesses in emerging markets? Any specific territories where pricing has been particularly challenging and in those more challenging markets, any consideration regarding exiting those territories? Thanks.

[Mike Pearson:]

Sure. So I said there really are no issues at all in Latin America, Southeast Asia or in South Africa. Europe is the place where we’re seen a couple of markets. There was a one-time impact this year in Poland. But as you can see, in terms of our overall price in all of Europe, we were down 1%. So not – it doesn’t affect us very much. And in Poland, we are quite comfortable with that, returning to strong positive growth next year. The markets that are the trickiest right now are Hungary and to some degree Czech. Our business is quite limited, probably $50 million-ish in those two markets. And there is more. That’s probably where our 1% came from, those two markets. And those are a little bit more difficult. Whether we exit them or not, we’re not sure, but we’re certainly not going to invest more in those marketplaces, at least in any kind of reimbursed product. OTC markets in each of these countries are actually quite strong and you have free pricing. So we’re fortunate that again, we’ve designed our business to have very little exposure to government action in terms of price reductions.

[Howard Schiller:]

Mike, we should also point out we’re making money in all regions in Europe. We’re not losing money anywhere.

[David Amsellem:]

Okay. And then second question on your ophthalmology efforts. You made some in-roads in building an eye care business. Question here is what’s your level of commitment to further building out this business? Are you looking at OTC and possibly generic opportunities in addition to branded products? Maybe give us a sense of your latest thinking here on eye care.

[Mike Pearson:]

Yeah, so ophthalmology is – it’s paying close to $100 million business for us. It continues to grow double-digits organically and we have very high margins and throw off a lot of cash. So we like the business. There are less assets in ophthalmology available than some other specialty businesses. So again, we’re not going to just grow it for the sake of growing it and pay any price that people are selling products – or selling companies or assets. We’ll continue to be very methodical. If acquisition opportunities come up that we can make our financial hurdles work, we’ll do it because we can benefit from the synergies. On the other hand, if someone likes our ophthalmology business and wants to buy it from us, we’re always open to that as well. So again, we have very strict financial criteria and we don’t think about businesses strategically unless we can make the numbers work.

[David Amsellem:]

Okay. And I then if I could sneak in a very quick follow-up on IDP-108, can you remind us of how – what’s the extent to which you’re going to be expanding your sales force, if at all, to support that product once you launch it?

[Mike Pearson:]

Sure. We have never given specifics on that, but what I will say is that we are very strong in dermatology and basically every market that we participate in, both in United States and beyond. We made an acquisition of Pedinol earlier this year, which is probably the best name in the podiatry marketplace. Clearly we’re going – we have a pretty nice dermatology footprint now, which will only get stronger once we complete the Medicis acquisition. Certainly we would need to expand our field force in podiatry from its current 25 reps; probably take it out to more like 60. And then we have the whole general practitioner community, which again, as I mentioned earlier, we would certainly plan to market the products, but we’re not at this point ready to explain how we intend to do that.

[David Amsellem:]

Okay. Thanks, Mike.

[Operator:]

Your next question comes from the line of Annabel Samimy with Stifel, Nicolaus.

[Annabel Samimy:]

Hi. Thanks for taking my questions. Just wanted to clarify on COGS first. You mentioned that a lot of that was from stronger Derm product sales, so a mix shift. But I guess last quarter, couple quarters ago as well, you mentioned that you might see some benefit from manufacturing consolidations near-term in certain markets and longer-term in some other markets. Did you not see any of that benefit this quarter and should we expect anything for the remainder of the year? And I’ll follow-up with another.

[Mike Pearson:]

Yeah. So let me comment and Howard may have a comment, too. Probably the place we’ve seen the most improvement is in Canada, because we’re shutting down our Bourdon facility. It should be completely shut by the end of this year. Unfortunately this quarter it was offset by the erosion – the generic erosion of Cesamet, which was a very high margin product. So if you look at the gross margin on all of our remaining products, it actually improved significantly. So that’s – I think you’ll begin to see more – we made progress in Europe. It didn’t show up clearly – the numbers we’ve – if you actually go down to the decimal points you’ll see that it’s improving and we would expect more improvement next quarter in Europe and Latin America, probably the beginning of next year.

[Annabel Samimy:]

Okay. Great. And then if I could switch to the Medicis acquisition quickly. Obviously you’re in a very competitive space and you have to keep the pressure on pretty consistently, is there anything specifically that you’re doing during this integration or consolidation period to offset potential competitors who are trying to take advantage of the situation with the integration?

[Mike Pearson:]

Ah, well, the thing we’re trying to do most is get this thing closed as quickly as possible because obviously our ability to react to those competitive threats will be stronger as one company, than as two. That being said, we have tactical things like putting retention bonuses in that will allow sales reps to earn more money in the fourth quarter, if they meet their targets, is helpful. Strategically, we can’t do much because Medicis continues to be a separate company from ours, but clearly we’re spending a lot of time with our people and trying to keep them motivated.

[Annabel Samimy:]

And anything in terms of promotional campaigns that have changed at all?

[Mike Pearson:]

Well, we have – we do have quarterly campaigns with our sales force, but – which we hope will be effective, but it’s my experience, a lot has to do with incentives, incentive comp, and if you incent people the right way and give them some upside, that in the end is often one of the most important levers that you can pull.

[Annabel Samimy:]

Okay. Great. Thank you very much.

[Operator:]

Your next question comes from the line of Doug Miehm with RBC Capital Markets.

[Doug Miehm:]

Okay. First question just has to do with the IDP-107 and the refiling with the FTC. Did you refile after you discontinued that product in terms of the write-off that you took this quarter?

[Mike Pearson:]

Okay, so IDP-107 was an oral acne compound that was in the pipeline of Dow. At the – in September of this quarter – we have our R&D review about twice a year, where we go through all programs and make go and no-go decisions. We decided that the risk of this getting approved – or the probability of this getting approved, given tone of feedback we’d heard from the FDA, did not justify continuing to invest in it, and so at that point in time, we decided to discontinue. From a valuation standpoint or from what was on the balance sheet for IDP-107, it was a substantial number, $130 million to $135 million. That was largely an impact of our merger with Biovail where all asset values of all valued assets had to get written up quite a bit because of the appreciation of the stock price between announcement and close which was largely synergy related. So that was a non-cash write-off of an old asset, and old Valeant asset in the pipeline that was probably accounting wise valued correctly, but largely driven by the increase of the share price between announcement and close of the Biovail transaction.

[Doug Miehm:]

Okay. And its discontinuation had nothing to do with the refiling?

[Mike Pearson:]

The refiling? I’m...

[Howard Schiller:]

No. It had nothing to do with the – it had nothing to do – if you’re asking did it have anything to do with the Medicis FTC process, the answer is no.

[Doug Miehm:]

Okay. Perfect. And then, Mike, just with respect to if you – it’s fantastic that you do provide the past acquisitions and how they’re doing and that sort of thing. One thing that did stand out besides some of the truly remarkable numbers was PharmaSwiss, compound annual growth rate of 1% there and it was tracking ahead of your deal model. And I’m just wondering why 1% would be ahead given the number of products that were going to be introduced by that product over a couple-year period.

[Mike Pearson:]

Yeah. So, good question, Doug. If you recall, PharmaSwiss really had two types of businesses when we acquired it. One was a – called a representation business where they sold other company’s’ products, Pfizer’s, BMS’s, Merck’s, Amgen’s, so a number of products and they really acted as the distributor. So they got very low margins. Usually they got about – often less than 20% of sales to distribute that and that was before any marketing or distribution costs. And that’s one of the reasons our COGS in Europe have been higher than what we would like. So what we’ve been doing is migrating that business. We have not been renewing these distribution contracts and we’ve been losing those sales which created very profitability for us and in many cases they were more break-even than anything else and we’ve replaced those with our own products that we have registered, products that we had in Poland, for example, that we have now registered in all those markets. So while the sale have only increased 1%, the cash flows have increased dramatically as the shift from representation business, which was probably 50/50, maybe even more. It was probably maybe 60/40 representation when we bought it. It’s probably less than – closer to 25% at this point and we’ll continue with this strategy over the next year or two.

[Doug Miehm:]

Okay. And then just to wrap up, do you think there’s a good possibility that 108 could become your largest drug outside of anything that you’re bringing on from Medicis over, let’s say a three year period? I’ll leave it there. Thanks.

[Mike Pearson:]

Sure. Well, we’re obviously hopeful. We haven’t provided any peak sales forecast. We have remarked that the two other products that have had decent efficacy in this category, Lamisil and Sporanox, and you guys can take a look at what those peak sales were. So we’re hopeful that it could be our largest product including the products that we’re acquiring from Medicis.

[Doug Miehm:]

Thank you.

[Operator:]

Your next question comes from the line of Marc Goodman with UBS.

[Marc Goodman:]

Good morning. First, can you talk about – when are we expecting to close the Medicis deal? It almost sounds like it could be done by year-end. Second question is, can we just come back to the Derm space? Can you tell us what were Zovirax sales? Or if you don’t want to give us what sales were, can you tell us how much sales were in the quarter that were above your expectations? And then third can you go back to Mexico and Brazil and just kind of dive into those areas a little bit and talk about how you’re doing there, the growth rate specifically? Thanks.

[Mike Pearson:]

Sure. So in terms of when we’ll close, we’re not changing our guidance on that in terms of the first half of next year. It’s completely up to the FTC but we will remark it’s been a very, very collaborative process with them so there probably is some slim probability it could close before the end of the year but I think the expectation is probably more for first quarter still. In terms of Zovirax sales, again, when we were trying to calculate exactly what the excess sales we may have sold, it was sort of like in the $10 million range. Again, we haven’t seen it in October sales but it was sort of that order of magnitude, so not hugely material. In terms of Latin America our business continues to grow quite strongly. What we are experiencing is some delays from the regulatory agencies in both Mexico and Brazil approving our new plants so we’ve done a lot of product transfers and we’ve done all the taxes that are required, but I think the agencies are pretty busy down there. So we would have hoped to have gotten some approvals for some of our products that we could manufacture them at lower cost sites. We’re hopeful that a number of these will come in in the fourth quarter so that by the time we get to next year, we can begin to see more COGS improvement down there. But in terms of sales growth, it’s quite robust.

[Operator:]

Your next question comes from the line of Lennox Gibbs with TD Securities.

[Lennox Gibbs:]

Good morning. Thank you. The Natur Produkt transaction, there’ve been some reports of a legal dispute there regarding the main asset and from a distance it sounds like a low visibility situation. Are you still confident that the issue can be resolved in time for a year-end closing?

[Howard Schiller:]

Yeah, I think the issue relates to restructuring that the current owners of Natur Produkt have to do. It’s not between us and them. And we’re still confident they’re going to get that done and then we’ll be able to close sometime this year. So our expectations haven’t change in that regard.

[Lennox Gibbs:]

Okay. Than secondly, could you just remind us as to how Natur Produkt fits into the Russian strategy, particularly as it relates to the assets you acquired from Gerot Lannach. I’m not certain if I’m pronouncing that correctly. Were there any assumptions of operating synergies or some sort of interdependence between those two entities or are they totally separate?

[Mike Pearson:]

So in terms of our business in Russia and the CIS, it really comes from four sources. You named two. We hope to close Natur Produkt. We did the GL asset deal earlier in this year. Sanitas also had about a $30 million business in Russia, which was mostly dermatology focused, OTCs as well as prescription drugs. That business has grown nicely, so it’s probably closer to $45 million at this point. And then what we’ve been doing is registering a lot of the products that we had originally in Poland as part of the old Valeant in Russia as well. So we have sort of four streams of products flowing into our CIS business for next year, probably a pretty clean split between OTC and prescription. So there’ll quite a few synergies with Natur Produkt on the OTC side. That’s an OTC company. So the infrastructure that we currently have, which came from Sanitas, will get synergized and also we’ll see synergies on the Rx side as well in terms of GL and the products we expect to get approved from the old Valeant Poland business. So that business will continue to hopefully grow. It’s been growing 15% this year organically and we should also continue to reduce our operating expenses over time.

[Lennox Gibbs:]

Thanks very much.

[Operator:]

Your next question comes from the line of David Krempa with Morningstar.

[David Krempa:]

Hi, guys. Thanks for taking the call. You talked about SG&A sticking to around 20% of sales for the rest of the year. I was just curious, long-term, do you see any room for improvement on that or should we look at 20% as basically the floor, since you’re already much leaner than anyone else in the industry?

[Mike Pearson:]

I think as Howard mentioned, I think 20% is not a bad number to think about going forward. We’re always looking for improvements. I guess, in theory, as we continue to get larger, G&A – the G&A piece of it should continue to decline, so I don’t think we’re at the limit at this point, but it’s not going to be huge place for improvement.

[David Krempa:]

And you think you can get back to 20% after the Medicis deal, even though they’re a much higher SG&A percent?

[Mike Pearson:]

Yes.

[David Krempa:]

Okay. Thanks.

[Operator:]

Your final question comes from the line of Michael Tong with Wells Fargo Securities.

[Michael Tong:]

Hi, good morning. A couple of questions. One, wondering if Howard would be kind enough to break out the emerging markets revenue between Central, Eastern Europe, Latin America and Southeast Asia, Africa? And then secondly, with respect to cash flow from operations, clearly Q3 was a bit of an aberration and some of that’s going to reverse in Q4, but you’ve also pointed out some push and pulls in Q4, so is $330 million to $430 million kind of a normalized level that you feel comfortable with before we add on the Medicis cash flows? Just want to get a better understanding as to what the baseline cash flow you would be looking at before we add the Medicis cash flows in?

[Howard Schiller:]

Yeah, well, let’s take the first – well, second question, first. As we mentioned earlier, I – our – when you start at our cash EPS and then you go to cash flows, our cash EPS, we hopefully have a pretty good handle on projecting; our CapEx, our depreciation, we’ve got a pretty good handle on it. And the real wild card is projecting our changes in working capital. And as I mentioned, with the acquisition piece of our business model it’s very difficult to project given that we don’t know what businesses we’re going to buy going into a year so we’d like to be much closer to net income than where we were – than we were this quarter. So I think the kind of range we’re talking about based on where we sit here today is probably a good one. We’d like to be at the upper end as opposed to the lower end but again, our base business also continues to grow quarter-over-quarter which is going to eat up – need some working capital invested in it. And we’re spending an awful lot of time trying to manage those working capital balances to be as efficient as possible. So that’s a long way of saying I think the range is a good one based on the quarter coming up and we’re pushing ourselves to be as – to get to the upper end of those ranges as opposed to the bottom end of those ranges. In terms of revenue, if you look at the press tables, you’ll be able to see the breakout between Central and Eastern Europe, on the one hand, Latin America and then Southeast Asia and South Africa.

[Michael Tong:]

Thank you.

[Operator:]

At this time there are no further questions. I will now turn the call back to Mr. Pearson.

[Mike Pearson:]

All right. Thank you very much. Thanks again for everyone weathering the aftermath and joining us this morning.

[Operator:]

This concludes today’s conference. You may now disconnect.