Bausch Health Companies Inc. (BHC) Q2 2012 Earnings Report, Transcript and Summary

Laurie Little J. Michael Pearson - Chairman of the Board and Chief Executive Officer Howard Bradley Schiller - Chief Financial Officer, Principal Accounting Officer and Executive Vice President Rajiv De Silva - President, Chief Operating Officer and Chief Operating Officer of Specialty Pharmaceuticals

Marc Goodman - UBS Investment Bank, Research Division Gary Nachman - Susquehanna Financial Group, LLLP, Research Division Annabel Samimy - Stifel, Nicolaus & Co., Inc., Research Division Rebecca M. Forest - Piper Jaffray Companies, Research Division Christopher Caponetti - Morgan Stanley, Research Division Gregory Waterman - Goldman Sachs Group Inc., Research Division Douglas Miehm - RBC Capital Markets, LLC, Research Division Juan F. Sanchez - Ladenburg Thalmann & Co. Inc., Research Division William Tanner - Lazard Capital Markets LLC, Research Division David M. Steinberg - Deutsche Bank AG, Research Division Gregory D. Fraser - BofA Merrill Lynch, Research Division Lennox Gibbs - TD Securities Equity Research

Good morning. My name is Matthew and I will be your conference operator today. At this time, I'd like to welcome everyone to the Valeant Pharmaceuticals Second Quarter 2012 Earnings Conference Call. [Operator Instructions] Laurie Little, you may begin your conference.

Thank you, Matthew. Good morning, and welcome to Valeant's Second Quarter 2012 Financial Results Conference Call. Joining us on the call today are J. Michael Pearson, Chairman and Chief Executive Officer; Rajiv De Silva, President and Chief Operating Officer at Specialty Pharmaceuticals; and Howard Schiller, Chief Financial Officer. In addition to a live webcast, a copy of today's live presentation can be found on our website under the Investor Relations section. Before we begin, certain statements made in this presentation may constitute forward-looking statements. Please see Slide 1 for important information regarding these forward-looking statements and the 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 outcome. In addition, this presentation contains non-GAAP financial measures. For more information about non-GAAP financial measures, please refer to Slide 1. Non-GAAP reconciliations can be found both in the press release that was issued earlier today and posted to our website, as well as in our previews earnings press releases and our Investor Day presentation. Finally, a financial guidance in this presentation is effective as of today, August 2, 2012. It is our policy to update or affirm guidance only through broadly disseminated public disclosure. And with that, I will now turn the call over to Mike Pearson.

Thank you, Laurie. Good morning, everyone, and thank you for joining us. On today's call, we will cover the following topics: first, I will review our second quarter results and performance; then I will cover some of our operational initiatives and recent events before turning the call over to Howard who will provide a financial update; finally, I will finish the call with our updated financial guidance for 2012. This morning, we reported Valeant's second quarter results for 2012 where we again delivered strong growth, profitability and cash flows. Product sales for the second quarter of 2012 were $749 million as compared to $530 million in the same period in the prior year, an increase of 41%. Total revenue, excluding onetime items such as the $45 million milestone received in 2012 and the $40 million milestone received in 2011, was $775 million as compared to $569 million, an increase of 36%. Our second quarter cash EPS was $1.01 per share or an increase of 38% over 2011. Excluding onetime items, such as the milestones in 2011 and 2012, and the investment gain we recorded in the second quarter of 2011, cash EPS was $0.87 in the second quarter of 2012 as compared to $0.54 in the second quarter of 2011, an increase of 61%. We are very pleased with the cash flow generation of our underlying businesses this quarter and the continued positive trend. GAAP cash flow from operations was $255 million in the second quarter of 2012 as compared to $191 million in the comparable period 1 year ago. Adjusted cash flow from operations was $307 million in the second quarter as compared to the prior year. If one reflects on our performance over the last 6 quarters, the positive cash flow improvement is significant. We expect the gap between GAAP and adjusted cash flow will continue to narrow over the next few quarters as our integration costs decline. This is a result of the type of deals that we have consummated so far this year. With many of these acquisitions, we did not require manufacturing facilities and/or people, so our restructuring cash costs in future quarters should continue to decline. As we stated during our Investor Day presentation in June, we are now breaking out both same-store sales and pro forma organic growth. On a same-store sales basis, our organic growth for the quarter was 6% and on a pro-forma basis was 10%. U.S. Dermatology continues to show strong growth, and we are continuing to gain share and grow volume with many of our key brands, including Zovirax, Acanya, Atralin and CeraVe. All of our other businesses that are included in this segment, including ophthalmology, podiatry and ascetics also demonstrated strong double-digit growth in the quarter. Finally, we would like to note that OraPharma is off to a good start in the third quarter, tracking ahead of our expectations. U.S. Neuro and Other continue to decline as expected as we lost approximately $25 million of top line sales versus last year if one looks at the product basket of Cardizem CD, Wellbutrin XL, Ultram ER and Diastat. The remaining portfolio actually grew approximately 3%. We expect the rate of decline of Neuro and Other to move to mid-single digits by the end of the year as the year-on-year comparison to pre-genericized Cardizem CD and Ultram ER will be largely behind us. Our Canadian and Australian segment was negatively impacted by the entry of a generic Cesamet in Canada, which occurred at the end of the first quarter. On a positive note, other growth drivers in Canada showed robust growth. For example, Wellbutrin XL grew 19% in Q2 in Canada. Additionally, in Australia wholesaler buying patterns negatively impacted Duromine growth in the quarter. However, end market growth of the brand was strong, showing IMS dollar growth of plus 13%. Finally, our emerging market segment showed strong performance in all regions against a tougher set of economic conditions. Despite the global economic slowdown, we remain bullish on our short- and long-term prospects in these geographies. In particular, we continue to believe that our Central and Eastern European markets will continue to behave very differently than the developed pharmaceutical markets in Western Europe. On the next slide, we show a comparison of our same-store sales organic growth in Q1 and Q2 in both 2011 and 2012. Same-store organic growth in the first half of the year has been approximately 5% in 2011 and increasing to 6% in 2012. Pro forma organic growth is running at 10% year-on-year in 2012, which is against the headwinds of a slowing global economy. Without our Neuro and Other segment, we are growing organically in the high teens, both in terms of same-store and pro forma metrics. In January of this year, we mentioned that our objective is to achieve 80% gross margins over time. We have 4 initiatives that we expect should get us to this goal over the next couple years. By far, our most important initiative is to consolidate multiple clients in certain of our geographic regions and improve our capacity utilization. I will speak more about this in a moment. Our second initiative is to negotiate and/or renegotiate our third-party contracts. Given our increased size and scale, we believe that we have the ability to improve many of our contracts. Our third initiative is to reposition the representation of business. When we acquired PharmaSwiss last year, they had built a very solid business representing and distributing other pharmaceutical companies' products in the markets of Central and Eastern Europe. Our preference is to in-license products, which tends to have longer time horizons, or market our own products. We expect that the mix of business in Central and Eastern Europe to trend away from the representation business in the future, which will also aid in future margin expansion. Finally, we plan to de-emphasize partner product businesses. Biovail has entered into several partnership agreements for products marketed here in the U.S. Many of these products will be -- many of these contracts will be coming up for renewal in the near future, and we will look for ways to improve the profitability of these contracts, potentially distributing many of these products ourselves. On the next slide, we have laid out our plant consolidation initiative. In addition to the previously announced consolidation plans, we have a few new items to note. In Australia we completed the shutdown of the legacy iNova plant in the second quarter and have moved the business to third party contractors. We have also consolidated our Australian commercial resources into one facility in July. In Canada, through our acquisition of Dermik, we acquired a state-of-the-art topical Rx plant in Laval, Quebec, which will also serve as our global headquarters. As a consequence, we have announced the closure of a Legacy Valeant plant in Montreal, and we expect to complete this closure by midyear 2013. Finally, at the end of Q1, we exited the Legacy Valeant plant in Puerto Rico, where the products have now been transferred either to third-party contractors or our plant in Laval. As part of these multiple plant consolidations, our capital expenditures over the next 18 months are expected to be incrementally higher by $50 million to $60 million over historic rates. At the time of the Biovail Valeant merger, we identified the high litigation spend of the Legacy Biovail as a potential source of significant savings. This slide shows our non-deal external legal spend, which is primarily for litigation, and you'll notice that this has been a source of substantial savings as we have significantly cut ongoing litigation expenses by settling legacy matters. In Q2, we settled our biggest matter, the Wellbutrin XL class action suits for $49.25 million. We and another pharmaceutical company were co-defendants. We had a window of opportunity to take advantage of a favorable summary judgment ruling that disposed of all but one of the plaintiff's claims. Our team moved fast to settle all the claims, especially given a then-pending appeals court decision that could have influenced the remaining claim. As this matter is the subject to final court approval and the other pharmaceutical company remains a defendant in this matter, we cannot comment further. But we are pleased to have this matter behind us, and we are hopeful that the low level of litigation spend will carry forward. Finally, we have several recent events we would like to update you on. First, we have submitted the new drug application for IDP-108 in July. This is an important milestone for Valeant for this potential product. I want to take a moment and thank all of our employees within the R&D team, including our Dow team, who were instrumental in making this happen. We will continue to update you on our progress in the coming months as appropriate. Second, we filed a citizen's petition with the FDA in July regarding their recent draft guidance on acyclovir ointment, the generic name for Zovirax ointment. In the citizen's petition, we requested that the FDA refrain from approving any ANDA referencing Zovirax ointment that does not contain data from an in vivo clinical endpoint study, demonstrating bioequivalent space of particular characteristics of this formulation. We also requested a full disclosure from the FDA of all information that may explain their departure from years of regulatory precedent regarding bioequivalence standards for locally acting semi solids. The FDA has approximately 180 days in which to respond. As you know, Potiga was launched in the middle of the quarter, and our recent updates from GSK indicate that recent prescription trends and an increase in new prescribers are all positive signs. Finally, we announced 5 deals and signed 2 smaller deals we did not formally announce. These smaller acquisitions will add $15 million to $20 million in annual revenue, and we paid less than 2x sales for these assets. The BC Pharma deal has closed late in the second quarter, and we expect Tobida Direct [ph] to close by the end of the third quarter. Natur Produkts [sic] (Produkt) has not yet closed, and we now expect closure to happen by the end of the year. Now I will turn the call over to Howard.

Thank you, Mike. Today, we reported our second quarter 2012 results. Mike already touched upon our top line and bottom line growth, but I want to provide further detail as to some of our other P&L items. Our cost of goods sold for the second quarter, excluding inventory step-ups, was 24% as compared to 29% in the second quarter of 2011. As Mike mentioned, we expect the gross margin will improve over time, although the progression might not be linear. This year, the improvements will be driven by plant consolidations and restructuring in Europe and Canada, while next year should see improvements in Latin America. We have restated for cash EPS purposes our cost of goods for the first quarter 2012 as we have moved the contract manufacturing business we acquired from Dermik into the service and alliance revenue line in the P&L. In addition, the associated costs are now in the cost of service expense line. We reported that cost of goods sold in the first quarter were 26% at the time. With this change, we would have reported a 25% COGS in the first quarter. SG&A expenses did increase as a percentage of sales this quarter to 22% of revenue. This percentage will fluctuate from quarter-to-quarter due to factors such as timing of acquisitions, synergy capture and the seasonality in sales activity. We expect SG&A as a percentage of sales to remain in a range around 20% over time. R&D expense was $18 million for the quarter or about 2% of revenue. Similar to SG&A, we expect R&D expenses to fluctuate from quarter-to-quarter but stay in this relative percentage range for the remainder of the year. Operating margin was a bit lower this quarter but in line with last year. This margin is also impacted by onetime items, but even excluding these items, we expect operating margins to remain in the 50% range. Bottom line, we achieved cash EPS of $1.01 and adjusted cash flow from operations of $307 million. Excluding the milestone, we delivered a cash EPS of $0.87. Our fully diluted share count is 313 million now as compared to 331 million 1 year ago, a decrease of over 5%. We first showed you this slide at our Investor Day presentation and wanted to show you an updated version with Q2 added. This chart strips out onetime items by its greater transparency to our results, so it is very clear as to how the underlying business is growing. This quarter, we generated strong revenue growth, up 36%, and cash EPS growth, up 61%. In addition, our cash earnings to revenue was at 41% this quarter as compared to 36% last year. The next chart details cash inflows and outflows that occurred during the second quarter of 2012. We started the quarter at $330 million of cash and realized $307 million of adjusted cash flow from operations and another $504 million from the net issuance of debt. We bought back 172 million shares during the quarter and paid $497 million for acquisitions. We paid out another $74 million in expenses, primarily related to capital expenditures, restructuring, legal settlements and integration activities. That brings us to $395 million as of the end of June. Valeant is a very strong liquidity position with our recurrent cash balances approaching $450 million today, and a $275 million undrawn revolver. Although we provided this comprehensive chart in our press tables, which we issued earlier today, the information is worth highlighting. We have now provided you with a breakdown of our acquisition integration restructuring costs, both by acquisition and by expense type. This should provide everyone with greater visibility as to the adjustments to cash flow. As you can see, our largest cash expense in this category was associated with manufacturing integration, and most of that was severance at the iNova plant, which we recently shut down. As a comparison, we reported $87 million in adjustments in the first quarter of 2011, a number that was relatively high due to the closure of several acquisitions at the end of 2011, which had significant severance costs, and the closure of the old Biovail headquarters. As Mike mentioned earlier, given the profile of recent acquisitions, this number should get smaller in the coming quarters. We continue to be impacted by fluctuation in currency rates, and on a year-over-year comparison, foreign exchange rates negatively impacted our revenue in the second quarter by about $50 million and negatively impacted cash EPS by $0.03 to $0.04. Based upon current rates, we expect that the third quarter will be impacted by about the same amount, both top line and bottom line. I will now turn the call back over to Mike.

Thank you, Howard. We now turn to an update on our annual guidance for 2012 to include the strength of our business, recent acquisitions and expected currency headwinds. We remain quite pleased with the way our base business and acquisitions continue to deliver strong operating performance and remain confident in our ability to weather significant FX headwinds. On June 21, at our Investor Day, we reaffirmed our guidance of $4.45 to $4.70 at the upper end. Today, we are raising the low end of the guidance by $0.10 and the upper end by $0.05 to $4.55 to $4.75 per share. Excluding onetime items, this translates into $4.18 to $4.38 per share. This guidance does not include Natur Produkt, as this is now not expected to close before the end of the year. Our guidance for revenue and adjusted cash flow remains the same. Revenues of $3.4 billion to $3.6 billion and cash flow -- adjusted cash flow at greater than $1.4 million respectively. In summary, the second quarter of 2012 delivered solid performance across all of our businesses. We remain optimistic about our performance over the second half of the year and beyond. With that, we'll now open up the call for questions.

[Operator Instructions] Your first question comes from the line of Marc Goodman with UBS.

Mike, can you just kind of take us around through some of these emerging markets and just some of the push and pulls that happened in the quarter, and specifically comment on Poland and update us on the situation there relative to your comments from the Analyst Day last month?

Sure. So let me talk about Poland. Poland, as we talked about at the Investor Day, because of some government changes both in terms of proxy [ph] we're going to be reimbursed in pricing changes. The market as a whole declined about 18% in the first quarter and about 6% in the second quarter. We are 1 of only 2 pharmaceutical companies to grow over both of these periods. And I think our overall growth rate, organic growth rate, in Poland was mid-single digits for the 6-month period. The market's beginning to turn around. It is now growing, and we continue to grow above the market and gain share. So I think the testament to our management team there and also some important decisions they made where they took some of our products that had been reimbursed and chose to take them out of the reimbursement system so that they're now cash pay products. The other strong growth area in Central and Eastern Europe is Russia, where we're growing at high double-digit growth rates. The rest of the markets are pretty stable, absent currency, with the exception of Hungary, which continues to be a difficult market, at least for us, but I suspect, most other companies. That represents roughly $50 million of sales for us. So it's not a significant market for us. The rest of the emerging markets, very pleased with Southeast Asia and South Africa, which grew organically 40% this quarter. So very, very strong performance. And Latin America was solidly in the mid-teens. So again, strong performance there as well.

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

Mike, first question, the organic growth rates were consistent in the first quarter and the second quarter. Do you see those accelerating in the back half or should it stay around that level?

That's a tough one to predict the future, but I think we feel comfortable with the level that they're at, and hopefully, we'll see improvement. Historically, if you look at the second half of the year, we do have stronger organic growth. So we're cautiously optimistic that we'll see that -- we'll also see that. The one thing that will help a lot for sure, in terms of overall organic growth, is the decline in the Neuro segment will moderate. And that's still -- although it's no longer our largest segment, but since Ultram actually went generic in the third quarter of last year and Cardizem in the fourth quarter, the relative comparators will mean that the negative 10 will, as we mentioned, trend more towards sort of mid-single digits. So that alone would suggest that overall organic growth, as a company, will improve in the second half of the year.

And then in Canada and Australia, are you still comfortable with your original guidance that you gave in the beginning of the year? And just talk about some of the dynamics going on there when you exclude some of the, I guess, onetime hits that you took in the second quarter.

So in terms of overall -- if you're asking about overall revenue guidance?

Yes.

We gave at the beginning of the year, I assume that's what you're talking about, in terms of Canada. Yes, we still feel comfortable. Assuming currency doesn't dramatically change from where it is today. So at current exchange rates, we're quite comfortable. So Cesamet we have built into our budget as going generic. So it was not a surprise, and so that's built in. And Australia is literally -- it's a timing issue on Duromine, which is our largest product there. We closely track sort of IMS data in Australia in terms of prescription volumes and redemptions. So it continues to grow double digits. I think it was 16% for the quarter. So it was purely a wholesaler ordering issue. So that will change in the third quarter.

And then lastly, how much should new deals that you closed before the end of the second quarter, how much did that contribute in the quarter?

Versus when? When you're talking about new deals, do you mean second quarter deals?

Yes. Sales that had closed in the second quarter. How much that contributed to the quarter?

Very little. I don't have a precise number for you, but it was not significant.

Your next question comes from the line of Annabel Samimy with Stifel Nicolaus. Annabel Samimy - Stifel, Nicolaus & Co., Inc., Research Division: Just going back to the situation in Poland. We've heard rumblings that government reimbursement has -- is somehow tied to the cash pay business or pricing in the cash pay business. So can you explain that a little bit, if there's -- if changes in the reimbursement on the government side has an impact on the pricing on the cash side? And you shared with us also at the Investor Day which parts of your -- the percent of cash pay or rather the percent of government reimbursement in your various emerging -- your Eastern European regions. Could you share that with Latin America and also with Australia?

You mean Southeast Asia and South Africa, I assume? Annabel Samimy - Stifel, Nicolaus & Co., Inc., Research Division: Yes, Southeast.

So in Poland, we sell 2 kinds of products, OTCs and Rx products. Obviously, all the OTCs are free pricing and I think largely unaffected by anything in the Rx market. We sell -- Rx, some of it is reimbursed and some of it is not. Our overall percent of non-reimbursed product in Poland is significant. It's 60% to 70% in that market. In terms of the interaction between reimbursed and non-reimbursed, at least we're not seeing a huge interaction. What we're seeing is our volumes continue to grow. We -- the way it worked in Poland this year is that each company had individual price negotiations with the government, at the beginning of the year and every quarter, there's another meeting. And so far, the net impact on our pricing in Australia for reimbursed is basically 0. So we're not gaining any price but we're not losing any price. Now part of this was the products that they did want to reduce our prices on. We decided to take them out of the reimbursement scheme, and we sell them now as cash pay products. So hopefully that answers your question. In terms of government reimbursement in Mexico and Brazil, in Mexico, we have probably about 20%, 25%, which -- through Tecnofarma, which is government reimbursed, 75% is not. Brazil is 100% nongovernment reimbursed. In Southeast Asia and South Africa, it's 100% nongovernment reimbursed.

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

This is Rebecca Forest for David Amsellem. Could you please discuss the pricing in Latin America, particularly Brazil and Mexico?

I'm sorry, could you repeat that question? I want to make sure I heard it correctly.

Yes. Could you talk about the pricing in Latin America, specifically Brazil and Mexico?

Well, pricing is -- pricing in Mexico is free. It's -- you can do whatever you want. In terms of our strategy, is basically take very little price. Basically, we price with inflation and grow our volume. So we don't have a set of high-priced products. In fact, we're trying to get relatively inexpensive medications to patients. So we could take price, but we basically price sort of with inflation. In Brazil, every year there is a basket of -- it's sort of a consumer price index that's for pharmaceutical products. So there's a pharmaceutical price index, and the government every year sort of indicates what pricing they're allowing different companies to take across the industry. So it's historically serving the 3% to 4% range. I think this year was a little bit lower than that. But the government sort of increases prices every year. It's one of the few markets where governments actually are increasing pricing.

Your next question comes from the line of David Risinger with Morgan Stanley.

It's Chris Caponetti for Dave Risinger. Just 2 questions, please. Mike, would you please remind us of any year-over-year inflections or anomalies that we should be anticipating in the second quarter of 2012 versus the second half of 2011? And then just for Howard, would you please remind us of your current leverage and how high you're willing to take on additional debt and rate that ratio?

Second half of the year, I don't think we have any onetime items that affected our business. So the only thing that was -- we made a few acquisitions over the course of the second half of the year. But we don't anticipate any extraordinary items to occur at this point in time. So there's no significant fluctuations in our business last year nor are any expected this year.

And in terms of our leverage ratio, our leverage ratio, our total debt to our pro forma EBITDA is just under 4x. We stated publicly that we plan to stay at 4 below, except for particular transaction, where we could get above that for a period of time, and that's something we continue to evaluate. We continue to generate a lot of cash internally, and we've got an ability to manage this ratio through modulating our share repurchase activities. But we could -- it's something we continue to evaluate all the time. It says -- the 4x was a board decision, not a market decision. The markets continue to be incredibly receptive to our credit, and our availability of capital has been quite robust. So something we always evaluate based on the opportunities we see.

And then just a quick follow-up. In terms of the raise for the second -- for the full year guidance of $0.07 at the midpoint, just what are the pushes and pulls there? Roughly, how much from acquisitions/currency, et cetera?

Well again, the raise was $0.10 on the bottom and then $0.05 on the top end. That both reflects the comments made at Investor Day that we were suggesting we'll be at the upper end of the previous range. We've -- but it's complicated, obviously. Clearly, the acquisitions will be positive to it. Our underlying business results continue to be strong, currency, obviously, is working against us. So it's difficult to apportion that at this point. So unfortunately, we're not going to be able to provide you any more visibility than that.

Your next question comes from the line of Greg Waterman with Goldman Sachs.

On gross margin, the discussion of gross margin improved initiatives was -- is very useful. Is there any way you can translate your expectations for gross margin improvement overall to the segment level and help us think it through on a regional and segment basis?

We have not provided that level of guidance. I guess, if you're asking that, I think you can look at the areas where we're planning to improve our COGS. I think Howard said the more immediate improvements will be in Canada and Europe, where we're either further along on some of our plant consolidations or Canada, you can make things happen a little bit quicker than you can in some of the emerging markets. And so I think improvement in those 2 segments over the course of this year and then Latin America next year. I think that should give you a pretty good hint of where we're going to achieve the improvements.

And as a quick follow-up on Canada, Australia, we did see gross margin, I think, step up pretty meaningfully this quarter as well. So -- will that continue into the back half of the year?

Gross margins should continue to improve based on the initiatives that we laid out. Obviously, we've contractually did shut down a plant this quarter in Australia, which certainly helps going forward. And we have announced the plant closure in Montreal, and again, are trying to work as quickly as well as being careful in terms of shutting down that Bordeaux [ph] plant. So the trend should continue to be positive.

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

Couple of questions. Perhaps, given the filing on IDP-108, you can give us some better indication now on when we might see some incremental data, whether it's going to be published or presented at the conference and which those might be?

Doug, this is Rajiv. I think we have previously indicated that we expect to publish the data towards the back half of the year, and that still continues to be our timeframe. So you should expect to see something probably by the end of the year, either in terms of a publication and/or presentation at conferences.

And secondly, Mike, just with respect to the repatriation of products taking them back in-house, what sort of impact do you think that would have on your P&L? And then also, maybe you can just walk us through why Natur Produkt is a little delayed at this point?

Sure. So the Legacy Biovail did not have strong distribution capabilities in the U.S. And therefore, a number of their products -- they partner with companies like Forest and Teva to actually provide the commercial support. And we're obviously a much different company than Biovail was when they made those decisions. And so in many cases, they're sort of splitting the gross margins or even paying more to the partners. And given our capabilities, we'll look to probably distribute those. So the gross margins of those products should double roughly once we bring them in-house. In terms of Natur Produkt, we're in close communication with them. They had to go through the regulatory process in Russia. They also have to go through a restructuring process from a legal standpoint to make sure the entity that we bought this out of it was -- the ownership was clear. So that's taking a little bit longer than we originally anticipated. But we do expect that we will get the same result and close by the end of the year.

Perfect, then that's not in your guidance, right?

That is not in our guidance, because there's still uncertainty around the actual closing date.

Your next question comes from the line of Juan Sanchez with Ladenburg Thalmann. Juan F. Sanchez - Ladenburg Thalmann & Co. Inc., Research Division: The question is how big is your U.S. Dermatology commercial team right now? And in case, when it all gets approved, I wonder whether or not you have to increase that footprint? The second question is on Cesamet. How big of a product was it before it went generic, and what percentage of that do you think you can conserve in Canada?

Well, on the -- first question on Dermatology. We have a field organization, which is in excess of 200,000 representatives in our dermatologist team, and we also have a 25-person sales organization in our podiatry team. Those are the 2 primary teams that will be the focus when we launch efinaconazole. Clearly, on the podiatry side, we expect to increase the size of that team, given the importance of what we believe this product will be. On the Dermatology side, we know we will see, because we will have some changes in the portfolio with some expected genericization of products that are hardly promoted. But they've been certainly open to expanding that as well as needed. And beyond that, given the potential of onychomycosis in the primary care setting, we will also evaluate partnerships to fully exploit the opportunity in the U.S. once the product is approved. On Cesamet, the product is in excess of $50 million. We've been able to successfully contract our brand at the provincial level, and even in the face of a generic entry, we expect to hold more than the average amount that you would expect for a brand that's genericized. I can't be more specific than that, but what we see now in terms of the predicted brands is exactly what we expected.

Your next question comes from the line of Bill Tanner with Lazard Capital Markets.

Mike, just on the Zovirax CP, I was wondering if you could elaborate a little bit on your comment about requesting FDA disclosure on departure from bioequivalence standard testing?

Yes. So on the citizen's petition, the -- in what we outlined in the document of the FDA, is, I believe, around why it continues to be important to have in vivo clinical data to establish the bioequivalence of a generic. It is primarily related to the complex nature of the Zovirax formulation. It is a multiphasic suspension and there are multiple elements that go into the product that does affect bioequivability, there's always the particle size, the crystal form, [indiscernible], so a lot of different things are relevant with respect to how we think about bioequivalence with this product. And then secondly, unlike many other semi solids, Zovirax is used on severely compromised skin, particularly when it comes to genital herpes. So the availability of the active ingredient at the particular site is a very, very important thing for our patient safety and efficacy standpoint. So those are the 2 primary arguments that we elaborate in our citizen's petition. And obviously, it's being filed recently so we expect some response from the FDA in due course.

And does that have any implications beyond Zovirax with respect to anything in your portfolio, or is this pretty just contained to that?

No, it's contained to the Zovirax ointment.

Your next question comes from the line of David Steinberg with Deutsche Bank.

A couple of questions on IDP-108. I'm assuming this is a standard review versus a priority, but I thought I'd ask into that. And given the July filing date, should we assume for modeling purposes Q4 launch next year and therefore initial revenues end of 2013? And then secondly, could you just update us given the U.S. filing, the timeline for x U.S. filings?

With respect to the review, we think it will be a standard review. And as you know, we've just filed with the FDA. So we need confirmation of the acceptance of the file, which we expect in due course within the next 60 days. And beyond that, obviously, I'm not going to comment on FDA review cycle. You know them just as well as we do. We are very confident in the data. But obviously, if things go well and there's no complications in the review, we would expect an approval to us back in the next day. But that's -- beyond that, we can't be too more specific than now. With respect to the x U.S. filings, obviously, the most important thing for us was to get a U.S. filing in, and we will shortly follow up with the Canadian filing. We are evaluating with our partner kakan [ph] how we approach Europe, because the data stand is a little different and it may take a little bit longer to file in Europe. And our partner kakan [ph] handling the filing in Japan.

Okay. And just a question on Latin America. Yesterday, it was disclosed that the largest drug company in Chile, CFR, is purchasing the largest drug company in Colombia, about $200 million in sales. I recall you had a significant interest and potentially entering the Colombian market. Was this an asset that you were looking at? And if so, was it just the price was too high or was there an auction you didn't want to get involved with?

Sure. We probably shouldn't comment on that situation.

Your next question comes from the line of Greg Fraser with Bank of America.

This is Greg Fraser for Greg Gilbert. What do you expect for CapEx for this year, next year? You mentioned incremental spend over the next 18 months, but can help us with total expected CapEx?

I think we've guided towards about $50 million of CapEx annually. And so -- which is I think the annual requirements for the business. What we're saying that over the next 18 months as maybe there's another incremental $50 million or $60 million over that period of time. And obviously, it's not complete precise number. But that would suggest there'll be an increase of maybe $30 million to $40 million in the next year and maybe another $20 million the year after, something like that.

And then you can get back to the sort of $50 million-ish range with the current business after that work is done.

Actually, as we consolidate plants and we outsource more, hopefully the capital requirements will actually decrease. Our whole strategy is one of asset light from a manufacturing standpoint, especially in the more developed markets. In the emerging markets, there's usually some advantage to having, both from a cost standpoint, in terms of hedging the currency. But also from a market access standpoint, there's usually a real advantage to having some manufacturing capability. In the case of Canada, having the dermatology plant there, a world-class, state-of-the-art facility in topicals is consistent with our focus on dermatology and increasingly ophthalmology. So that will be cost effective for us. But beyond that, we don't find a lot of room for manufacturing facilities. So I guess that's a very long way to saying that over time we would hope our capital requirements would decline over time.

And in Australia, was the impact from wholesaler buying patterns specific to a single product? And are inventory levels normalized by now?

It's not -- no, it wasn't a single product. It had to do with some government pricing changes, reimbursement changes. None of our products actually were reimbursed. And -- but because wholesalers are treating all products more or less the same, whether we'll be reimburse or not, there were some fluctuations. We highlighted DermaVeen just because that was the largest single impact on us.

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

Just taking off on your Investor Day comments regarding your interest in asset purchased -- and purchases and also I know of your interest in South Africa. Should we think of the GSK Aspen transactions, the type of assets that might be attractive to you, perhaps something you might have looked at? And then secondly, do you sense that there could be more of these kind of portfolio deals coming or was this perhaps just a one-off?

So GSK and Aspen have had a long-standing relationship in South Africa well before we ever entered that market through the INO transaction. So we were not involved looking particularly at that market at that point in time. So we've just gotten into South Africa. It's doing extremely well. The market, we really like the market, and in particular, our company, which I think Rajiv laid out on Investor Day. Our gross is well above market gross. One of the fastest-growing companies there. We also like the fact that we are 100% self pay in that market. And so a lot of good characteristics. So we are evaluating our opportunities in South Africa and also Southeast Asia, quite frankly. We do want to build our business both organically and inorganically in those areas. But I wouldn't want to comment any further on any specific kind of transactions in either of those 2 markets.

We have no further questions at this time. I'll turn the call over to Mr. Mike Pearson for any closing remarks.

Well, thank you for your attendance this morning, and we look forward talking to you next quarter.

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