Bausch Health Companies Inc. (BHC) Q1 2012 Earnings Report, Transcript and Summary

Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Valeant Pharmaceuticals First Quarter 2012 Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to Ms. Laurie Little, Vice President of Investor Relations. Please go ahead.

Thanks, Michelle. Good morning, everyone, and welcome to Valeant's First 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 of Specialty Pharmaceuticals; and Howard Schiller, Chief Financial Officer. In addition to the live webcast, a copy of today's slide 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 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 in the press release issued earlier today and posted on our website. Finally, the financial guidance in this presentation is effective as of today, May 3, 2012. It is our policy to update or affirm guidance only through broadly disseminated public disclosure. And with that, I will 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 first quarter results and performance; then I will touch on our Emerging Market segment; third, Rajiv will touch on our Specialty Pharmaceutical update; fourth, Howard will provide a financial update; and finally, I will discuss our updated financial guidance for 2012. This morning, we reported Valeant's first quarter results for 2012 which again showed strong growth, profitability and cash flows. Total revenue in the first quarter of 2012 was $856 million as compared to $565 million in the same period in the prior year, an increase of 52%. Product sales increased 54% to $768 million in Q1. Our first quarter cash EPS was $1.14 per share or an increase of 84% over 2011. Excluding onetime items, the divestiture of Cloderm in 2011, and the divestiture of IDP-111 and generic Efudex in 2012, cash EPS was $0.99 in the first quarter 2012 as compared to $0.56 in the first quarter of 2011, an increase of 77%. Adjusted cash flow from operations was $322 million in the quarter or an increase of 58% over the same comparable quarter in 2011. It was $265 million excluding the alliance and royalty revenue related to the Dermatology divestiture. Organic growth is an important metric for our company, and we are pleased to report an overall organic growth rate in the first quarter of 11%. With the exception of the U.S. Neuro and Other segment, which is composed of a diverse set of primarily nonpromoted tail products, all of our business segments showed strong organic growth rates at or close to the double-digit level. Of particular note is the strength of our Canadian and Australian business, which grew 22% over…

Thank you, Mike. As we mentioned in January, we expect our U.S. Neurology and Other segment to continue to decline in the range of 5% to 15%. In the first quarter, this segment declined 10% versus the prior year. But this decrease was attributable to 3 products, Wellbutrin XL, which as we have mentioned many times, is continuing its slow decline, and 2 other products, Cardizem CD and Ultram ER, which both lost patent protection on certain remaining doses at the end of 2011. If these products are excluded from the calculation, the rest of the U.S. Neuro and Other portfolio, which we call the core Neuro portfolio actually increased 6% year-over-year. We are pleased with the performance of this core Neuro portfolio. As the year progresses, we expect the Wellbutrin XL, Cardizem CD and Ultram ER declines to have a smaller and smaller impact on the overall Neuro and Other growth rate. We now expect the decline in Neuro and Other to be around 10% for 2012. Moving now to Dermatology. Our core growth assets from Legacy Valeant continue to show double-digit growth on a moving annual total or MAT basis. Atralin, Zovirax and CeraVe all showed greater than 25% volume growth versus Q1 2011. Acanya growth at 12% MAT has been impacted by the declines in the market for fixed dose BPO clindamycin products. In addition, the comparison for Acanya for the month of March was also impacted by an unusually high prescription volume in 2011. Both Acanya and Atralin grew market share within their respective categories, fixed dose BPO clindamycin combinations and for [indiscernible]. Our strategy to promote Elidel to dermatologists continues to bear fruit with consistent TRx growth in that segment in Q1 2012. Turning now to our recently acquired brands. We are managing the 29…

Thank you, Rajiv. Today, we reported our first quarter 2012 results. Mike already touched upon our top line and bottom line growth, but I wanted to provide some further detail to some of our other P&L items. Our cost of goods sold for the quarter was 26% compared to 27% in the first quarter of 2011. I'll give more detail on our cost of goods sold later in this presentation. We continue to maintain a tight rein on our expenses. SG&A expenses as a percentage of sales has decreased to 19%. We expect SG&A as a percentage of sales to remain in this relative range. R&D expense was $22 million for the quarter or a bit less than 3% of product sales. We expect R&D expense to stay in this range for the remainder of the year. And operating margin was significantly higher than prior year's levels but below Q4 2011 levels due to slightly higher cost of goods sold percentage and a lower amount of service and alliance revenue this quarter. Bottom line, we achieved cash EPS of $0.99 and adjusted cash from operations of $255 million when you exclude the alliance and royalty revenue recognized in connection with the Dermatology divestiture. Total adjusted cash flow from operations was approximately $322 million, more than 50% higher than Q1 2011. We will address working capital in a later slide. Our fully diluted share count was 316 million as compared to 333 million one year ago, a decrease of over 5%. The combination of strong organic growth, business development activities and the declining Neuro and Other segment have significantly transformed the composition of our revenue base. Our current U.S. revenue is approximately 52% of total revenue, which compares to 65% of revenue in the first quarter of last year. As we…

Thanks. We are pleased with the way our base business and acquisitions continue to deliver strong operating performance. Due to our recent acquisitions, coupled with the outperformance of our base business versus our budget in the first quarter, we are pleased to be in a position of increasing our financial guidance for the rest of 2012. We believe that our annual revenue will be in the range of $3.4 billion to $3.6 billion in 2012. We are raising our 2012 cash EPS guidance from $3.95 to $4.20 to a range of $4.45 to $4.70 per share. This increase takes into account the strong performance in the first quarter, as well as our recent acquisitions and the first quarter divestiture which was not anticipated. Finally, based on this projection, we believe that adjusted cash flow from operations should be in excess of $1.4 billion in 2012. In summary, the first quarter of 2012 begins another year where delivering solid operating performance, generating strong cash flows and producing significant bottom line results for our investors is our focus. Through organic growth, margin improvement and our acquisition strategy, I believe that we are delivering on our goal to return significant value to Valeant shareholders and provide our employees and patients with a strong future. With this, we'll now open up the line to questions.

[Operator Instructions] Your first question comes from Marc Goodman from UBS Securities.

Maybe you could just give us a little more color on some of the Emerging Markets and just the underlying growth rates there in Eastern Europe, Latin America and the Asian markets, just a little more color?

Sure. Well, we gave you overall growth rates, both Mexico and Brazil continue to have a strong double-digit organic growth rates. Brazil's probably slightly ahead of Mexico, but both well above 10%. In Asia and South Africa, we're just still getting our arms around this business. South Africa in particular grew quite well in the first quarter, but we actually feel very good about our prospects in Southeast Asia. In Europe, across Central and Eastern Europe, Russia was probably the strongest growth rate in the first quarter, but we had good solid growth in some of our core markets like Poland and Serbia as well. I think one of the reasons for our growth rates in these markets is, about 70% of our total revenues across all of the emerging markets is cash pay. So less than 30% is sort of reimbursed volume, which certainly helps from -- given governments even in these countries are looking hard at pharmaceutical prices.

And when you talk about the growth in Mexico and Brazil over 10% just to start there, is that because those markets are growing that fast or are you gaining share? Are you launching more products? How is it working there?

Well, the data is a little sketchy and looking at IMS and looking at some of the local groups, we are gaining share. We're growing faster than the markets both in Brazil and in Mexico and quite frankly have for the last 2 or 3 years.

And is that also the case in Central and Eastern Europe?

I can't tell you by market. I don't have the data. I can say in Poland, we've certainly increased our share substantially. And Russia, we're probably just -- we're just too new to it to sort of have a comment. In Serbia, we certainly have. And the rest, I just can't give you that, that answer. I suspect we are, but I cannot give you a percentage there.

And one other question on Slide 5, you have this deal update and then there's other transactions down at the bottom where you said you divested Bioskin and you acquired these other assets. Can you just give us a flavor for how that impacted -- how much was the divestiture impact and then the acquired assets?

In terms of bottom line, the divestiture was 0. It was sort of at its basis. And the -- it was pretty late in the quarter that we picked up the Ortho products in Canada and Brazil, so the sales for the quarter would've been less than $1 million.

But what kind of run rate in revenues would those products have?

Probably close to $5 million.

$5 million on a -- for a full year?

Yes, $5 million year [ph] on a full year basis.

For both the Canada and the Brazil?

Yes.

Your next question comes from Chris Schott from JPMorgan.

First question was on the 80% gross margin target that you've referenced the last couple of quarters. Can you just elaborate a little bit more on the drivers that will kind of lead to this improvement? Is this mostly facility consolidation? Is it bringing products in-house? Is it mix? Is it one of the business segments driving all of this?

Yes. So it's a little bit of all of the above, and let's talk about it a little bit. First of all, the first time we raised that target was at -- or we talked about our long-term goal was just our last call, so it has not been the last couple of quarters. It was, I think, our guidance call in January. And what's driving that is largely getting manufacturing synergies that sort of trail our acquisitions by a year or 2. We are very, very careful in terms of plant consolidations, running out of supply, given the high gross margins we have in the first place is not a risk we want to take, so we are very, very careful. But there clearly are opportunities. So we're going in Mexico from 4 facilities to 1; in Brazil, from 3 facilities to 1; in Europe, from 5 facilities to 2; and those are just examples. In terms of the mix of margins, in terms of our products, that largely depends on acquisitions. And on acquisitions, we don't make acquisitions to either improve or hurt our gross margins. We make our acquisitions to create value for shareholders. So it's all around cash flow returns. So some will have better margins and some will have worse. But we continue to make good progress, and we do think that 80% is a very realistic goal for ourselves.

Great. Can you also just talk a little bit more about Russia, and I know you touched on that in the last question. But the opportunity you see for Valeant following your acquisition this quarter? Can you maybe just give us a sense of how large of a business this is for the company at this point? And do you feel you have critical mass in the Russian market at this point?

Well, across all of CIS and Russia is probably 90%. I think our run rate, once we close Natur Produkt, will be about $180 million on an annual run rate basis, but it's also -- we're projecting growth of 15%-plus in that market. I don't feel this is -- we're gaining mass, but we're not a critical mass yet. We think it's a huge opportunity. It's a -- the good thing about health care in Russia, it's for developed -- for what was formerly pretty developed country. The average male, slightly -- lives slightly beyond 50 years and females are sort of in the late 50s. So it's not a healthy nation, and we believe there's a huge opportunity in Russia. So since we've mentioned in last couple of calls, it's going to be an area of focus for us.

Great. And then final question, you've been very busy on the deal front this year. A lot of these have been smaller in terms of dollar size. Are these smaller deals really remaining your sweet spot in terms of what you're looking for? And what type of opportunity are you seeing for larger transactions in the market?

Sure. So we're not driven by size of deal. What we're driven by is return, and I think that over time, you're going to see some larger deals sprinkled in with the smaller ones. What we have been able to do is actually decrease our average cost to about 2.1x revenue, which allows for very, very short paybacks. We also are emphasizing buying assets to the extent we can because those are quite efficient from our corporate structure standpoint. But certainly, we'll continue to make a lot of smaller deals, but we continue to work on and are looking at slightly larger ones. So again, it's all based on the return that we're going to get, cash-on-cash return because that's the key metric for us.

Your next question comes from Corey Davis from Jefferies.

First question on your guidance raise, how much of the raise is from the acquisitions that you've done since January and how much is from the base business performance? I'm already stripping out the $0.15 from the Derm divestiture this quarter?

Right. Yes, you should take the $0.15 out because that was not something that we expected when we -- we thought that deal would close last year originally, so that was not in our original guidance. So $0.35 and I'd say it's probably 1/2 and 1/2.

Okay, great. And Raj, thanks for your comments on the generic Zovirax. And I realized that even if someone were to start today, it's still probably years away, but at some point, does it make sense to get more aggressive with what you're going to do with a Xerese launch?

Thank you, Corey. So the short answer to this is that we have many different life cycle management strategies that we're working on for Zovirax, which includes Zovirax itself as well as Xerese. So Xerese is currently available only in the cream form, and it's been very well received product from an efficacy standpoint. So absolutely, so -- we look at this as a franchise, and we expect to increase our promotion of Xerese going forward and also to continue to focus on many different life cycle management projects that we have ongoing.

And last question, the 38% growth in Zovirax grams that you saw in the quarter, was the revenue growth higher or lower than that?

We -- let us to stay for [indiscernible].

We'll get back to you on that one, Corey.

Your next question comes from David Risinger from Morgan Stanley.

I have a number of questions. I guess just to start out, Mike, I was hoping that you could frame for us, number one, what we should expect at the June 21 analyst meeting, if you could preview that? And second, you mentioned IDP-108. Could you update us on the timing for you to file and also describe the differentiation you see of that compound versus the alternatives?

Sure. So in terms of our investor meeting, it's going to focus probably on the markets outside of the United States where you probably have a little less familiarity, we'll bring our general managers from the different markets, and they will talk a little bit about the overall market and our position, our products and give more detail in that area. We'll probably have an update on our R&D or some of our work out at Petaluma, and that's probably the main highlights of that. Second question, IDP-108. As Rajiv mentioned, we will be filing it later this year, is the plan. I can't give you a precise month, but there's not that many months left. So it's got to be one of them. And in terms of the data, it's -- we will say it's significant, but as Rajiv said, we would like to communicate that through a publication and/or a conference or both, and that's our plan.

Okay, that's helpful. And then with respect to your guidance, obviously, Potiga has been in your guidance since January 6. In your new updated guidance, do you have any other future -- do you have any other major one-timers or divestitures in the new revised guidance?

No. No, we have nothing -- we have no new business development. We have no new divestitures. The guidance is all based on either things we have acquired already this year and an assumption that the outperformance we saw in the first quarter versus our budget will be continued.

Your next question is from the name of Gary Nachman from Susquehanna Financial.

Mike, first question, what have the operating margins been for most of these smaller deals that you did recently? 2.1x seems pretty attractive, but I'm curious about the profitability of those since you haven't really disclosed that.

Yes well, when we buy a company, the current profitability of the company is largely irrelevant because what's relevant is the synergized operating margin. And most of them are not making a lot of money, that's why we're able to buy them at these kinds of prices. But in most cases, we are keeping very little of the infrastructure and folding it right into our business. So the operating margins become quite, quite substantial. So the payback, which is a very crude cash-on-cash metric are consistently well under 5 years.

Okay. And any update to specialty areas that you're focused on in terms of adding to your business? Are you still excited about ophthalmology? Do you still see further opportunity for consolidation in Dermatology? And are you still committed to Neuro? And then any others that you really have your eyes on at this point?

So we are -- continue to be committed to ophthalmology. We're obviously very committed to Dermatology. We have others that we are very interested in. We added podiatry, which we think is a very good market, especially given IDP-108, and we do have others that we're looking at, but which we think will be very good markets, but once we announce deals in those areas, you'll find out what those are. In terms of Neuro and Other, I think what we're pleased about is that the decline has largely been driven by a small set of products too, which just had generics that enter and now there's not a whole lot of products left that have potential generic competition in Wellbutrin. And what we're beginning to see is that sort of the core Neuro business continues to chug along quite nicely. But we're not -- don't expect us to make another big Neuro acquisition with a sales force and all that type of thing. That's not an area that we're -- we think is a good fit with our capabilities.

Okay. And then a couple more quick ones. What will growth in Canada look like this year, factoring in generic Cesamet? And then I guess this is for Howard, what's the right cash tax rate we should be using for the full year? It was hard to tell from the first quarter.

So growth in Canada, especially in the first quarter was quite high. That had more to do with a quarter-to-quarter comparison of 2011. If you go back to the end of 2010, there was actually in the third quarter a Cesamet shortage. And so what happened is in Q4, there was a big buy-in, in 2010 of Cesamet, which -- then we had light sales in 2011 of Cesamet, and then this year strong sales. So that had an impact on the quarter. Going forward, the Canadian/Australian segment, we continue to believe double-digit growth is -- which is what we committed to at the beginning of the year is what we'll continue to see.

And you could do that with generic Cesamet, the double-digit growth?

Yes. That has been built into our original forecast.

And our cash tax rate for the first quarter was around 4%, and we're comfortable with that rate going forward.

Your next question comes from David Amsellem from Piper Jaffray.

Just a couple. So on Acanya with your last Orange Book patent expiring in 2015, I believe, and then Atralin with the last Orange Book patent expiring in 2014, I believe, are you assuming that there are Paragraph III filers out there on the products? And talk about what kind of life cycle management plans you have on Acanya and Atralin?

So I think for obvious reasons, we don't want to get too detailed, but I can assure you that we have many different life cycle management ideas and programs that we are working on for both Acanya and for Atralin. And to answer your question on Paragraph IV filers, we're not aware of any.

Okay. And then second question, can you just go through for us what the other income line of, I believe is $24 million for the quarter was, what drove that?

The biggest driver of that as we mentioned in the press release was the $30 million gain from the way the iNova transaction was constructed. The -- as we've mentioned before, we've got a global business, we've got -- exposed to lots of different currencies. And like this quarter, we had a hit on the revenue line of -- hit on the cost of goods sold line and then we had this gain here a couple of quarters ago, there was a loss in that other income line as a result of some intercompany movements of cash. So these are hard to predict and will happen quarter-to-quarter, but that is as detailed in the press release, that is the -- that was the bulk of it.

So just to be clear, that, that gain is in the cash non-GAAP EPS calculation?

Yes.

Okay. And then just last question on the European launches in 2012. Can you go through with us which country you're having the most launches in? Launch activity, in other words. And maybe quantify what kind of impact the launch products would have on the European business, either in terms of dollars or growth for 2012?

I will suggest you'd show up to the Investor Day because that's the type of thing we'll be covering. We'll have Pablo who runs our European, Central and Eastern European business go through some of those details.

Your next question comes from Doug Miehm from RBC Capital Markets.

Mike, maybe you could talk about the decentralized operations of the company and what sort of turnover you've seen in management? You've made a lot of acquisitions, and I'm sure that you're upgrading management along the way. But maybe you could speak to that a little bit.

Sure. Some of our key management positions are clearly the sort of the GMs or the president or the heads of our different decentralized businesses. Over the last 12 months, a number of changes have been made. Some of those are based on people retiring, and some of them are based on different factors. So in Europe, we now have -- we have a new leader in Europe, we have a new leader in Australia, we have a new leader in U.S. Dermatology compared to some time before. On the other hand, we have some people that continue to do terrific jobs like in Canada and in Mexico, Brazil and Neuro [ph].

Okay, great. Opportunities in Southeast Asia, you mentioned that there could be some significant growth there. Are there many companies that you could look to acquire in that part of the world?

Yes, it's very much like the rest of or like most of the other emerging markets that we're in today. It's highly fragmented. Many, many private companies tend not to be public companies. So the same kind of landscape that we see in Brazil and Mexico and in Russia, we also see in terms of the Southeast Asian market.

Okay. And then just to wrap up again on acquisitions, there've been some larger acquisitions, I'd say across-the-board. We saw one last night by Novartis. Are you going to tend to try to stay away from those just given that you'd like to keep the sales multiple below 3x and try to get a reasonable payback time or good payback times?

Well, what we do is we avoid auctions, and in some of these larger cases, they tend to be auction processes. And two, as you mentioned, Doug, what we are really focused on is return to our shareholders in terms of cash to cash returns. So -- but we're also quite -- there's certain markets we like and we don't like. And for example, generics in the U.S. and Western Europe, which has been where a number of acquisitions -- we're just not interested in those markets. We don't think for us they're good long-term markets. So there's that factor as well. So it has to be in the right business and in the right geography and the right return on investment for us to participate and making a transaction.

Your next question comes from Annabel Samimy from Stifel.

I just want to get a little bit more granularity on the guidance that you provided. You said it was half base business, half acquisitions. So can you tell us specifically which acquisitions have included only the ones that are closed, the ones closing by midyear, all the ones that you've acquired? And can you say the same for the operating synergies that you expect and which acquisitions are included in that?

So in terms of the guidance, all the deals that we've announced are included with the exception of AcneFree, which we just did late last night. So we didn't change our models and stuff based on that. And in terms of all the others -- but some of them won't -- are not going to contribute very much this year since a number of them haven't even closed and we've taken appropriately conservative assumptions about when acquisitions will close. In terms of operating performance in the first quarter, obviously, since we outperformed in the first quarter, those were all sustainable outperformances so we felt we could build that in, in terms of what we're going to do the rest of the year. To the extent that we improve on that, we improve on it.

Okay, great. And then in the Derm business, we noticed that you had some pretty decent price increases in some of the products, and you said in the past that you wouldn't really take that many price increases as part of the strategy. Is that changing a little bit based on prescription trends that you're seeing now?

We take, like most pharmaceutical companies, as products get to the end of their life cycles and generics are coming in, we do take more aggressive price increases. So things like BenzaClin, you will see that, which is pretty standard practice in the area. But in terms of our core products, again, we've had this discussion before. One needs to think about net prices, not gross prices. And some of the ways that we price our products is through these discount cards to consumers, it's discounts to managed care, it's incentives to distributors. So the net price increases actually in Dermatology continue to be quite low, low single-digit.

And also one additional comment, which is obviously when we acquire brands, we look at competitive pricing of competing brands when we do our price increases, and that also guides some of our activities around the time of closing on transaction.

Okay. And then one more question on FX. I mean, you've got in the past, you've talked a lot about how you've been naturally hedged, and we are seeing some bigger FX swings that wasn't expected. Is this more translational or is there a greater mismatch between the revenues and the expenses now and how does that look going forward?

Well, we are susceptible to translations. We tend to reinvest our cash flows in the regions where it's generated, and we manufacture in those regions so we tend to be hedged. But we will have some currency fluctuations. For instance in Europe, because we buy some API in euros and we buy products from some partners in euros and then we sell it, we could sell it in Poland or in other Central and Eastern European countries. In this quarter, the zloty, for instance, weakened against the euro, so we get hurt in that regard. But net-net, we're susceptible to movements in currencies, but we do have a significant hedge.

Yes. And our experience so far over the last 4 years of being involved in many of these markets is, some quarters it's a help, and some quarters, it hurts. And over time, we measure our performance, our business units based on local currency. And that's what we expect them to deliver, to grow share in local currency, and that's been to -- and to grow cash flow in local currency.

Your next question comes from Tim Chiang from CRT Capital.

Mike, I wanted to get your thoughts on the M&A space this year. I guess you've bought what, almost 7 or 8 companies already this year. I think you bought 9 last year or more. Certainly, you guys have done an incredible job of getting value out of the transactions. I think you talked about what, a multiple around 2x sales. I mean, is that something that you think you'll get some pressure on in the transactions you are looking at in the future? Also, I wanted to ask Howard about the balance sheet, I'll ask them after you answer this question.

Sure. Well, we chart sort of multiples we pay, both sort of sales multiple, which is a very crude measure but is, in some ways, maybe the best measure from an external standpoint, given often the profitability of what we're buying, as we talked about earlier, is not particularly high when we buy it, but is quite high after we've integrated it. We've looked over the last 4 years, 4-plus years that I've been here, and it's actually a little bit lower now than it has been. I think on average over those 4 years, it's probably about 2.5x sales. So we've been fortunate in the first quarter to actually be a little bit lower, but we think between 2x and 3x depending on the gross margins, the nature of the business, the growth prospects, that's really the area that we try to operate in. Sometimes, we get below 2x and that's great, and sometimes we'll pay a little bit more than 3x. But that's only if there's very high margins and very high growth expected. Your balance sheet question?

Yes. I mean, Mike, I think you talked about building or acquiring at least one additional growth platform. I mean, have you already done that or I mean in these Russian acquisitions or is that still more to come?

Well, I think the answer is yes and yes. I would think that our 2 -- there's -- really Russia is going to be an important growth platform for us. In the year ago, we had no sales in Russia. So that's happened over 3 acquisitions. First, Sanitas, which got us into the country and then with the 2 that we made this quarter. We believe Pedinol, which is one of the best-known companies in the field of podiatry, introduces us into that segment, which we think is a great opportunity. So I'd say both of those are new growth platforms for us. So I would be highly disappointed that if by the end of the year, if we'd not added another 1 or 2 to those growth platforms as well.

Okay, great. And Howard, I wanted to ask you a couple capital structure questions if I could. Looking at the debt, how much flexibility do you think you'll have in terms of: one, lowering your borrowing costs, could you talk a little bit about that? And also, I guess the debt to equity ratio is actually coming down and not going up. And is there an optimal debt to equity ratio that you guys are focusing on this year?

Well, we stated publicly that we would like to keep our leverage below the 4x level on an adjusted basis. The way in our covenants, we get credit for the acquisitions and most of the synergies so we're comfortably below 4x right now. And we think at that level, we could execute our acquisition strategy and maintain strong access to the credit markets at attractive pricing, and that's our goal. The key for us, as Mike's talked about, is going to be maintaining discipline in terms of cash-on-cash returns. Because as you've seen, the business generates an enormous amount of cash. Because we're spending money on acquisitions, we're generating an enormous amount of cash from operations and the combination of discipline and the cash generative ability of the business will continue to -- will allow us to maintain a strong balance sheet going forward.

Howard, I'm just going to do one last question. What is the cost of your debt right now?

So the last financing that we did was a term loan, and it was in the Term Loan B market and the all-in cost to us was around 4%, including the fees and the original issue discount. So there's very, very strong appetite for our paper. We're still more heavily fixed than we are floating, the spread between fixed and floating is quite significant. I think we feel comfortable adding more floating right now given that spread, but the appetite for our paper was quite strong.

Your next question comes from Juan Sanchez from Ladenburg.

Just a couple of short questions. The first one is from the acquisitions that show us closed in your presentation, which ones, if any, closed after the quarter ended? And what would be your current cash position? And the second question is on Potiga, [indiscernible] my understanding was that Potiga was only going to contribute to your P&L once the P&L with Glaxo became profitable. Is that still the case or that has changed?

Right. So the only -- of the closed transactions, Pedinol closed after the end of the quarter. But only really Probiotica and Eyetech were there for the -- for any substantial period of time at all. In terms of the arrangement with Glaxo is in 3 territories: the U.S., Canada and Australia. It's a profit-sharing arrangement, so yes, until the brand becomes profitable, there will be no impact on our P&L. Now between the period of approval to close, we were continuing to bear 50-50 of the cost of developing and commercializing this product, preparing to commercialize the product. So the net impact on a go forward basis, as Rajiv was mentioning, is actually positive because it's an expense reduction from the commercial on the R&D side since that's now all incorporated into the P&L of Glaxo.

Your next question comes from David Steinberg from Deutsche Bank.

You touched on the recent podiatry acquisition in part as laying the groundwork for your future IDP-108 commercialization strategy. And I was just curious given the framework you've laid out, and we haven't seen all the data, but it sounds like IDP-108 could be your biggest product down the road. Assuming approval, do you -- is your current sales and marketing infrastructure right-sized for the opportunity? Or upon approval, will you expand it or add on with acquisitions? And then secondly, you indicated you're going to file before the end of the year in the U.S. Could you just update us on your x-U.S. regulatory strategy for IDP-108?

Sure. So in terms of the infrastructure now, it's not close to being what would be required to launch a major onychomycosis product in the U.S. So it will need a lot more support than what we currently have, whether we choose to do that ourselves or we find partners or CSOs, we have not -- we don't want to get the cart before the horse. Let's get this thing approved first. But we're obviously thinking about it. In terms of the rest of the world, we have a partner, Kaken, who is responsible for Japan, and in fact, has all the economics in Japan. It was their compound originally. And then the rest of the world, we have rights to large portions of the rest of the world, and we are actively working on our regulatory strategy there, and we can update you in more detail -- I'd rather have Sue Hall do that, who's our head of R&D at the Investor Day conference.

Okay. And then one question on Brazil. The split down the road as I understand it, in early 2014, the government's mandating that all generics that have not undergone bioequivalency studies have to be removed from the market. And it sounds like there are hundreds of these products. Is this a major opportunity that you think you can capitalize on?

Well, it certainly won't hurt us because we do have full bioequivalence approval on all our products. And if they actually implement this, and it will obviously help all those companies in the market that have bioequivalence already established. So it is an opportunity if the government falls through on that initiative.

And your final question comes from Michael Tong from Wells Fargo.

Mike, I just want to make sure I don't misunderstand you. Based on -- your new guidance is based on first quarter being $1.14 rather than $0.99, is that correct?

I'm sorry, could you repeat the question?

Yes. Your new 2012 EPS guidance, is it based off of first quarter being $1.14 rather than $0.99?

Yes. What we did is basically we had the extra $0.15 gain which was not anticipated. So if you want to look at it from that way, we have raised our guidance for the rest of the year $0.35 from where we were before because we got that additional $0.15 in the first quarter. So we think that compared to our original budget, we're expecting over $0.10 improvement in each of the following 3 quarters based on our operating results in the first quarter and the deals we have done. And that, as I mentioned earlier, is roughly a 50-50 split between the 2.

Okay. And then 2 questions for Howard. Number one, the $20 million revenue hit that you mentioned, how well was that absorbed as that revenue hit travels down the P&L line as part of your operational hedges? And then the $30 million FX gain, why wasn't it kind of netted out as part of -- since it's an intercompany loan, why wasn't it netted out as part of intercompany transfer as part of preparing for the consolidated financial statements?

Well, the second question, we'll tackle that first. It was a dollar-based loan for an Australian-based company, and that's not their functional currency, so the accountant -- accounting convention is for us to recognize gains or losses. And in terms of the $20 million, it depends on the region. For the most part, we are mostly hedged as I mentioned because we will operate in the same region -- we'll manufacture in the same region where we're selling, so we're exposed really to the profits which we also tend to reinvest in those regions. So it tends to be more translation. But as I mentioned in Europe, where we were buying API in euros and we're buying products from partners in euros and then reselling them in zlotys and other currencies. We do have some real currency exposures that we saw this quarter as the euro strengthened against those currencies.

Okay. So if you were take a stab, maybe you could absorb it like, you could absorb 50% of that hit within the P&L?

I don't have that number. Certainly, the majority of it if you look at our average margins, we should be able to, but I don't have a specific number for you.

Okay, so thank you. Rajiv, I think you have the answer to Corey's question.

That's right. So Corey, the answer to your question on Zovirax, the question was whether the net sales growth was going to be higher or lower than the volume growth. The answer to that is going to be lower, and the reason for that is, as you will recall, we began our transition from the 15-gram to the 30-gram tube last year in the first quarter, so there was some loading [ph] into the channel that will probably reverse itself when you look at our second quarter results.

Good. With that, we will close out the call. We thank you for all participating, and we'll look forward to talking to you next quarter.

Thank you, everyone, and this concludes today's conference call. You may now disconnect.