Good morning, my name is Lorrelaine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Valeant Pharmaceuticals First Quarter Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to our host, Ms. Laurie Little. You may begin your conference.

Thank you. Good morning, everyone, and welcome to Valeant's first quarter 2014 financial results conference call. Presenting on the call today are J. Michael Pearson, Chairman and Chief Executive Officer; and Howard Schiller, Chief Financial Officer. In addition to a live webcast, a copy of today's slide presentation can be found on our website under the Investor Relations section. Our presentation today contains forward-looking information. We would ask that you take a moment to read the forward-looking statements mentioned at the beginning of our presentation as it contains important information. In addition, this communication does not constitute an offer to buy or solicitation of an offer to sell any securities. This communication relates to a proposal which Valeant Pharmaceuticals has made for business combination transactions with Allergan Inc. In furtherance of this proposal and subject to future developments, Valeant and Pershing Square Capital Management may file one or more registration statements, proxy statements or other documents with the U.S. Securities and Exchange Commission. This communication is not a substitute for any proxy statement, registration statement, prospectus or any document Valeant, Pershing Square and/or Allergan may file with the SEC in connection with proposed transactions. Investors and security holders of Valeant and Allergan are urged to read proxy statements, registration statements, prospectus and other documents filed with the SEC carefully in their entirety if and when they become available as they will contain important information about the proposed transactions. Any definitive proxy statements will be mailed to stockholders of Allergan and/or Valeant as applicable. Investors and security holders will be able to obtain free copies of these documents and other documents filed with the SEC by Valeant and/or Pershing Square through the website maintained by the SEC at www.sec.gov. Information regarding the names and interests in Allergan and Valeant of Valeant and persons related to Valeant who may be deemed participants in any solicitation of Allergan or Valeant shareholders in respect of the Valeant proposal for a business combination with Allergan is available in the additional definitive proxy soliciting material in respect of Allergan filed with the SEC by Valeant on April 21, 2014. Information regarding the names and interest in Allergan and Valeant of Pershing Square and persons related to Pershing Square who may be deemed participants in any solicitation of Allergan or Valeant shareholders in respect of a Valeant proposal for a business combination with Allergan is available in additional definitive proxy soliciting material in respect of Allergan filed with the SEC by Pershing Square. The additional definitive proxy solicitation materials that I just referred to can be obtained free of charge from the sources indicated. 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. Now, I'll turn the call over to Mike Pearson

Thank you, Laurie. Good morning, everyone, and thank you for joining us. Today's call will be relatively short, as we just recently provided a very comprehensive overview of the Valeant business and updated our guidance. On today's call, I will review our first quarter results and performance, provide an update on Valeant's business, and Howard will discuss and update you on our first quarter financials and the current status of our offer for Allergan. After our remarks, Howard and I will be available for Q&A. This morning, we reported Valeant's first quarter results for 2014, which were driven by strong sales growth and profitability across all our regions, including continued outperformance from Bausch + Lomb, demonstrating the durable nature of our business model. Total revenue in the quarter was $1.89 billion as compared to $1.07 billion in the first quarter of 2013, an increase of 77%. This revenue, adjusted for foreign exchange, which was greater than $35 million versus Q1 of last year, exceeded our expectations for the quarter. Cash EPS was $1.76 per share, and adjusted cash flow from operations was $636 million for the quarter, an increase of 84% over the prior year. We are particularly pleased that the adjusted cash flow conversion represents more than 100% of adjusted net income. Organic growth for the quarter was stronger than expected. We delivered organic growth of 1% for the total company, including the impact of all generics. We had originally guided to an anticipated negative same-store organic growth rate for the first quarter due to unfavorable first quarter comparisons for both Zovirax and Retin-A Micro, coupled with a new entry of generic Vanos in the U.S. and Wellbutrin XL in Canada. Excluding the impact of these generics, same-store organic growth was 8% and 7% on a pro forma basis.…

Thank you, Mike. I agree with Mike that Q1 was another very strong quarter for Valeant. We overcame FX headwinds and the generization of 3 of our top 10 products, including our largest product, and exceeded our expectations for revenue. Most of our U.S. businesses and Emerging Market businesses and the entire Bausch + Lomb business globally exhibited particularly strong growth. Our gross margins at 74% of sales were in line with our expectations, and we expect low to mid-70s gross margins for the remainder of the year. Through improving mix, the growth of our newly launched and soon to be launched products, and manufacturing synergies, we would expect gross margins to trend up over time towards our goal of 80%. On our 2014 guidance call, we explained that SG&A, as a percentage of revenue, would be above historical levels due to the cost incurred to launch our numerous launch products, the investments made to significantly increase the size of our aesthetics and dental sales forces, and the cost of direct-to-consumer media for a number of our consumer brands. As expected, SG&A was 26% of sales in Q1. SG&A, as a percentage of sales, should be in the same range in Q2 and then start trending down to historical levels in the second half of the year. Our R&D expenses were lower-than-expected due to the acceleration of the integration of our core dermatology and ophthalmology R&D groups. We did not cut any clinical programs during the quarter. Given the acceleration of the synergies, we now believe that R&D expenses for the year will be in the $250 million range, and we continue to expect that we would exit 2014 at a $200 million annual run rate. As we also mentioned during our guidance call, we expected 40% of our cash…

[Operator Instructions] Your first question comes from the line of Chris Schott with JPMorgan.

I guess, my question here is can you just elaborate on the Bausch + Lomb trends we're seeing? It seems like there's some very strong performance you put up these last few quarters. I guess, specifically, can you talk about, is this driven by more price versus volume? Is it new products versus more established brands? I'm just trying to understand a little bit what's kind of going on here. Just a quick second one, just a follow-up. EPS progression, can you just maybe give us an update of how we should think about the rest of the year playing out as well?

Thanks, Chris. Let me take the first half of your question, and Howard can take the second. Actually, for Bausch + Lomb, the growth is almost all volume. I don't think we've taken price on any of the significant products. So this is largely volume, and it's largely products that they had when we bought them, because most of their new products are just starting to launch now. We talked about Ultra, which was only sold to 300 doctors this quarter. It'll be nationally launched this month. PeroxiClear, which was, I think we only sold about $1 million of PeroxiClear in the first quarter because we just launched it at the very end of the quarter. So we were very pleased that by moving to a decentralized model, where our general managers and their teams can sort of adjust for these sort of marketing mix, and we have more feet on the street, we've been able to really accelerate the growth in places like China, Western Europe, Latin America, Central and Eastern Europe, and even in the U.S. since we now have one eye health group. The new products will only help going forward because every quarter for the rest of the year, we'll be launching new Bausch + Lomb products, which we think will further drive the growth going forward.

And, Chris, in terms of the EPS progression, when we updated guidance on April 22, we were still comfortable with the 40-60 mix that we talked about during the guidance call, and that each quarter will be greater than the prior quarters. So Q1, we expect to be the lowest of the year, and Q4, the highest for the year.

And your next question comes from the line of Louise Chen with Guggenheim.

I'm curious as to -- I know that you believe in the success, potential success of acquiring Allergan. But say that doesn't go through, what's your plan B? And then also, in the meantime, as you wait for Allergan to respond, would you consider another larger deal if it came along?

Thanks. First of all, we are very committed to this Allergan deal. In fact, as Howard mentioned, it makes huge sense for both sets of shareholders, and that's only been reinforced when talking to the shareholders. So we're highly confident given those conversations that in the end of the day, we will end up with this transaction being successful. We also mentioned though that we continue in all of our business development efforts, both in terms of the tuck-ins, and we're always in discussions with other companies. But for now, we're focused primarily on the P&L. I mean, the Allergan transaction.

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

Just a very quick one. In terms of the performance of Allergan, I mean, they had a fairly significant raise in their guidance. So I guess the question here is, given their organic growth and given that the company suggested that they're going to provide more color on their plans for longer-term organic growth, that doesn't exactly dovetail with your comments on shareholders being overly enthusiastic about the transaction given the organic growth. So that begs the question, what is the compelling rationale for the deal from an Allergan shareholder perspective?

Again, we can only repeat feedback of the shareholders we've talked to. We've talked to quite a few of them. I think the key in this is the cash flow. I think that you can spend an awful lot of money and get growth. But if you're not delivering cash flows to your shareholders, at a certain point, it does -- our preference would be to get more cash flows. I think people are compelled by the synergies since we all -- both of us operate in 3 spaces. And they're also compelled by the durability of both our assets and their assets, which means that there's very few [indiscernible] as you look forward. And that the franchise, if you look 10 years out, that the majority of the products for both companies will still be there.

Your next question comes from the line of Gary Nachman with Goldman Sachs.

Mike, just to follow up on that last point, on the synergy target that you've laid out. Have you gotten any pushbacks from investors with respect to the size of the synergies? Are people comfortable that you could achieve that? And then, just also characterize the pipeline of other deals you mentioned. It seems most of those are x U.S., and how is the pricing environment for those types of transactions?

Great. Size of the synergies, when we talk to investors, the Allergan investors, the first is they do comment on our track record, that we've been doing this for a while and they do note that we've always overachieved our synergies. There's been relatively little pushback on the R&D side. And in fact, many of them have said that they have been talking to the company about this themselves. On the SG&A, the place [ph] that they want to get more clarity is in the United States. I think outside the United States, I think they feel that we probably have a stronger sort of international business and it's certainly larger. And especially in the emerging markets, they can see that putting [ph] Allergan into our operations will probably only help. In the U.S., they just caution us to make sure that we're careful, that Allergan has done a very nice job on the marketing side, and that to be very careful in terms of achieving synergies there. But that's a small fraction of the total number, and we will certainly take their advice. In terms of the deals, you're absolutely right. If we look at the deals that we're doing, and we've done one in Central Europe, we're looking to close certainly in South Africa, in the Middle East, in Indonesia, we mentioned Vietnam early this year. So a lot of our deals are in the emerging markets. And it's interesting that the -- maybe because of what's happening in Central and Eastern Europe, the prices actually, if anything, are certainly in the range that we've been paying historically, and maybe even a little bit lower. So right around 2x sales.

Your next question comes from the line of Andrew Finkelstein with Susquehanna.

Talk a little bit more about some of the drivers of organic growth you're seeing in various regions. In particular, you noted some of the same-store sales growth drivers in the U.S. business. So that's -- you noted some of the dermatology products. But is there anything you're doing differently in terms of how you're marketing them or improving the gross to net on those products? And then you highlighted some of the upcoming launches in the ophthalmology business. If you could talk at all about how that sales target breaks down between different drugs and the opportunities you see for each of them.

So I will take the first half, Dermatology and some of the things -- changes we made in the U.S., and, Howard, if you don't mind taking the second one. Yes, I think we have made a few changes in the U.S. business. The first is we have really stabilized our sales force. It was -- last year was a big transition year when we combined Medicis and Valeant. And we had a fairly high turnover rate over the course of the year. And that's now been stabilized. We think we have an excellent team. And I think we learned something from doing that acquisition with Bausch + Lomb that we didn't touch the sales forces. And I think we're seeing the benefits of not touching the sales forces and the performance of Bausch + Lomb. So that's a lesson learned and one we'll apply to the Allergan transaction. I think the other thing is -- that we worked on is a much more sophisticated alternate fulfillment system that we've implemented in the U.S., which is really helping. Those scripts don't show up in IMS in terms of what it's doing, but we're very pleased that Solodyn is now growing. And we've applied that to a number of our other products, which is also helping in terms of the growth.

Yes, in terms of new products in the pipeline, you mentioned ophthalmology, there's new product launches in a number of our businesses in the United States, including -- and Derm and aesthetics and consumer. But this year, I think Mike referenced that we'll have some, but not a huge impact from those. Obviously, it will grow as the year progresses. It's really next year and thereafter where we're going to feel the biggest impact, given, as you know, these products, they take some time to ramp up. And some of the more significant ones, well, this quarter, Luzu and NEOTENSIL were obviously quite significant, and Ultra will be quite significant. But then Jublia, in the middle of the year, we would hope to launch, we would hope to be quite significant. And then even further on, as Mike referenced, the Phase III eye health portfolio with the eye whitening drug and the glaucoma drug, in particular, will give us growth even further out.

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

I just wanted to know where you are in the process of the sales hires that you want to do in Derm and dental. It does seem that this quarter, there was some meaningful lost share in the cellular and skin care markets. And just wanted to know if there was some disruption going on there and where you were in the process, and when we can see the productivity of that team flow through?

Sure. So we're 100% hired in both dental and in aesthetics. In aesthetics, I know there were some comments based on some survey in terms of our share. Our injectable sales, which would include Dysport and our fillers in the first quarter in the United States, grew 15%. I think I heard somewhere that it was cited the market grew at 11%. So I'm not familiar with that survey, but that would suggest we're gaining share, not losing shares. So we had very strong performance on the aesthetics side, continuous strong performance. And that's before the impact of the extra 100 people we have now hired. But quite frankly, really, we spend a lot of time with training, and they're just getting to know their physicians right now. On the dental side, the same thing, everyone's hired. We have trained them extensively. They're now out in the field, and we expect to see a real acceleration of growth in dental also in the second quarter.

Your next question comes from the line of Alex Arfaei with BMO Capital Markets.

Could you provide more details on how you achieved the cost savings with Bausch + Lomb? You mentioned you didn't [indiscernible] the sales force. So what did you cut? And, Howard, could you provide more details on the opportunity to improve the Bausch + Lomb manufacturing cost to achieve your goal of approaching 80% for gross margins?

Sure. So for B+L, the cuts came in, in a number of places. First, they had a corporate headquarters and we had a corporate headquarters, and we didn't need both. Second, they had regional offices. They had a large office in Switzerland, for example, and 3 regional offices in the U.S. for each of their 3 businesses, the vision care, the surgery and the pharmaceutical business. We didn't need any of those. And then they had a very decent -- they had a model, it was a centralized model, that in each country, for example, in the U.K., they had 3 general managers, 1 right in each of their different businesses. And that each of those general managers had a staff and a marketing department, and a finance department, et cetera, et cetera. So what we have done is combine those all into an eye health group in each of the different countries and in the U.S. So what we really -- most of the savings came through taking out management layers, and as we've mentioned, people that are not touching the customer. B+L had the exact same structure as Allergan has in terms of if you go to the countries in Europe, there'll be 3 general managers. And our European team is -- come back and we figured out the synergies bottoms up, and that's why we view the Bausch + Lomb acquisition pretty much as a blueprint to what we would do with Allergan, and why we're confident that we can maintain and perhaps even accelerate growth while taking these costs out.

Let's just say, in terms of the -- some of the manufacturing synergies, firstly, we continue to look and find opportunities on costs that are above the plant, so plant overheads. Secondly, as we've talked about, we have plans that we're developing, putting in place, to manufacture a number of these products much closer to the markets. We've talked before how the solutions business is -- solutions are manufactured in the U.S. and in Western Europe, and then shipped around the world. So we're basically shipping water around the world. So we're looking at opportunities to manufacture a number of the products closer. Thirdly, there's no natural hedge of the gross margin in emerging markets because we're, again, manufacturing either euros or dollars and then shipping to these emerging markets. So we have a vast opportunity. We're also just looking at where our costs are in these various plants and trying our best to maximize or minimize cost per unit, then move manufacturing around in that regard. And then the last one, longer-term, which is something B+L was looking at prior to the acquisition, was future consolidations of plants to get additional cost savings.

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

You mentioned in the context of the Allergan proposed transaction that the company was talking to others about mergers of equal. And I wondered how and whether that dynamic has changed since the Allergan proposal was announced, if these other companies are more or less interested in talking to Valeant and -- or whether things have really paused. I mean, I would assume, historically, the company is keeping confidential who you're talking to.

Certainly. We always keep confidential who we're talking to. But I'll just repeat what Howard said on the call. We think the Allergan transaction is compelling. And that's been very, very much reinforced in talking to Allergan shareholders. It's clear that they really see the compelling nature of this transaction. And we have strong, strong support to get this deal done. And so if their shareholders are speaking and our shareholders are speaking, they want us to focus on this and get it done, and that's what we intend to do.

Your next question comes from David Risinger with Morgan Stanley.

I have 2 questions. So the first is, could you discuss ValueAct exiting the board? I know that it was conveyed by ValueAct at least 3 weeks ago. But how much of it has to do with ValueAct's disagreement with Ackman rather than his lack of -- or their lack of support for Valeant? And then second, with respect to the synergies, can you clarify whether you assumed the proceeds of divesting the Restylane and Dysport franchises in your synergy targets?

I'll take the first one, and Howard will take the second. Thank you, Dave. So in terms of what's behind ValueAct's motivation, I think it's best that you talk to them. I will say that Mason has been a terrific board member for the 6 years that I've been here and has made outstanding contributions to the company, so he'll be sorely missed from a board membership standpoint. But I also turn -- I think we shared his letter this morning with everyone. And I think it's quite clear that ValueAct still feels very, very strongly that our company will continue to create value. In a sense -- my sense is they view that their job is done as an activist, that they've helped turn around the ship and were set on a strong course. And in terms of any other motivations, I suggest you talk directly to Mason and/or ValueAct.

And then, Dave, in terms of the costs associated with the injectables business that we would intend to sell, if you would go back to the April 22 presentation and the 2014 pro forma slide, we pulled the book of revenue and the costs associated with that business out of those pro formas. So yes, we included those, the reduction of those costs in terms of the synergy capture.

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

You touched on the Dysport a little bit, but I was hoping you could comment on some of the other data Allergan released. They talked about the derma filler market share of Valeant falling 7 points to 34%. They also talked about Bausch + Lomb only growing 3% versus the closer to 10% we're hearing from you guys. Could you offer any commentary there, or is there something going on we should be aware of?

Sure. First of all, when I was talking about injectables growing 15%, that included both the fillers and the toxins. So they're different products, but they're often sort of sold in combination. And so when I say that the 15% growth, I was talking across the -- both the fillers and the toxins. And there wasn't significant difference in terms of the growth rates across the 2 of them. In terms of our ophthalmology franchise, I assume you're talking about the prescription side. We can just report the numbers that we're selling. So maybe you'll need to check on their sources because we know what we sold.

Your next question comes from the line of Raghuram Selvaraju with Aegis Capital Market.

Just in terms of -- as I think others have asked what the plan B might be if the Allergan acquisition doesn't go through. Could you talk a little bit -- and not just on the context of what happened with Allergan or didn't happen, but in the larger context of your overall acquisition strategy about if you are looking at larger targets, what the debt load of those larger targets mean in the context of your strategy, and how much that plays into whether you would consider a company an appropriate acquisition target or an inappropriate acquisition target [indiscernible]?

Yes, if it doesn't really play into it. When we look at possible acquisition targets of small, medium or large, we base our analysis on cash flow projections and in terms of what we believe we could do with these companies. What we do is we look, again, for a certain return to our shareholders. And then we also look at the payback period because we don't believe in putting huge value on terminal values, 10-year plus on cash flow streams. So we think that should -- if it happens, that's wonderful. So that's how we look at an acquisition. And then we just look at how we'll figure out, from a financing standpoint, what's the best approach to that acquisition. So it's truly a cash flow analysis. And whether a company has a lot of debt or a little debt, what we're really doing is looking at the assets. Howard, I don't know if you have any other thoughts on that.

Well, I think that's right, and I'd also point out the business development side that Mike referred to, most of our BB folks continues to be on these smaller tuck-ins where we get enormous returns. And again, because of our footprint around the world and our decentralized model, we're able to execute a number of transactions simultaneously. And we add them all up, it adds up to a significant number. So we're not dependent on these quite large transactions in any event.

And your final question comes from the line of Alan Ridgeway with Paradigm Capital.

Question about what's going on in Central and Eastern Europe. It was only here that really came in below we were looking for. Could you maybe, Mike, talk about what markets are maybe, in particular, difficult over there right now? Or is it just a general trend in the whole region? And maybe explain how exposed you guys are to the Ukraine.

Yes, let me start with the last question. Ukraine is about a $40 million business for us. So it's not huge. Well, it was off about 40%, I think, in the first quarter. And so that was a market that was hit the most. Russia slowed down in the first quarter, as did Poland, which borders on Ukraine as well. The good news in talking to our guys, we're already halfway through the next quarter, business is back in Central and Eastern Europe. Their growth rates are much stronger. So I can't explain exactly why, it was more of a temporary blip. But we feel quite comfortable that in our teams, based on talking to our teams over there, that we should see a return to stronger organic growth rates in the second quarter and for the rest of the year. I guess that's it. So thank you, everyone, for joining us, and we'll be talking to you soon. Thank you.

Thank you for joining the Valeant Pharmaceuticals First Quarter Earnings Conference Call. You may now disconnect.