Salix Pharmaceuticals, Ltd. SLXP
Q4 2012 Earnings Call Transcript
Transcript Call Date 02/28/2013

Operator: Good afternoon. My name is Katrina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Salix Pharmaceuticals Fourth Quarter 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

Mr. Freeman, you may begin your conference.

G. Michael Freeman - Associate VP, IR and Corporate Communications: Thank you. Good afternoon. I am Mike Freeman, Associate Vice President of Investor Relations and Corporate Communications for Salix Pharmaceuticals. With me today are Carolyn Logan, President and Chief Executive Officer; Adam Derbyshire, Executive Vice President and Chief Financial Officer; and Bill Forbes, Executive Vice President, Medical and Research and Development, and Chief Development Officer.

Adam will begin the presentation with a review of the financial results for the fourth quarter and full year 2012. Carolyn then will review operations to complete the formal segment of today's call. At the conclusion of each comments, management will respond to appropriate questions.

Various remarks that management might make during this conference call about future expectations, plans and prospects for the Company constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results might differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our press releases and SEC filings, including our Form 10-K for 2011. Specifically, the information in this conference call related to projections, development plans, and other forward-looking statements is subject to the Safe Harbor.

I now will turn the call over to Adam.

Adam C. Derbyshire - EVP, Finance and Administration, and CFO: Thank you, Mike. Total product revenue was $198.2 million for the fourth quarter of 2012, a 28% increase compared to $155.2 million for the fourth quarter of 2011. Total product revenue for the full year of 2012 was $735.4 million, a 36% increase compared to $540.5 million for the full year 2011.

XIFAXAN revenue for the fourth quarter of 2012 was $147 million, a 37% increase compared to $107.2 million for the fourth quarter of 2011. XIFAXAN revenue for the full year 2012 was $514.5 million, a 38% increase compared to $371.7 million for the full year of 2011.

APRISO revenue for the fourth quarter of 2012 was $13.7 million, a 24% increase compared to $11.1 million for the fourth quarter of 2011. APRISO revenue for the full year of 2012 was $70.3 million, a 36% increase compared to $51.7 million for the full year 2011.

Total cost of products sold was $30.7 million for the fourth quarter of 2012 and $124.6 million for the full year 2012, compared to $27.5 million for the fourth quarter of 2011 and $95.4 million for the full year 2011.

Gross margin on total product revenue was 84.5% for the fourth quarter of 2012 compared to 82.3% for the fourth quarter of 2011 and 83.1% for the full year 2012 compared to 82.4% for the full year 2011.

Research and development expenses were $36.6 million for the fourth quarter of 2012 and $123.2 million for the full year of 2012, compared to $19.1 million and $104.4 million respectively for the prior year periods. The increase in research and development expenses for 2012 compared to 2011 is due primarily to increased expenses related to our Phase 3 retreatment study of f rifaximin for irritable bowel syndrome with diarrhea and increased personnel costs.

Selling, general and administrative expenses were $70.9 million for the fourth quarter of 2012 compared to $54.2 million for the prior year period and $258.2 million for the full year 2012 compared to $187 million for the prior year period. The increase in selling, general and administration expenses for 2012 compared to 2011 is due primarily to increased personnel costs related to our sales force expansion in 2012, increased marketing expenses related to RELISTOR, SOLESTA and XIFAXAN550 for hepatic encephalopathy and premarketing expenses related to FULYZAQ and GIAZO.

The Company reported GAAP net income of $17.6 million, or $0.28 per share fully diluted for the fourth quarter of 2012 and $64.2 million, or $1.01 per share fully diluted for the full year ended December 31, 2012.

Net income on a non-GAAP basis for 2012, excluding the loss on extinguishment of debt, non-cash adjustments related to the repurchase of a portion of our 2028 Notes in 2012, the intangible asset impairment charge, change in acquisition-related contingent consideration, the difference between income taxes paid and income taxes expensed, non-cash depreciation, amortization, stock-based compensation and convertible debt interest expense, was $205 million or $3.22 per share fully diluted for the full year ended December 31, 2012 and $51 million, or $0.81 per share fully diluted for the fourth quarter of 2012.

For more detail regarding these non-GAAP items recorded during the fourth quarter and full year 2012, I'll refer you to our fourth quarter and full year 2012 financial results press release issued by the Company earlier today.

The Company reported adjusted earnings before interest taxes, depreciation and tangible impairment charges, amortization, loss on extinguishment of debt, change in acquisition related contingent consideration and gain on adjustment of put option to fair market value or adjusted EBITDA of $238 million for the full year of 2012, which represents 38% growth over 2011 adjusted EBITDA.

Adjusted EBITDA for the fourth quarter of 2012 was $62 million. Adjusted EBITDA is a non-GAAP measure and again for more detail regarding these non-GAAP items recorded during the fourth quarter and full year 2012. I refer you to our fourth quarter and full year 2012 financial results press release issued by the Company earlier today.

We believe these non-GAAP measures might provide investors additional relevant information in part for the purposes of historical comparison. In addition, we use these non-GAAP measures to analyze our performance in a more detail and better historical comparability.

However, you should be aware that non-GAAP measures are not superior to nor substitute for comparable GAAP measures. Cash and cash equivalents were $751 million as of December 31, 2012.

In March 2012 Salix strengthened its balance sheet by raising $690 million through the issuance of 1.5% senior convertible notes due 2019 and using a portion of the proceeds to repurchase some of its 5.5% senior convertible notes due 2028.

XIFAXAN550 continue to perform well during the fourth quarter and full year 2012. During the quarter our XIFAXAN prescription business comprised of XIFAXAN 200 mg tablets and XIFAXAN 550 mg tablets, demonstrated impressive growth, on a milligram basis, of 25% compared to the fourth quarter of 2011, and full year growth was 24%. APRISO also demonstrated strong prescription year-over-year growth of 28% for the fourth quarter of 2012 compared to the fourth quarter of 2011, and 29% for the full year. RELISTOR prescriptions increased 90% year-over-year for the fourth quarter of 2012 compared to the fourth quarter of 2011, and 137% for the full year.

We believe total company revenue for 2013 will be approximately $920 million, representing 25% growth over 2012 revenue. We believe we'll be able to generate EBITDA for 2013 of approximately $344 million, representing 44.5% growth over 2012 adjusted EBITDA.

Net income on a non-GAAP basis for 2013, excluding non-cash depreciation, amortization, stock-based compensation, convertible debt interest expense and applying a tax provision to the adjusted income before tax, we believe it should be approximately $215 million or $3.37 per share fully diluted for the full year ending December 31, 2013. Please refer to today's press release for more detail regarding these non-GAAP items.

The current annualized run rates based on dollarizing January 2013 prescriptions, prescription data, for XIFAXAN, MOVIPREP/OSMOPREP, APRISO, RELISTOR and our 'other products' are approximately $550 million, $117 million, $92 million, $45 million, and $40 million, respectively. In line with the full year 2013 guidance, for the first quarter of 2013, we anticipate total company product revenue should be approximately $200 million, EBITDA should be approximately $68 million and adjusted net income should be approximately $40 million, or $0.63 per share, fully diluted, on a non-GAAP basis.

Now we'll turn the call over to Carolyn Logan, our President and CEO.

Carolyn J. Logan - President and CEO: Thank you, Adam. Our fourth quarter growth was driven primarily by XIFAXAN550, APRISO and RELISTOR. XIFAXAN continues to grow sequentially, with prescriptions, on a milligram basis, increasing 9% for the fourth quarter of 2012 compared to the third quarter of 2012. APRISO also continued to exceed the Company's expectations during the quarter. APRISO prescriptions increased 10% during the fourth quarter of 2012 compared to the third quarter of 2012. RELISTOR prescriptions increased 18% during the fourth quarter of 2012 compared to the third quarter of 2012.

On December 31, 2012 the Food and Drug Administration approved FULYZAQ which is crofelemer 125-mg delayed-release tablets for the symptomatic relief of non-infectious diarrhea in adult patients with HIV/AIDS who are on anti-retroviral therapy or ART. FULYZAQ is a locally-acting, minimally-absorbed drug derived from a botanical source. FULYZAQ is believed to act by blocking chloride secretion into the lumen of the GI tract and thus reducing the accompanying high volume water loss as seen in HIV associated diarrhea.

It is this secretion that is believed to lead to diarrhea with the associated symptoms of dehydration, electrolyte imbalance, abdominal cramping, urgency and increased frequency. The FDA approval of FULYZAQ is a significant step forward in addressing the unmet medical need of people with HIV/AIDS on ART therapy who experience non-infectious diarrhea, which can often lead to reduced treatment compliance. Since the introduction of antiretroviral therapy, people with HIV are living longer and thus medication compliance and tolerability, as well as quality-of-life issues are increasingly prominent components of their overall health outlook.

Diarrhea negatively affects quality of life and is a common reason for discontinuing or switching ART regimen. Salix's expertise in gastrointestinal medicine should position the Company to deliver this much-needed treatment to HIV patients. During the fourth quarter, our sales force continued launching SOLESTA, our first-in-class biocompatible tissue bulking agent for the treatment of fecal incontinence, or FI. Fecal incontinence is estimated to affect approximately 15% of people in the United States over the age of 50, and is the leading reason for admission to assisted-living facilities in the United States.

Physicians and patients continue to show significant interest in the use of SOLESTA as an alternative to more invasive treatment options in their treatment of FI. In early November 2012, the Centers for Medicare & Medicaid Services, or CMS, assigned SOLESTA a unique HCPCS Code of L8605 for reimbursement purposes. This new code should facilitate separate reimbursement for SOLESTA. SOLESTA began being billed under the new code Injectable Bulking Agent, Anal Canal, also known as L8605 effective January 1, 2013.

On July 27, 2012 the Company received from the FDA a Complete Response Letter or CRL requesting additional clinical data for our supplemental New Drug Application or sNDA for RELISTOR, which is methylnaltrexone bromide, injections for subcutaneous use for the treatment of opioid-induced constipation or OIC in adult patients with chronic, non-cancer pain. On October 5, 2012 Salix conducted an End-of-Review meeting with the FDA's Division of Gastroenterology and Inborn Errors Products to better understand the contents of the letter.

The Division has expressed a concern that there may be a risk associated with the chronic use of mu-opioid antagonists in patients that are taking opioids for chronic pain. In order to understand this potential risk, the Division has communicated that it believes a very large, well-controlled, chronic administration trial will have to be conducted to assess the safety of any mu-opioid antagonist prior to market approval for the treatment of patients with OIC who are taking opioids for chronic, non-cancer pain.

Salix has held discussions with the Division and has expressed the view that the post-marketing, clinical and pre-clinical data currently available for RELISTOR adequately demonstrate an appropriate and expected safety profile sufficient to permit the approval of the current sNDA.

The Company is continuing to work with the FDA to potentially generate a path forward that can be agreed upon by both parties for the further development and regulatory review of RELISTOR. While it is not possible to definitively determine the duration of our discussions with the FDA regarding this matter, at this time we anticipate a conclusion could be reached during 2013.

Opioid induced constipation is a debilitating and unmet medical need that occurs as a consequence of opioid use in some patients that are taking opioids for chronic pain. Currently, there are no FDA-approved therapies for OIC in chronic, non-cancer pain. Before changing our RELISTOR development plans, we intend to make every effort to gain approval to extend the benefit RELISTOR has provided to relieving opioid-induced constipation in advanced illness patients since 2008 to meet the unmet medical need of OIC in patients with chronic, non-cancer pain.

In respect of the currently-approved subcutaneous formulation of RELISTOR for OIC in patients with advanced illness who are receiving palliative care, physician feedback indicates a significant need in the marketplace for a treatment that targets the underlying cause of OIC without impacting opioid-mediated analgesic effects on the central nervous system.

RELISTOR does this by displacing opioid binding in tissues in the gastrointestinal tract. Since we introduced RELISTOR in April of 2011, an increasing number of physicians are treating their patients with advanced illness, who are receiving palliative care with RELISTOR as a solution to OIC when response to laxative treatment has not been sufficient.

In early November 2012, the Centers for Medicare and Medicaid Services or CMS assigned RELISTOR a unique Healthcare Common Procedure Coding System, or HCPCS code, of J2212 for reimbursement purposes. We estimate peak year sales of RELISTOR for advanced illness in patients who are receiving palliative care when laxative therapy has not worked could reach $100 million.

On February 21, 2012, the Company initiated TARGET 3, it's a Phase 3 study to evaluate the efficacy and safety of repeat treatment with rifaximin 550 milligram TID or three times daily for 14 days in subjects with irritable bowel syndrome with diarrhea or also called IBS-D, who respond to an initial treatment course with rifaximin 550 milligram TID for 14 days.

During the fourth quarter we continued to enroll subjects in the clinical trial. We continue to anticipate securing a FDA decision regarding approvability during the first half of 2014. During 2012 we also continued to strengthen our intellectual property relating to rifaximin for the treatment of IBS-D.

A method of treatment patent regarding XIFAXAN550 for the treatment of IBS-D issued November 13, 2012 and should provide protection until 2029.

In August of 2012 Salix entered into an exclusive agreement with Alfa Wassermann by which we licensed rights in the United States and Canada to an extended intestinal release or EIR, formulation of rifaximin for gastrointestinal and respiratory indications, including Crohn's disease.

The EIR formulation of rifaximin has been designed to provide an efficient delivery of rifaximin by releasing the active drug following passage through the stomach in order to provide a homogeneous distribution of rifaximin in the intestinal tract.

We intend to study this EIR formulation of rifaximin for its potential to target difficult-to-treat diseases of the intestinal tract such as Crohn's disease. We intend to initiate two Phase 3 trials during the first half of 2013 with the goal of securing FDA approval to market EIR rifaximin for the treatment of Crohn's disease.

During the fourth quarter of 2012, the Company also continued to make progress in the development of budesonide foam and a new formulation of rifaximin. We have completed patient enrollment in our two budesonide foam Phase 3 trials. Currently, we are targeting submission of the NDA for budesonide foam for the treatment of moderate ulcerative proctitis or proctosigmoiditis during the third quarter of 2013.

Regarding our next generation formulation of rifaximin, our pharmacokinetic study to assist in the characterization of three prototype tablet formulations progressed during the fourth quarter of 2012, and currently we intend to move forward with the initiation of a clinical trial in the first half of 2013.

In addition, we continued our work on the development of LUMACAN oral formulation prototypes. During the fourth quarter, we initiated an exploratory study designed to evaluate fluorescence kinetics of LUMACAN following enema administration for precancerous and cancerous lesions, in respect of the quality, onset and offset of fluorescence following administration of the enema. If the enema administration is successful, we intend to proceed to orally administered test formulations. We believe that LUMACAN, if approved, has the potential to significantly improve earlier detection and diagnosis of colon cancer.

Salix is built on a tremendous history of success including the approval of nine New Drug Applications, the acquisition/licensing of 16 products and the establishment of a top-ranked specialty sales force since 2000. Our core business remained strong and continues to grow. Our portfolio of marketed products is complemented by our impressive pipeline of product candidates in development, that should drive additional revenue growth over the long term, if and as they are commercialized. Additionally, the Company continues to actively pursue additional product opportunities to expand and broaden our product portfolio.

We are extremely pleased with the success we've achieved to date, and we believe the Company is well-positioned to continue to succeed in our mission of being the leading specialty pharmaceutical company licensing, developing and marketing innovative products to health care professionals, to prevent or treat gastrointestinal disorders.

This completes our comments. Thank you for your participation in today's call. Now we'd like to turn the call over to the operator, so we can begin the question-and-answer session.

Transcript Call Date 02/28/2013

Operator: Ami Fadia, UBS.

Ami Fadia - UBS: I had a couple of questions. Firstly, on the RELISTOR opioid-induced constipation indication. Could you give us some color on your current interactions with the FDA, the nature of those interactions and at this point, do you anticipate potentially running a study and is that incorporated in your guidance? And I have two other follow-ups. I'll wait for this answer first.

William P. Forbes - EVP, Research and Development, and Chief Development Officer: This is Bill Forbes. Right now, we're progressing with the appeal with the FDA. So right now, we don't really have much a substance to tell you on that. I can tell you that we do not have any plans currently to do a study along the lines of a (MASE) trial, so we're going to wait to see how that appeal plays out and at that point in time, we will provide for you some further guidance on what the next steps are.

Ami Fadia - UBS: I guess another way to ask that question is if they do not grant that appeal, would you then discontinue development, or is there any other pathway?

William P. Forbes - EVP, Research and Development, and Chief Development Officer: I think you can appreciate. We don't want to get into a situation of trying to address hypothetical situations. So I'd much prefer to just wait until our discussions with the FDA are done and I do believe they will grant the appeal, what they will do with it and whether or not they will work with us is another issue, but as far as having to file the appeal and to work through with that, that for us is not something that we feel is going to be a problem, it just a matter of what the outcome of the appeal will be.

Ami Fadia - UBS: Then another question on the retreatment study if you could provide us with an update on how the trial is progressing and the enrollment et cetera, and maybe an update on the timing?

William P. Forbes - EVP, Research and Development, and Chief Development Officer: So the timing hasn't changed. We have over 300 active centers in United States and screening is going very rapidly right now. So at this point in time what we're driving towards is to be able to have top line data for the primary endpoint at the end of this year beginning of next year and then to file a complete response, to the complete response letter they will take six months to review it. So that's essentially the timing that we have.

Ami Fadia - UBS: Maybe a question for Adam. Firstly, were there any changes in inventory for any of the key products? APRISO looked a bit light. So, if you could comment specifically on that? Maybe give us sales for some of the other smaller products? Then just separately on guidance, maybe I'm confused about something, but if you could tell us how to bridge from the EBITDA guidance to the adjusted net income, that will be great?

Adam C. Derbyshire - EVP, Finance and Administration, and CFO: So, yeah, there were no significant changes in inventory, although our wholesalers have continued to resist stocking multiple units of MOVIPREP with the size of that configuration, but outside of that, inventory levels have remained fairly constant. I guess, you wanted a breakdown on the revenue and I'll just give it to you for the full year. So I think you have it for APRISO, XIFAXAN and RELISTOR already. So for the purgatives, for the year it $64.9 million, $8.4 million for the quarter, again reflecting the size of the unit and the resistance from wholesaler so to stock multiple units of that. For SOLESTA, it was $1.6 million, $2.9 million for the year. For DEFLUX, it was $6.5 million, $28.6 million for the year. Then all other is roughly $6 million – all the rest of the products $6 million for the year and about $2.9 million for the quarter. The other comment I should make though is that we did launch to the trade, GIAZO, and that was $13.2 million in the fourth quarter.

Carolyn J. Logan - President and CEO: What was your concern about APRISO?

Ami Fadia - UBS: Well, it seems to be little light quarter-on-quarter and your comments on the volumes seem to indicate that it is continuing to grow. Is there any change in the gross to net conversion on the product which was sort impacting sales here?

Adam C. Derbyshire - EVP, Finance and Administration, and CFO: No. It is that the earlier numbers we talked about were demand based, of superscription based and then sometimes there can be a difference between prescriptions and ex-factory sales. That's all that is.

Operator: David Amsellem, Piper Jaffray & Co.

David Amsellem - Piper Jaffray & Co.: I will just limit it to two. Just help us understand the tax rate for 2013 and also longer-term how we should model cash taxes? Then, secondly, I wanted some color on SOLESTA, how you think reimbursement is going? To you feel like since the implementation of the new code in the beginning of the year, you're seeing doctors less skittish about financial taking on financial risk and how should we think about the ramp for that product this year?

Adam C. Derbyshire - EVP, Finance and Administration, and CFO: David, this is Adam. I will just handle your tax. On both a GAAP and a non-GAAP basis, we're looking at a tax rate of 38%. However, if you're looking at cash taxes for both, the GAAP and a non-GAAP basis, it's about 43% GAAP and about 28% for non-GAAP. So if we were reporting a cash EPS number it would actually be $3.92, based on the actual cash taxes we expect to pay in 2013. Moving forward I would expect that 38% from a book rate remain the same and then our cash taxes will over time come in line with that rate. So for this year for 2013, it's 38% for non-GAAP on a book rate and for a cash rate its 28%. I think your second question had to do with SOLESTA. So we just recently got the code L8605 which issued in January and so it's just nice to have certainty around the reimbursement and have a code that's actually specific to the procedure. So we're seeing it being well excepted out in the marketplace and obviously a lot of time with practices and training them on the new L Code and how to go about reimbursement for that.

David Amsellem - Piper Jaffray & Co.: So the quick follow-up, have you seen an uptick in volumes since the beginning of the year?

Adam C. Derbyshire - EVP, Finance and Administration, and CFO: Yes, we have.

Operator: David Buck, Buckingham Research.

James Dawson - Buckingham Research: It's Jim Dawson for Dave Buck. Would you review any price activity, price increase activity in the fourth quarter, and anything since then, actually?

Adam C. Derbyshire - EVP, Finance and Administration, and CFO: So, for the fourth quarter, we had several price increases. APRISO, 8%, MOVIPREP, 8%, RELISTOR, 10% and then XIFAXAN 200-milligram of 10%, so that occurred in fourth quarter of 2012.

James Dawson - Buckingham Research: Then also, what about the outlook for SOLESTA and RELISTOR that is embedded in that 920 top-line forecast, or the 25% growth in 2013? Could you give a little more detail on those two products?

Adam C. Derbyshire - EVP, Finance and Administration, and CFO: Yes, we just provide total company revenue guidance, we don't provide it by product.

James Dawson - Buckingham Research: Just lastly, could you just discuss the environment, business development environment currently and your deal capacity?

Carolyn J. Logan - President and CEO: We're continuing to look at a lot of interesting things. There are a lot of opportunities out there. There are a lot of things to look at. So, right now, we're probably more focused on product, individual product opportunities. I don't know if that answers your question or not, but there is no shortage of things to look at.

James Dawson - Buckingham Research: How about your leverage – how high could you take your leverage ratio? What type of financial flexibility do you have?

Adam C. Derbyshire - EVP, Finance and Administration, and CFO: No, I mean, we think over the next two to three years, we should to be able to have operating margins in excess of 40%.

Operator: Jason Gerberry, Leerink Swann.

Jason Gerberry - Leerink Swann: Your first question, can you talk a little bit about gross margins in '13. It looks like XIFAXAN, as a percent of the mix, last two quarters was about 75%. So wondering, as you think about – there's obviously a mix, potential mix benefit with that. Then, with the change in the supply arrangement on XIFAXAN, I know that the gross margin on XIFAXAN, I suppose, is to tick up closer to around the 93% range. Do we see a benefit, an annualized benefit in '13 relative to '12 on XIFAXAN?

Adam C. Derbyshire - EVP, Finance and Administration, and CFO: Overall margins, we're expecting to be about 83% for 2013. We do have the capability in 2014 to start sourcing API from other API manufacturers that could bring or increase our margins. But I would not expect that to happen in 2014. As you may know, we are buying API from another API manufacturer right now and we'll be utilizing that in the 2014 time frame. So I would expect that we could possibly have an impact on our rifaximin margins in the 2015 timeframe, related to purchasing API from other manufacturers.

Jason Gerberry - Leerink Swann: Then just one follow-up, on the recent subpoena issue, I was just wondering if you guys can maybe provide the investors with the framework for thinking about downside risk and maybe some of the promotional activities that we're cited in the subpoena?

Carolyn J. Logan - President and CEO: We really don't have much to add other than with what is in the 8-K. The subpoena is requesting documents regarding the Company's sales and promotional practices for XIFAXAN, RELISTOR and APRISO. So of course, we are fully cooperating, we are in the process of responding but we are just in the very beginning stages of it that we really don't have anything to add other than what we said in the 8-K filing. It's our understanding though that this enquiry or investigation can go on for quite some time, it's usually not a short process as we've been told.

Operator: Mario Corso, Mizuho Securities USA.

Mario Corso - Mizuho Securities USA: Just hoping you could talk a little bit about SG&A and R&D spending 2013. Maybe number one in relation to where they were in the fourth quarter whether those are good run rates or kind of what is pushes and pulls might be and then also in the absence of specific line item numbers is more expected to really grow more than the other this year. Then on taxes, I guess, why would non-GAAP and GAAP taxes be the same rate. I don't think that was the case in 2012. So I'm wondering why you wouldn't have something closer to the cash EPS rate in your non-GAAP numbers?

Adam C. Derbyshire - EVP, Finance and Administration, and CFO: R&D for 2013 we on a GAAP basis, we expect it to be around $139 million, $140 million SG&A about a $100 million or $295 million on a GAAP basis. On a non-GAAP basis, R&D of about $133 million, SG&A about $270 million. In terms of the taxes, in 2012 we made a non-GAAP adjustment for taxes for the difference between taxes paid and taxes booked, which would be your cash taxes. For 2013, the way we evaluated non-GAAP is we actually did a tax provision on our adjusted income before tax. Just like you'll do it tax provision on your GAAP income before tax. So that's the difference, but if you do want to look at 2013 on the pure cash basis similar to how we provide a guidance for 2012, that would yield an earnings per share fully diluted earnings per share of $3.92.

Operator: Gary Nachman, Susquehanna Financial Group.

Gary Nachman - Susquehanna Financial Group: Carolyn first are you factoring any real contribution from FULYZAQ in 2013, what are your plans for launching that product? If you could talk a little bit more about that? Then Bill, if you could talk about the Phase 3 EIR effects and then for Crohn's trials, how long will they take, how big will they be just give us some color around those?

Carolyn J. Logan - President and CEO: I will start with your question on FULYZAQ. We had our National Sales meeting or a lunch meeting for FULYZAQ last week. Quite a bit of training took place there. All the representatives, of course, left there pretty excited about the opportunity. We have hired five HIV specialists that will be in the largest HIV markets. They received some training at the National Sales Meeting but they will be in here next week for – I believe it is three weeks of very intent training. So then after that they'll be add in the field and they will be totally focused 100% on this opportunity. Then the Futura sales force which is about 96, 97 representatives, they will also have this product in their bag. I believe they are starting out with a number of targets and they'll eventually end up with about 20 targets each. So I believe our total physician target based on that is close to 3000 physicians. So we are covering most all the physicians that are writing HIV or AIDs therapy.

Gary Nachman - Susquehanna Financial Group: What are you expecting in terms of formulary acceptance? I am assuming for this patient population it should be pretty good?

Carolyn J. Logan - President and CEO: Yeah we think so, our National Accounts Group and there are a lot of people in the Company are focused on working with the (ADAP) group and on working with Medicare and Medicaid to hopefully have really good pricing. We are starting off with a copay card so essentially the first prescription is free and then after that we're hoping that the patient excluding Medicaid and Medicare will pay no more than $25. We price the drug in line with the generic ARTs. So we're doing our patient assistance program, we are in line with other manufacturers in this space at 500 times the federal property level so they can have quite a nice income and still qualify for our patient assistance program. So we are doing a lot of things to try to make sure that we make this product available to those patients who need it. I believe your other question was for Bill.

William P. Forbes - EVP, Research and Development, and Chief Development Officer: Regarding the Crohn's indication, I believe you're asking on what that program would look like and how long it might take. So the first study there will be initiated with the EIR formulation of rifaximin will assess induction of remission in patients with moderate Crohn's disease and there will be two of those study that will initiate soon. As we've spoken publicly, we've spoken to four different health authorities, Germany, U.K. France and of course, the FDA. We file that IND here in the United States earlier this month and so we're looking forward to getting some comments on the protocol from the FDA soon if they have any comments to give us. So we'll progress the induction studies then they will be about 600 patients each, 300 per treatment group it'd be 800 milligrams twice a day for 12 weeks and of course, we also are interested in a maintenance indication and those studies will follow on from the induction studies and those we'll comment a little bit more when we get done designing those trials, but they obviously are going to be fairly large in scope as well and go on for 52 weeks because in order to get a maintenance indication, you have to run those for one year. So as far as timing goes, we're doing everything we can to try to conclude most of the development by 2017. I think certainly for the induction study, that's quite doable, but for the maintenance studies, that might be a little bit of a stretch. So we'll have – as time goes on, some discussions with the different health authorities about whether or not we can submit the induction studies, as the maintenance programs are going on. So I can't tell you definitively exactly when the submissions will occur, but we'll be opportunistic in trying to make sure that we get the most indications with the (fewest) filings.

Gary Nachman - Susquehanna Financial Group: Then just a real quick one for Adam, just a follow-up on the stocking question. When I do the math for XIFAXAN, if I take the annualized number of 550, I get about $10 million less than what you reported on 4Q. So I just wanted to make sure that there wasn't any stocking specifically on XIFAXAN.

Adam C. Derbyshire - EVP, Finance and Administration, and CFO: No.

Carolyn J. Logan - President and CEO: I think the run rate is $555 million.

Adam C. Derbyshire - EVP, Finance and Administration, and CFO: Yes, the $555 million is the run rate.

Gary Nachman - Susquehanna Financial Group: Right. So if I take that and divided it by four, and I get a number that's $10 million less what you guys reported? Am I not doing the math, right?

Adam C. Derbyshire - EVP, Finance and Administration, and CFO: No, you're doing the math right, but January of 2013 versus January of 2011, it's up 27%. It's just at a high growth rate.

Gary Nachman - Susquehanna Financial Group: Okay. So, nothing unusual in the fourth quarter?

Adam C. Derbyshire - EVP, Finance and Administration, and CFO: No.

Gary Nachman - Susquehanna Financial Group: I just wanted to confirm that.

Operator: Irina Rivkind, Cantor Fitzgerald.

Irina Rivkind - Cantor Fitzgerald: I wanted to follow-up on XIFAXAN IBS-D recurrence trial. I just wanted to see what you're doing in the recurrence trial that will give the FDA additional comfort around antibiotic resistance? Do you think you can overcome their prior concerns as a potential barrier to approval, even if your study results are positive?

Adam C. Derbyshire - EVP, Finance and Administration, and CFO: I think as we had talked about at the advisory committee that was held for this particular study, we will – we are in the process of collecting different samples from the patients, including feces and also some skin swabs, and we're assessing changes in the microbiome of both the derm and the chronic microbiome. Then of course, we'll do some cross-resistance testing on other antibiotic classes and that's pretty standard issue. And I – so I think, along those lines, we should be able to come up with enough information to provide the, to more than provide the Division with the type of information that they were looking for. So I hope that answers your question, but that's probably the quickest way I can give you a short answer to a very long issue.

Irina Rivkind - Cantor Fitzgerald: Then I just had a SOLESTA follow-up. So reimbursement, with the L-Code, it should help beginning in January. But do you think that the doctors also need more hands-on practice with – and proctoring, and at which point do you think you could start sort of ramping down the launch cost of that product?

Carolyn J. Logan - President and CEO: The physicians, we still are doing training. That will probably continue through this year because we have trained probably close to 3,000 physicians by now. But we obviously have more that would like to be proctored or have hands-on training. So there are a lot of programs planned this year to assist in that effort.

Operator: John Newman, JMP Securities.

John Newman - JMP Securities: I just wondered if you could comment a little bit around your activities for XIFAXAN in HE. I know in the past you've talked about putting some additional promotional resources towards the PCP community and also just trying to help doctors become more aware of the fact that this small portion of patients are getting treated. So just curious if you could give us a little bit of commentary as to how that process is going?

Carolyn J. Logan - President and CEO: For HE, you are absolutely right John, we did discover that about two-thirds of the patients are not receiving treatment. Of the patients that are being treated we have about a 60% market share. We're either used alone or in conjunction with lactulose. So there is a big campaign by our sales force and our institutional reps, our key account managers, to make physicians aware that when these patients are avert patients and they've had an episode, they – we don't want them to have multiple episodes. So our CAM or institutional sales force, is working very hard with hospitals to get standing orders, so that patients who are admitted leave the hospital on XIFAXAN and hopefully, stay there. We also have compliance programs to try to encourage compliance and persistence. So, same thing for the office based salespeople. We're doing a lot of things to encourage the physician to talk to the family members. We're also doing some brochures in the waiting room that encourage family members to talk to physicians. We've done the documentary. I think you probably – you may have seen that. If not, we'd be happy to make that available for you, but it's pretty impressive and certainly hits home that HE doesn't just affect the individual, HE affects the entire family and certainly any children in the home and the caregivers, it has a major impact on them. So we are seeing growth, nice growth as you can see by the numbers in HE, but we've still got a lot of work to do there. The good news is we've still got a tremendous amount of opportunity, because we have stated that we believe peak year sales for HE that it's $1 billion opportunity and we've seen nothing that changes our mind on that, because HE is a chronic condition and it is a population that's growing. So I don't know if I've answered your question, but if not, maybe tell me what else should like to talk about.

John Newman - JMP Securities: That's very helpful. The only additional follow-up I might have is, over time do you think that there is a greater opportunity just to gain more market share of the untreated patients versus the revenue uptick that you might see from pushing out the duration of therapy?

Carolyn J. Logan - President and CEO: We definitely have a lot of opportunity to get more patients and we're working on that, but I mean actually we're working on longer treatment days, too. So there is just there is a lot of opportunity both ways with two-thirds of patients not even being treated.

Operator: Tim Lugo, William Blair & Co.

Tim Lugo - William Blair & Co.: Can you update us on the post-marketing commitments in HE? I believe there was XIFAXAN alone versus lactulose head-to-head study ongoing. Can we expect data that from anytime soon?

William P. Forbes - EVP, Research and Development, and Chief Development Officer: That study right now is ongoing and we are enrolling patients into it. We don't know when the top line results will be available for us, but I imagine it will take probably 18 months in order to get to that point. It may come faster or slower, but I hope that enrollment in that trial goes rapidly, because every patient gets rifaximin, half the patients get lactulose. So really it provides healthcare for everybody in form of medications. We are hopeful, and the early goings here is encouraging, but I have to keep updating you on whether or not we hit our marks and whether or not we can collect that information and make it available sooner than later.

Tim Lugo - William Blair & Co.: Is it difficult to roll in lactulose arms? Is that maybe one of the issues?

William P. Forbes - EVP, Research and Development, and Chief Development Officer: One of the things that they have to do is agree to take both – obviously they have to all agree to take rifaximin and then they have to agree that they may be allocated to the lactulose. It is randomized in that respect. So the patients, it's too early to tell whether or not the lactulose patients are dropping out, but I think it shouldn't be too difficult to get them to stay in the study and get the information that the FDA request and that we want.

Tim Lugo - William Blair & Co.: Just quickly on your Q1 guidance. It's essentially flat on the revenue side and $0.63 on the bottom line, is – I haven't seen you do in the 60s EPS in a while, can you maybe give me some granularity of the tax rate issue are you more spend in the first quarter?

Adam C. Derbyshire - EVP, Finance and Administration, and CFO: What is the tax rate issue, but then also you know we are expecting R&D to be up and an SG&A to be up as well, but it's mainly a tax rate issue.

Operator: Annabel Samimy, Stifel Nicolaus.

Annabel Samimy - Stifel Nicolaus: I just want to follow up on the HE question against XIFAXAN. Are you still making any in roads into the minimal HE population, you're doing any studies there. I know the patient population that's not treated, does that include a minimal HE I guess diagnosis? Also in terms of the growth you clearly had some decent growth in XIFAXAN, is there a way you can split out what growth was a contribution from HE versus IBS and also if you can give us the duration number for HE that would be great – the duration of treatment for HE?

William P. Forbes - EVP, Research and Development, and Chief Development Officer: Annabel, I'll go ahead and answer the first question to have a minimal HE, as you are aware we do have a next generation formulation for rifaximin that we're bringing along and we have just recently did an E submission for the IND on that particular formulation. What we're going to do there is actually look at prevention of complications in subjects with compensated liver, cirrhosis and so rather than going down minimal HE what we're looking for is recruiting patients with certain amount of cirrhosis and also obviously MELD scores somewhere in the range of 14 or higher and then treating them with various doses of this next-generation formulation and then trying to prevent time to decompensated liver, which includes hepatic encephalopathy and also SVP and esophageal variceal bleed, a number of clinical outcomes that will either hospitalize the patient and the other thing that we've added to that is all cause mortality. So it's a composite endpoint that contains very clinically relevant outcomes. Along the way, we're going obviously collect a lot of information around their cognitive functioning. So, we will enroll patients, as we did, I believe, with the overt hepatic encephalopathy program that had minimally-AD already. So we'll document that and we'll, of course, have that information as it goes forward. Directly, we won't be looking at minimal AT, but I guess, indirectly through the data that we collect, we'll certainly, over time, compile enough information to understand what happens in those patients that come into the program with minimally-AD as defined by some of the assessments that we're making, and what their outcome is. I think that unless you have any other questions about the program and what we're looking at, I guess I'll pass it over to Adam.

Adam C. Derbyshire - EVP, Finance and Administration, and CFO: Your question about whether minimally-AD is included in that untreated population, it is not included in that. In terms of the duration of therapy, it's been a while since we've conducted our awareness trial and usage. We will be doing that shortly and get a better hand on that, but we think on average, it's about 125 days. I will say, though, for patients that are a part of our hepatic encephalopathy living program, our health program, that duration is much higher. So then that is another initiative. It's been an initiative since the beginning, but again, we're pushing that hard to physicians and patients to become a part of the hepatic encephalopathy living program because it just benefits the patient being in that program.

Annabel Samimy - Stifel Nicolaus: Can you just give us a little bit of granularity on the growth contributions between HE and IBS because there was clearly pretty decent growth number and just want to see if it's driven by – well I guess the follow-on question to that is with the Attorney General investigation do you sense that there might any hit to the IBS growth component of that?

Carolyn J. Logan - President and CEO: I'm sure how that would impact IBS, but we don't really track IBS. We don't – we believe that the majority of our growth is coming from HE, because that's where we spend all our time, that's where we spend all our effort, that's where our programs are. So – and the size of the prescription, the average size of the prescription would indicate to us that HE is the driving force behind the growth.

Operator: Michael Tong, Wells Fargo Securities.

Brian Jeep - Wells Fargo Securities: It's actually Brian Jeep on for Michael tonight. First question, I wondered, will you recognize a 2012 R&D tax credit in Q1 and if so, I guess how many basis points should we think about the benefit there being?

Adam C. Derbyshire - EVP, Finance and Administration, and CFO: Can you repeat that I'm sorry.

Brian Jeep - Wells Fargo Securities: Sure. It was about recognition of the 2012 R&D tax credit, will you recognize that in Q1, if so I guess how much benefit do you think you'd see in Q1?

Adam C. Derbyshire - EVP, Finance and Administration, and CFO: I will have to get back to you on that. I don't have any details on that in front of me, so let me get back to you on that. All I know is from that we are expecting a 38% rate and I can see how that – how that impacts that percentage.

Brian Jeep - Wells Fargo Securities: Then in terms of business development, I guess I'm curious, when you are out there shopping, what areas within GI are you looking at, where you still think you need assets?

Carolyn J. Logan - President and CEO: We are in interested in liver disease. So fatty liver disease, we're looking at anything really related to liver disease, we have an interest in that. Also, Crohn's disease, we hope to have an indication someday with our EIR rifaximin. But Crohn's disease or IBD is an interest level for us. We don't have a product for IBS-C that's another area of interest. We have looked at pancreatic enzymes before that continue to be something, if there were something unique or interesting to us there and basically just anything along the GI tract gastroparesis is another big opportunity and area of interest. Celiac disease is another area I'm probably leaving out something so Adam or Bill if you think of anything…

Adam C. Derbyshire - EVP, Finance and Administration, and CFO: We're in a purgative business and we like to stay in the purgative business. So we're always interested in more better, to better tolerated more innovative type purgatives would be have interest to us other rectal products would be have interest to us, so all gastrointestinal focused.

Operator: Greg Fraser, Bank of America.

Greg Fraser - Bank of America: It's Greg Fraser for Gregg Gilbert. First time GIAZO, we thought your sales expectations for that product were fairly modest, I think you may have mentioned $20 million peak sales potential in the past. You have $13 million of stocking in the quarter, if I heard that right, so maybe if you could just update us on your latest thinking on market potential for that product?

Adam C. Derbyshire - EVP, Finance and Administration, and CFO: Sure. So obviously we wanted to stock GIAZO and every pharmacy where you have a bottle Asacol, a bottle of Lialda, a bottle of balsalazide disodium, right. So in order to do that appropriately we stocked it the way we did. So, yes, we don't expect this to be the $50 million to $100 million product, but over time peak year which is year seven, we would hope that we could do better than $20 million with this product.

Greg Fraser - Bank of America: Then on FULYZAQ, what are the next steps in terms of looking at other forms of diarrhea? Is there any development work planned for 2013?

Carolyn J. Logan - President and CEO: At the current time, we don't have any development work planned for 2013. This was a very complicated approval; in a lot of senses it is a complex mixture. It is first oral botanical that the agencies ever approved. This was a true collaborative effort between our development group and the agency. The agency was very helpful to us as both our Company and the agency blazed this new trial getting this drug to market. We still are working with the agency on it and doing some laboratory testing. I think we will need to get all of that behind us before we would consider pursuing or working on another indication.

Greg Fraser - Bank of America: Is the dispute with your partners still something that has to be resolved?

Carolyn J. Logan - President and CEO: Yes, we are still going through that process. So that is still ongoing.

Operator: Scott Henry, Roth Capital Partners.

Scott Henry - Roth Capital Partners: I'll be quick. I know it has been a while. A question on XIFAXAN pricing. The ($550) is now moving in on 90% of the franchise and I understand the strategy of continuing to raise price on the 200 milligram to switch people over, but at what point do you think you can become more aggressive on the pricing for the 550 milligram?

Adam C. Derbyshire - EVP, Finance and Administration, and CFO: Well, in the past we've done 5% price increases I mean we could possibly consider 7%, 8% price increases on an annual basis, but we would not want to push it further than that. So the 200 milligram on a run rate basis is still about a $15 million product even on a milligram basis is only 6% of total milligrams, but it still represents roughly a $50 million product. So we wouldn't want to stop supplying that in hope that that would move over to the 550. So if it continues to hang in there at that $40 to $50 million, we'll continue to keep it available and increase price and to help force business over to the 550.

Scott Henry - Roth Capital Partners: Adam, could you remind me when you took the last price increase on the 550 milligram?

Adam C. Derbyshire - EVP, Finance and Administration, and CFO: We took it in May of 2012.

Operator: Shabani Malhotra, RBC Capital.

Shabani Malhotra - RBC Capital: Most of my questions have been asked, but I guess, could you just give us an update on your thinking around guidelines for the management of HE, I know that's something that you are hoping would be updated at some point since they are very old and I was wondering if you heard anything about that since we last spoke? Then second, on the IBS-D enrollment, is it going at the rate you expected or I know there has been (web-based) study, so how should we be thinking about whether there is potential for further delay or whether it's just going as expected?

Adam C. Derbyshire - EVP, Finance and Administration, and CFO: Let me take the last part of your question first, regarding IBS enrollment. Obviously, we're always pressing as hard as we can for these centers to perform, and we're working with them very closely. I think the short answer to that is that we're very encouraged with some of the activity that we've seen since the first of the year and we expected this. I believe that we're going to see a lot more of that and we need to, to get through this year. So, I mean, to everything that we've looked at, that's why we've held the guidance right where we're at. We're not bringing it closer to us or pushing it further out. Right now we feel it's exactly where it needs to be. Regarding the treatment guidelines, I don't really have any information. As you can imagine, being a sponsor company, we don't really have access to exactly where that is, other than we know that these societies of EASL and AASLD were interested in putting something out and we see that EASL has a symposia talking about the diagnosis and treatment of HE at their – at the European meeting that's coming up shortly. So, we'll see what they have to say and if they have an update regarding the release of any treatment guidelines.

Operator: At this time, there are no further questions. Ms. Logan, do you have any closing remarks?

Carolyn J. Logan - President and CEO: Not really. I just would like to thank everyone for joining us today and say that we look forward to speaking with you on our next call and have a nice evening. Thank you.

Operator: Thank you for participating in today's conference. You may now disconnect.