Bausch Health Companies Inc (BHC) 2015 Q2 法說會逐字稿

Good morning. My name is Angela, and I will be your conference operator. At this time, I would like to welcome, everyone, to the Valeant Pharmaceuticals' second-quarter 2015 financial results conference call.

(Operator Instructions)

Thank you. I would now like to turn the conference to Ms Lori Little, Head of Investor Relations. Please go ahead.

Thanks, Angela. Good morning, everyone. Welcome to Valeant's investor conference call, where we will be discussing our second-quarter 2015 financial results. Participating on today's call are: J Michael Pearson, Chairman and Chief Executive Officer; Rob Rosiello, Chief Financial Officer; Dr Ari Kellen, Company Group Chairman; and Anne Whitaker, Company Group Chairman. In addition to a live webcast, a copy of today's slide presentation can be found on our website under the Investor Relations section.

Before we begin, our presentation today contains forward-looking information. We would ask that you take a moment to read the forward-looking statement legend at the beginning of our presentation, as it contains important information.

In addition, this presentation contains non-GAAP financial measures. For more information about these non-GAAP financial measures, please refer to slide 2. 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 only as of today. It is our policy to update or affirm guidance only through broadly disseminated public disclosure. With that, I will turn the call over to Mike.

Thank you, Laurie. Good morning, everyone. Thank you for joining us.

We are pleased to report exceptional results across all financial and operational metrics for our second quarter. Driven by a strong sales growth in profitability across our regions and businesses and once again demonstrating the strength of our diversified and decentralized business model.

Before we begin discussing the details of our performance, I wanted to provide the highlights of the quarter. We have now delivered four consecutive quarters of more than 15% same-store organic growth. Strong performance throughout our businesses resulted in both our top and bottom line exceeding the Q2 guidance that we provided on our last call. These results were driven by the continued outperformance of our US businesses and strong results around the world including Asia, Australia, Canada, Mexico, and the Middle East and North Africa.

I am also pleased to report that Salix is off to a fast start. The productivity of Salix's R&D portfolio is demonstrated by the approval of Xifaxan for IBS-D in May and the NDA filing for Relistor Oral in June; two significant milestones for our GI business. We remain focused on reducing Salix's wholesaler inventory and are on plan.

Specifically, we have reduced inventory levels for Salix products to approximately 3 to 3.5 months as compared to 4 to 5 months at the April 1 close. Finally, we have already achieved $500 million in run-rate synergies and fully expect to achieve $530 million by the end of the year.

Third, Dendreon continues to exceed our expectations for both revenue and profitability. We achieved: $74 million in revenues through the second quarter, an increase of 18% versus the previous quarter; and gross margins of approximately 64%, an improvement of 15%. And operating margins of approximately 40% to 45%, which we expect to continue to improve through the remainder of the year. This is a huge turnaround for a Company that was unprofitable just last year.

On the business development front, we have remained quite active with eight tuck-in deals already signed and/or closed so far this year. Later in the presentation, we will provide an annual update on M&A performance since 2008.

Based on our strong base business performance and the approval of Xifaxan for IBS-D, we are raising 2015 cash EPS guidance to $11.50 to $11.80. Our revenue guidance, we're raising to $10.7 billion to $11.1 billion for the year. We continue to expect total company same-store sales organic growth to exceed 10% for the remainder of the year, despite the genericization of Targretin in July and the expected genericization of Xenazine in August.

For the quarter, our total revenue was $2.7 billion, an increase of 34% over the prior year, largely driven by the exceptionally strong growth in many of our US businesses, which offset negative headwinds from foreign exchange. Adjusting for the negative impact of FX of $173 million, revenue grew 42% over Q2 2014. Cash EPS was $2.56, an increase of 34% over the prior year, which includes the negative impact of $0.13 from the strengthening US dollar. Adjusted for FX, cash EPS grew 41% over Q2 2014.

As mentioned in our press release, Salix had a negative impact of $0.04 on our cash EPS this quarter; therefore, our cash EPS would have been $2.60 for the quarter without Salix. Rob will take you through the math later in the presentation.

Turning to organic growth, our overall same-store total company organic growth was 19% for the quarter. The exceptional growth of our US businesses driven by the strength of dermatology, contact lenses, dental and Obagi was complimented by many of our emerging markets including China, Middle East/North Africa, Russia and South Korea. As we are now halfway through the year, our same-store sales organic growth was 17% for the first six months.

Our overall pro forma total company organic growth was primarily impacted by Salix, as we continued to reduce inventory in the wholesaler channels. Salix's revenues declined by approximately $16 million in Q2 2015 as compared to Q2 2014. Our pro forma total company organic growth excluding Salix was 20%. B+ L continues to demonstrate strong organic growth led by Rx pharmaceuticals in the United States, our US contact lens business and our emerging markets.

Q2 revenues increased to $836 million from Q1 revenues of $745 million. We continue to expect B+ L organic growth to be approximately 10% for the full year. As we approach our two-year anniversary of the B+ L acquisition, we have fully integrated the business and manage it as an integrated iHealth portfolio; therefore, this will be the last quarter that we break out the US B+ L organic growth by sub category.

Turning to our Top 20 products. Our Top 20 products represented 40% of total second-quarter revenue, with the Top 10 products contributing approximately 28% of revenue. Our Top 20 products delivered organic same-store growth of 32% for the quarter.

Excluding new product acquisitions, roughly half of our growth came from volume and half came from price. Our largest product, Xifaxan, represented approximately 5% of Q2 revenues, despite revenues that were muted due to excess inventory in the channel.

Jublia is now our second largest product with annual run-rates sales of approximately $450 million. Due to the generic launch of Targretin in July and the generic launch of Xenazine expected in August, we believe both products will fall out of our Top 20 products in Q3. I would also like to note that one of our new products Glumetza loses it's patent protection in February 2016 and will fall out of the list in 2016.

Our US dermatology business had another excellent quarter with our launch brands leading the way. Both launch and core brands contributed to the dermatology revenue growth of 55% year-on-year. Jublia scripts grew 37% in Q2 versus Q1, which points to an increase of 55% on a 4-millimeter equivalent basis. Our DTC campaign featuring John McEnroe is having a positive impact on the product and continues to expand prescribing volume, particularly with the primary care physician base.

Onexton has demonstrated rapid TRx uptake since its January launch and recently reached 8,000 scripts per week. The fully-integrated DCT campaign with TV, print and digital is accelerating growth. The current annualized run-rate for Onexton is approximately $70 million.

Luzu scripts have reached a new record high with volume up 55% relative to Q1. Luzu continues to grow with our new DTC campaign driving awareness. The current annualized run-rate for Luzu is approximately $26 million. Lastly, our script trends for our base dermatology business, including Solodyn, Ziana, Atralin, Elidel and Zyclara are all demonstrating strong double-digit growth rates.

Our US eye health business continued its strong growth trend and delivered 10% growth over the prior year. Contact lens grew 19% organically over the prior year. Biotrue ONEday continues to grow 4 times faster than its category. Based on the growth of the Biotrue franchise over the last five quarters, six additional Biotrue lines are currently planned.

B+ L's ULTRA contact lens continues to be well received by eye care professionals. Our first commercial manufacturing line for ULTRA is operational. We continue to sell to capacity. We recently approved lines five and six for ULTRA to support the long-term global demand.

Our prescription drug ophthalmology business continues to see strong -- extremely strong growth across promoted brands fueled by the Lotemax Franchise and Prolensa. We are also quite pleased to announce that we have filed Vesneo with the FDA.

Organic growth for surgical was 1% for the quarter. Adjusted for the continued shift from the sale -- from sales to leasing models of femtosecond lasers, organic growth would have been 3%. We expect to see improving organic growth for surgical for the remainder of the year, driven by market share gains across our product lines including our IOL's and our surgical equipment.

The strong performance of neuro and other, as well as the generics portfolio was driven by promoted brands including Aplenzin, Cuprimine and Syprine. In our consumer business, CeraVe, Preservision and BioTrue MultiPurpose Solution all demonstrated strong double-digit growth demand.

Finally, our dental business continued its track record of strong double-digit growth. In March, we expanded our dental product portfolio through the acquisition of Neutrasal, a treatment for general dry mouth and oral mucositis.

When we acquired Neutrasal, its annual revenues were approximately $8 million. After four months, the run-rate revenue for Neutrasal is over $16 million. This is another example of our ability to quickly have an impact on our acquisitions.

Now, turning to the rest of the world. In our emerging markets, organic growth for our business in Asia was 10% versus the prior year. We continued to see strong growth in a number of countries, including China at 15% and South Korea at 23%.

In Latin America, we delivered 7% organic growth, with Mexico at 12%, offsetting more modest growth in Brazil and Argentina. Central and Eastern Europe, the Middle East/North Africa delivered strong double-digit growth of 18%. Russia returned a positive organic growth this quarter.

Overall growth in other Central and Eastern European countries were slightly negative this quarter as they were primarily impacted by Ukraine and Greece. For the rest of the world developed markets, the underlying business remained strong with our Australian, Canadian and Western European businesses performing well, with 6%, 7% and 5% organic growth respectively.

Now let me turn to the Salix acquisition. We completed our acquisition of Salix on April 1. We have already achieved several significant R&D milestones with the approval of Xifaxan for IBS-D, the submission of Relistor Oral NDA and the approval of the Relistor injection in Europe.

Obviously, the big event was the IBS-D approval where we saw immediate growth in script uptake of Xifaxan post-approval. Our soft launch commenced right after approval with our sales force undergoing training the first week of June. At this time, we continue to promote the package insert as we are still awaiting regulatory approval for our marketing campaign, including our first DTC advertisement.

Based on our quick start, revenues and EBITDA are both significantly ahead of the deal model and the integration is nearly completed. In addition to the realignment of the sales force, which we discussed in our last earnings call, we revamped the sales-force compensation model to be in line with our existing performance-based compensation structure versus Salix's structure which force-ranked the sales team. We believe these adjustments will maximize the effectiveness of our sales team going forward.

Finally as I mentioned earlier, we are pleased to report that our wholesale inventory reduction program is on plan. We are currently at approximately 3 to 3.5 months as compared to 4 to 5 months at the April 1 close. We still expect inventory levels to be reduced to 1.5 months or less by year-end. Rob will take you through the details later in the call.

As slide 15 shows, we have experienced a significant increase in script trends from 15% to 33% year-over-year growth for Xifaxan since the approval for IBS-D on May 27. Following the close of the acquisition, we held a pipeline review session with the Salix R&D team, the Valeant R&D team and several external experts. The purpose of the session was to provide an in-depth discussion of the pipeline products and determine which ones would move forward. I am pleased to report that a vast majority of the programs are still ongoing and are detailed on slide 16.

As expected, we continue to be very active in the business to all MENA activities. We have closed or signed eight deals so far this year, with the most significant one being Amoun, an acquisition we announced last week. This acquisition adds approximately $225 million to our existing Middle East/North Africa sales, which is one of the fastest growing emerging markets in the world. Including Amoun, our Middle East business will be approximately $500 million in 2016.

As we have mentioned for a number of quarters, we're continuing to look for opportunities to grow in Latin America. We recently agreed to acquire Humax, a branded generics company in Columbia that provides us entry into a new market and will compliment our current business in Mexico. Finally, we have recently agreed to buy Commonwealth Diagnostics, a company that sells a recently approved test for IBS-D. We believe this test will represent an important piece of our efforts to tap into the under-diagnosed IBS-D patient population.

When we embarked on our new strategy in 2008, we began to acquire assets that would build a strong foundation and fuel future growth. Since 2008, we have completed over 140 acquisitions, license deal and co-promote agreements and deployed over $40 billion in capital.

Our IRR hurdles continue to be the highest in the industry. We target IRR's of at least 20% based on local statutory tax rates and a cash payback period of six years or less. We monitor the process of each deal by tracking both top line and EBITDA by quarter.

We share these results with our Board of Directors every quarter and provide an update to investors on an annual basis. Today is that update. I'd also like to note that senior management's compensation is tied to past deal performance.

As we break down our deal performance into large, medium and small deals, our track record, I believe speaks for itself. Our large transactions such as Biovail, Medicis, Bausch + Lomb, and Salix have all performed in line or ahead of the deal model. We believe there are several factors contributing to the success of our large deals, including the benefits of our decentralized model, detailed review of key business drivers and pipeline or other unexpected product upsides.

For our medium sized deals, those $300 million to $1 billion, 10 of the 11 transactions are tracking towards or delivering well above our 20% IRR hurdle. All have delivered above our cost of capital. We have had a number of home runs in this category, including Ortho, Dermik, Aton and Sanitas.

Finally, our small deals, approximately 50 are small acquisitions -- approximately 50 which are less than $300 million (inaudible), in aggregate are performing well above expectation, that is greater than returning an -- returning an IRR of greater than 20%. This category also includes several home run deals, deals of greater than 35% IRR fully taxed, such as Coria, Natur Produkt and Targretin. While we have had great success on the small deal front, we do have four failed deals, which performed lower cost of capital: Neotensil in the US; Vita Direct in Russia; PFI in Australia; and Vital Science in Canada.

We have analysed the performance across all of our deals since 2008. Our achieved cumulative EBITDA exceeds our deal models by 18%. This reflects performance of our deals before applying the benefits of our lower tax rate. On a cumulative net income basis, the deal model net income reflects our analysis using the statutory tax rates, the approach we take when reviewing potential acquisitions.

The cumulative achieved net income includes the benefit of our lower tax rate. When comparing the deal model and the accumulated -- achieved accumulative net income, our achieved outcome exceeds our deal models by 59%. Based on our performance of deal to date, our expected IRR excluding the benefit of our tax rate is approximately 26%. Our expected IRR including the benefit of our tax rate is greater than 37%.

The important part of our deal analysis is our targeted six-year payback period. We have reviewed our largest deals since 2008. We are pleased to report that five of these deals have already been paid back entirely including Coria, Dow, Aton, Biovail, Ortho and Dermik. While many of the small or mid-sized deals, including Targretin, Elidel and Tecnofarma, which are not included on this page, have also been paid back.

Other deals, such as B+ L, are on track to meet their expected payback period. B+ L is approximately 30% paid back after less than two years since the closing of the acquisition. Since the time of the acquisition, B+ L has delivered approximately 30% of Valeant's total EBITDA. I'd also like to note that B+ L, our largest deal prior to Salix -- we have improved organic growth from 2% to 9% since the acquisition, demonstrating our ability to create value under the Valeant business model.

One of the more important parts of our internal deal review is looking back at past acquisitions to determine what has contributed to our success and failure. Slides 24 and 25 outline our key learnings from the acquisitions.

Now, I will turn the call over to Rob.

Mike already described our exceptional Q2 results. Our revenue of $2.7 billion exceeded the mid-point of the guidance we provided during our Q1 earnings call by approximately $200 million, primarily driven by the outperformance of our US businesses, including dermatology, contact lenses and dentistry. Our overall cost of goods sold improved to 23% in the second quarter, primarily due to the continued growth in dermatology, as well as the acquisition of Salix, resulting in improved gross margins of 77%.

SG&A remains above historical levels, but improved by 1 point from last quarter on an overall basis, despite increased costs associated with our launch initiatives. In the second quarter, we spent approximately $60 million in DTC advertising supporting Jublia, Onexton and Luzu. The overall improvement also demonstrates our rapid synergy capture from the Salix integration. R&D was $81 million in the quarter, an increase of approximately 45% relative to Q1, reflecting our continued investment in legacy Valeant programs and the addition of the Salix programs described earlier.

As Mike mentioned, Salix contributed negative $0.04 in cash EPS for quarter, taking into consideration the incremental interest and incremental shares related to the Salix financing. Valeant, excluding Salix, showed an even stronger sequential and year-over-year cash EPS. Legacy Valeant's top line organic growth and improved product mix more than offset increased investment in our launch brands.

Turning to slide 28. The acquisition of Salix had an even more significant impact on GAAP cash flow than adjusted cash flow. Valeant's GAAP cash flow excluding Salix was substantial, at $714 million. There were minimal add-backs to arrive at adjusted cash flow of $770 million.

Salix had negative GAAP cash flow of $303 million, driven by significant cash charges related to: unvested equity awards; restructuring charges, primarily severance; and the buildup of accounts receivable and growth to nets of $96 million. In Q2, Salix contributed $3 million to our adjusted cash flow. Starting in Q3, we expect our aggregate cash flow to improve significantly as Salix's inventory normalizes and one-time restructuring items are reduced.

Cash conversion for both the Valeant stand-alone and overall business was 86%, reflecting our continued investment in working capital to support the exceptional growth of our business. Given our acquisition of Salix, our goal is to achieve 90% cash conversion by the end of the year. As we have discussed, we plan to reduce inventory levels for Salix to 1.5 months or less, ideally 1 month by year-end.

Currently, individual wholesalers have varying amounts of inventory for specific Salix products. So while we continue to work down inventory, wholesalers are placing orders for specific products where inventories have been reduced to our targeted levels. For Q3, we expect our reported net sales for Salix to be about the same as Q2 sales or approximately $300 million, due to the continued reduction in wholesaler inventory levels. By the end of Q4, we expect to normalize inventories and enter 2016 with sales reflecting actual product demand.

On slide 3, in Q2, we incurred restructuring and integration expenses of $153 million, approximately $122 million of this quarter's charges relate to Salix. We expect to realize up to an additional $175 million of charges for Salix during the remainder of 2015. We also recorded $18 million of charges related to Dendreon. We expect any additional charges for Dendreon for the remaining of the year to be minimal.

Bausch + Lomb restructuring is complete. Restructuring and integration charges for other recent small deals were approximately $13 million this quarter. For the remainder of the year, we expect less than $20 million of incremental charges for deals already closed, excluding Salix and Dendreon. This guidance excludes any deals that have not yet closed and any new deals that might occur.

In terms of our balance sheet, we ended the quarter with a strong liquidity position through a combination of a $1.5 billion undrawn revolver and $958 million of cash on hand. Our net debt to pro forma adjusted EBITDA ratio was approximately 5.5 times. We remain committed to reducing that ratio to below 4 times by the end of 2016. During the quarter, we opportunistically repurchased $50 million in Valeant equity at $223 per share. Our accounts receivable DSO's improved this quarter as compared to the second quarter of 2014 at 65 days.

2015 continues to be a strong year for our Company. Based on the continued outperformance of Valeant's business and the approval of Xifaxan for IBS-D, we are increasing our 2015 guidance. Given the Salix inventory situation, we are making an exception to past practices and are providing Q3 and Q4 guidance. Until Salix is fully normalized, we feel it is important to provide investors with this information.

For 2015, we are increasing our guidance for revenue to $10.7 billion to $11.1 billion from $10.4 billion to $10.6 billion. We had previously guided that Salix revenues would be $1 billion for the year. Given the approval of the Xifaxan IBS-D indication and progression of the planned reduction in wholesaler inventories, we are taking our 2015 guidance for Salix revenues up to $1.2 billion. We are also increasing our guidance for cash EPS to $11.50 to $11.80 from $10.90 to $11.20; and our adjusted cash flow from operations guidance to greater than $3.2 billion from greater than $3.1 billion for the year.

Our Q3 and Q4 guidance reflects both the expected generic impact from Targretin and Xenazine, as well as the Salix inventory drawdown program still underway. We expect our same-store organic growth to be greater than 10% for the second half of the year, despite the impact of generic entrance for Targretin in July and the expected generic entrance for Xenazine in August.

Finally, although I will not go through all of our key assumptions used to build our forecast, they are listed on slide 33 for your reference. Now I would like to turn the call back over to Laurie.

Thanks, Rob. Before we open the call to questions, I'd like to remind everyone that in order to ensure that we have adequate time to take everyone's questions, we will only take one question per caller. If you'd like to ask a follow-up question, you're welcome to get back in the queue.

We'll try and take as many questions as possible in the time allotted. With that, we will take our first question.

Chris Schott, JPMorgan.

Congrats on the very strong results here.

Mike, Can you just elaborate a little bit more on the Xifaxan launch in IBS-D? Just, specifically, how should we think about the rest of the year in terms of priorities for the organization? When should we think about DTC really starting to roll out? Are you comfortable at this point giving us a little bit more color in terms of peak sales opportunity for this particular indication? Thanks very much.

Hi, Chris. Thank you.

We've submitted the marketing materials to the Agency. We hope to get those approved sometime in August -- unfortunately probably late August. So our current expectation is we'll roll out our DTC program in September. We plan for a very heavy spend in the back half of the year, actually much higher than we had for Jublia last year. As long as it, again, keeps working like it has for Jublia, continue that spend.

We are not going to give a peak sales yet. We're not ready to give a peak sales yet for IBS-D. We'll pull the whole sales force -- all the sales forces in that are going to be selling the IBS-D indication in late August, and have at launch meet as well. We also recently decided to actually create a fifth specialty sales force covering GI and doctors who have the potential to prescribe Xifaxan. So we'll now have five sleeves rather than four sleeves.

Andrew Finkelstein, Susquehanna Financial.

Congratulations on the results.

Perhaps you could address it in a bit more detail, what you're seeing in the global eye care market? Particularly -- where are you taking share? One of your competitors had a much more challenging quarter in that area, so maybe you can talk a bit about what differentiates your growth profile there? Then, bigger picture -- as you think about this spending level, as you've talked about some of the incremental investments you're making. But as we look out to next year, has the level of SG&A and R&D investment you're thinking about changed from what you had previously talked about for 2016? Thanks.

Sure. In eye care, it's a category that has a number of great companies competing in it. I think we've just been a little bit lucky in having some great new products that we've been able to introduce into the market. So I talked about the BioTrue ONEday, which is doing extremely well. It's a great contact lens; very comfortable. I think it's certainly doing extremely well. ULTRA, I think is going to be better than that. It's a great lens too. So we're the beneficiaries of having some newer products. I think we've also reorganized our business into local teams. Through our decentralized model, I think that's really helping in terms of -- so, we are gaining share in contact lenses. We are gaining share, I think, in the Rx products. We are gaining share in surgical. But I think it's a combination of some great products and a really focussed and talented team.

We are not going to give guidance on 2016 yet. In terms of philosophically, we have not changed our view in terms of what we think R&D and sales and marketing spend should be for the Company.

Louise Chen, Guggenheim Securities.

It's Brandon on for Louise. We'd like to get your views of whether you're still interested in animal health? If so, why? Why not? Thank you.

We're not going to comment on future acquisitions.

Annabel Samimy, Stifel.

Congratulations on the quarter.

You've pretty successfully added some very strong sources of organic growth. You have some meaningful franchises now. It looks like your M&A activity is going a little bit back to the bolt-on. Is this what we can expect -- from like, right now? How do you see the pricing environment in the different regions looking? How does that drive your M&A strategy?

Sure. I think our M&A strategy will always be a question of the tuck-ins or bolt-ons as you referenced, and opportunistically, larger acquisitions. One can never predict the timing of a larger acquisition, so when those happen, those happen. We don't put them on a timeline. But the way you should continue to see at minimum is continued bolt-on acquisitions. In the segments -- of the deals that we did -- the deals this quarter, again, none of them were competitive. They weren't processes. I think we don't -- at least the deals we're doing, we're not seeing a big change in any kind of pricing environment. So I guess that answers the question.

David Amsellem, Piper Jaffray.

So with the recent 500% price increase on Glumetza in mind, can you talk about the extent to which you envision more pricing power, not just for other products acquired by the Salix transaction, but maybe just your assets, broadly speaking, in the US? How should we think about that? Thank you.

I think most pharma companies that I'm aware of, as the product gets into the last stages of their life, like Glumetza -- we're going to lose Glumetza within six months -- often price increases are taken at the end. So that was just consistent with what most companies do.

Our view on pricing -- across most of our portfolio, we do not take prices. Outside the US, there's like zero price. I think, David, as we get more and more into segments like contact lenses and consumer products and other devices, we're not able to take price. So we're opportunistic when it comes to price. But our base strategy is, how do we grow organically through volume, which is -- I think this quarter, we once again exhibited our ability to do so.

Tim Chiang, BTIG.

Mike, I think in past quarters I've asked you about Emerade. Is there any update on Emerade? Is that a product that you're still targeting for US launch, sometime, what? Late next year? Early 2017?

Yes, we are still hoping to get that product approved in the US. We have a meeting with the FDA coming up. So why don't we update you on the next quarter on that? Hopefully, we can agree on the timing and the path with the FDA. But before we have that meeting, I don't want to guess.

Okay, great, thanks.

Gregg Gilbert, Deutsche Bank.

On the Salix increased guidance, is that all IBS? Or are there some other drivers? Can you also share with us what the gross to net is for Xifaxan at this point? Thanks.

Rob, why don't you answer the gross to net question?

But first, in terms of the revenue increase in Salix -- what we modeled in, yes, is IBS-D. Some of the other products are doing a little bit better than our forecast. But we wanted to be prudent in terms of raising our guidance. So the rates, the $200 million raised for IBS-D is what's included in the guidance.

Our forecast for gross to net is 30%.

Alex Arfaei, BMO Capital.

Congratulations on a strong quarter. Welcome, Rob.

Can you provide more details of the profitability of the Amoun business? Possible synergies? How accretive the deal could be? Thank you.

Yes. Amoun -- their operating margin today is sort of mid-30%s; so 35% is probably a good proxy. So it should be, actually, quite accretive. We don't know the exact timing of close. Our partners -- or the private equity company we purchased it from thinks we'll close in the third quarter. But we've built in fourth quarter close.

We need to meet with the Minister of Health in Egypt. The process is not as clear in Egypt as it is in some countries. But it should be quite accretive. We will obviously get some synergies from this deal as well. The synergies may come more on the Valeant side than on the Amoun side. But as we consolidate our Middle East and Northern African business, we do expect to maintain and maybe even accelerate the growth rates of that business.

Marc Goodman, UBS.

Mike, on slide 13, you started to go through some of the organic growth you were seeing in different parts of the world. Could you go into a little more detail just on Russia, China, some of these emerging markets, and what you're seeing? Because, clearly, the rest of the industry is struggling in these regions. Thanks.

So Russia, we had a tougher first quarter, as you may recall. Part of that was, everyone was buying like crazy in the fourth quarter. So Russia, we're very pleased. We have a great team over there, are very pleased to see that organic growth has not returned -- it used to be growing there about 15% -- but 7%, we're satisfied with for this quarter. Obviously, we'd like to get back to double digits. But we're very pleased to get that back.

China -- we just have a great team over there. It's just again, you may remember an acquisition of Bescon last year. Those aren't actually in organic growth, they're probably still in pro forma. But with some new colored contact lenses. But we've launched BioTrue daily in China. It's really taking off. They're just doing a great job. I think a lot of this is driven in China and North Asia by the B+ L business. Again, I think we have a set of newer products that are allowing us to maintain the growth and gain share. But I would really point to our people as the main reason we're doing so well.

Gary Nachman, Goldman Sachs.

Nice quarter.

Now that you've filed Vesneo and Relistor Oral, what are some of the commercial initiatives you're thinking about with those products? How will they be differentiated in their respective markets? How big do you think they could be? Thanks a lot.

Yes. Gary, we haven't done a lot of work yet on the launch plan for Relistor Oral. We've just got to file, so it's probably -- we hope to get it approved next year. But what's great about this product is, it's fast-acting. Competitor products, I think, act within a couple days. Our product will act within three, four hours; for most people, it reacts right away -- 30 minutes. Since you -- if you're super-constipated, fast-acting is good.

Also, what we're finding is, it's actually a product that helps save the healthcare system money. If you're at a hospital, you're not allowed to be discharged until you have a bowel movement. So it's a product that I think is -- this is going to be a premium product based on helping healthcare economics. All that means is that we really haven't laid out our full sales and marketing plan. But we'll start doing that now that it's filed.

Douglas Tsao, Barclays.

Mike, maybe on Jublia, if you could just elaborate, given the transition to 8 mL? I'm curious what you're seeing in terms of the gross to nets on that product versus the 4 mL? Then also, are you seeing comparable coverage from managed care? Or are you seeing any sort of limitations in terms of quantities and refills the patients are able to get? Thank you.

I'm going to let Ari take that question; he's closer to it.

Yes. The uptake on the 8 mL has been strong. It's just running under -- as we've said around 29%. In terms of the gross to nets, we're in ongoing discussions with managed care. We suspect the gross to nets will be no worse than and probably better than the 4 mL.

Which is? Then also just in terms of the limitations on refills? If any?

Well, the label, as you know, requires treatment up to 48 weeks; that is what we're promoting. Physicians understand that this product needs to be taken for a duration of therapy to achieve the desired result. Refills are tracking very nicely.

Yes, so what we -- many people have multiple toes that are affected. So we're seeing the refill rates on the 8 mL to be quite comparable to the 4 mLs, if that's what you're asking.

David Risinger, Morgan Stanley.

Yes. I guess my first question is, I'm wondering if the -- you're trying to suggest with the background noise that you may be onsite doing due diligence on a duck farming business. (laughter) We don't want you diversifying -- we don't want you diversifying that much. (laughter)

But my real question is, with respect to cash flow, obviously, you've provided an upgraded adjusted cash flow guidance of over $3.2 billion. Could you provide some more color on GAAP cash flow? How we should think about that in the back half of the year? Then one tidbit of a question -- could you just, Mike, tell us in a little bit more detail, the timing of when you're assuming Glumetza generics launch? Thank you.

I think Glumetza generics -- is it February?

Yes.

Early February of next year. We can get you the precise date. But that's -- so we assume we have it for the rest of this year.

In terms of GAAP cash flow -- Rob, do you want to take that one?

Yes. Here's what I'd say: with respect to the $3.2 billion overall, until this inventory situation that we are in is resolved, we're being conservative. What we described on the disaggregation was, when you look at the GAAP cash flow for Valeant excluding Salix, it was very strong. As we work through both the inventory on Salix as well as these largely one-time items that hit in Q2, you're going to see an acceleration in our overall GAAP cash flow.

Yes. In terms of GAAP cash flow, obviously, it will converge to adjusted cash flow over time. The big components are -- we've taken all the expenses for all the severances in this quarter for Salix; it's largely driven by Salix. So there should be a ton-ton more charges. I think that next quarter, GAAP will still be probably a big -- a significant difference. But by fourth quarter, we should be in a pretty good place.

The only piece that will be lingering is, the severance agreement for Salix with some employees paid out over -- rather than a one-time payment, they were paid out over 12 months, or 24 months in some cases. So there'll be some small cash component. We did not accelerate that for obvious reasons. But we probably will offer a program where people who want to get accelerated, at a discount we'll give it. But I think by fourth quarter, you should see some [nuke] and convergence. I do think this will be the most extreme -- Q2 will be the most extreme quarter.

Corey Davis, Canaccord Genuity.

So if gross margin is going to be running at close to 80% by the end of the year, without giving formal guidance for 2016 directionally, can you tell us how we should think about that going into 2016?

We certainly plan to get to 80% by next year. We'll see if we get there by the fourth quarter or not. Then, over time, we should -- again, absent any other big deal, which could have an impact on it, I think gross margins will continue to improve.

One quick follow-up on an earlier question on Vesneo: are you still feeling as good on that one as you have in the past? Have you developed a commercial plan for that yet?

As Mike mentioned, we've filed Vesneo. We still feel optimistic about the product, as we've discussed in the past -- the unique mechanism of action for this minor therapy, and the nitric oxide-donating piece of it. We have had, obviously, since the last call, many more discussions with KOL. So we remain optimistic about the prospects of this product. Its approval expected next year.

Great, thank you very much.

Douglas Miehm, RBC Capital.

Doug? We'll go on to the next call.

Glenn Greenberg, Brave Warrior Advisors.

Quick question -- on Salix, you've said the revenues this year would be about $1.2 billion. It looks like they were $300 million in the last quarter and will be $300 million again in the third quarter. So does that imply that the fourth quarter revenues would be $600 million? That we could maybe annualize that or a little better as we look into its contribution to revenues next year?

Yes. We're projecting $600 million for the fourth quarter. The $1.2 billion in the end may prove a little conservative; it depends. It's just hard to know all the inventory that could be out there. But the business is also accelerating. The growth continues to be very strong. Certainly, by first quarter of next year, we should be selling to full demand. So if you incorporate maybe a slight bit of inventory is still in the channel in the fourth quarter, we don't know. That's what we're assuming. Then you continue to model in the growth that we're experiencing across the brands, that should give you a pretty good feel for what this thing will look like for next year.

Okay. One further point -- how did you make such improvement on the gross margin there?

In which -- you mean overall? Or --?

Yes, In the Salix (inaudible).

In the Salix. Well, a lot of it, again, there's a lot of discounting going on.

Okay.

In terms of -- in inventory in the channel. So we're obviously just selling to demand.

Thank you.

David Steinberg, Jefferies.

Just wanted to follow-up on the Jublia question. You mentioned the change in the gross to nets, but did the -- especially, did the number of scrips going through the specialty pharmacy improve? I think it was about 50% last time. Secondly, given the strength in some of your other derm products, Onexton and Luzu, what percent of those scrips are through your specialty pharmacy channels? Thanks.

Yes, the adoption through multiple specialty pharmacies continues. I think last time we said Jublia was around 50%. That trend continues. For derm overall, it varies by product, but it's around 40%.

Alan Ridgeway, Scotiabank.

Mike, you commented in your prepared remarks about the number of commercial lines for contact lenses, now planned to be five or six. Can you maybe just comment on what you guys are seeing in the market as far as what gives you comfort that you'll be able to fill up that capacity? I'll leave it at that. Thanks.

Sure. We talked about the two platforms that are really growing. One is BioTrue daily. I think, there, we're increasing by five or six. Then the second being ULTRA; there, we're increasing by -- we're going up to six. We only have -- we currently have one installed. The size of the lines are quite different. BioTrue has much lower capacity than an ULTRA line, so that accounts for why so many more BioTrues than ULTRAs. It's probably close to 2 to 1. So it's probably about the same level of expansion.

What gives us comfort is, first -- well, in the case of ULTRA, right now, we're only selling in the US. The other markets are clamoring for it. We're probably going to expand in the next quarter to a few more countries. But we have the whole rest of the world and we can't satisfy demand in the US. BioTrue daily, again, in the US, for example, is growing 4 times the growth rate of the segment.

When we model out what we think our final share will be and how quickly -- we're going to need this capacity. I think what we have is a reenergized sales forces around the world. Maybe most important, eye care professionals, especially in the contact lens area -- Ari, our source -- we need to see that B+ L back in the game. You may want to comment further.

Yes, I think that as Mike said, both the BioTrue as well as ULTRA is demonstrating the impact of the terrific technologies that B+ L had been developing that we're fortunate to have received. It really is new technology, with better comfort, better oxygenation, and better hydration and comfort throughout the day. Eye care practitioners in the end of the day are trying to deliver outstanding products to their patients. We're simply enabling that. Hence the growth in share in the US for both of those platforms. Again as Mike had said earlier, tremendous growth across Asia, China, Korea, Japan, and elsewhere in the world with these new technologies.

We have no further questions. I'll turn the call back to you for closing remarks.

Great. Well, thanks everyone for your questions. I guess it's time to get back to work. We'll talk to you next quarter.

This does conclude today's conference call. You may now disconnect.