Bausch Health Companies Inc (BHC) 2015 Q4 法說會逐字稿

Good morning. My name is Heidi and I will be your conference operator today. At this time, I would like to welcome everyone to the Valeant fourth quarter 2015 unaudited financial results conference call.

(Operator Instructions)

Thank you. Head of Investor Relations, Laurie Little, you may begin your conference.

Thanks Heidi. And good morning everyone and welcome to Valeant's investor conference call. Participating on today's call are Mike Pearson, Chief Executive Officer; Rob Rosiello, Chief Financial Officer; Dr. Ari Kellen, Company Group Chairman; Anne Whitaker, Company Group Chairman; and Linda LaGorga, our Treasurer. 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. Non-GAAP financial 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 affirm -- to update or affirm guidance only through broadly disseminated public disclosure and with that, I will turn the call over to Mike.

Good morning, everyone. And thank you, Lori. Thanks for joining us. Today, we would like to cover the following topics. First, we will discuss our preliminary unaudited fourth-quarter 2015 results. Second, we are going to take you through our new tax presentation. Third, we're going to provide revised Q1 2016 financial guidance.

Fourth, I'd like to take a few minutes to provide my perspective on the current state of the business since I've been back a couple weeks, including a revised 2016 guidance and other key business updates. Fifth, Linda LaGorga, our Treasurer, will provide a liquidity and cash flow update.

And finally, I'm going to address some questions that we've gotten ahead of the call. And then we will open it up to Q&A. We've added a number of slides in the Appendix around assumptions and our top 30 products which we will not be going through but are -- will be made available to you.

As we've previously disclosed, there is an ongoing review of our 2014 financials and as such, we're not able to provide year-over-year comparisons today. Financial metrics that are impacted by this include the organic growth, business unit growth, and price volume detail. What we can provide today are preliminary unaudited 2015 fourth-quarter results.

With this, let me turn the call over to our CFO, Rob Rosiello, to cover Q1 and -- Q4 and Q1.

On Page 5, for the quarter, our total revenue was $2.8 billion versus our guidance of $2.7 billion to $2.8 billion. GAAP EPS was a loss of $0.98. Adjusted non-GAAP EPS was $2.50, which falls below the guidance range of $2.55 to $2.65 we provided in December. The shortfall was caused by unexpected reductions in higher margin product sales, driven in part by channel destocking and negative reaction to our agreement with Walgreens.

Cash flow from operations was $562 million. Adjusted cash flow from operations came in at $838 million, above our expected target of greater than $600 million. As a reminder, we have listed adjusted cash flow from operations on this slide but as we reported previously, we will no longer provide this metric going forward.

On the next slide, I would like to discuss changes in Valeant's tax reporting for 2016. Historically, Valeant has reported our non-GAAP tax provision on Table 2a and 2b of the press tables that combined the tax effects of non-GAAP adjustments and the use of tax attributes and other timing issues.

This number, approximately 5%, matched the actual cash tax that Valeant paid each year. Going forward, we will no longer include the tax effects from the use of tax attributes and other timing issues, which will, in turn, raise our reported tax rate to between 10% and 15%. This new reporting metric has no change to either cash flow or actual taxes paid.

On the next page, we are also updating our previous guidance for 2015 Q1 from revenue of $2.8 billion to $3.1 billion to $2.3 billion to $2.4 billion. We expect adjusted EPS will now be $1.30 to $1.55 from $2.35 to $2.55, as compared to the guidance we provided in December.

With the new tax presentation shown on the far right, adjusted EPS will be $1.18 to $1.43 for the first quarter. While most of our businesses remain strong, there are a few areas that changed since December that will impact our first quarter. First, we are realizing a decrease of roughly approximately $0.80 per share coming from the underperformance in several businesses.

This includes slower-than-expected growth in GI, including additional product destocking. We are also realizing a slower-than-expected rebound in dermatology that includes additional product destocking and loss refills from the Philidor transition to Walgreens.

Finally, we are also seeing underperformance in several other US businesses, such as Ophthalmology Rx, Obagi, Solta and Women's Health as well as in Western Europe. We have also experienced headwinds from currency fluctuations, hence our guidance was first set.

We also expect that another $0.20 roughly comes from the fact that even as revenue was brought down, we took little expense reduction despite this lower revenue forecast. Let me turn it back to Mike.

Thanks, Rob. So as you all know, I've been back from my medical leave for about two weeks. I've had a chance to review what's happening in the businesses and there's a mixed combination of some good news and some bad news. I just want to take a few minutes to sort of give you my assessment and what we plan to do about it.

While our businesses continue to grow we are now forecasting a lower growth rate in certain business, such as dermatology, given the continued external pressure from managed-care, the pricing environment and our slower-than-expected start in 2016.

We continue to expect strong growth in GI, contact lenses, oral health, oncology, generics in certain emerging markets. This strong growth will be somewhat offset by some of our other businesses, including Western Europe, Ophthalmology Rx, Solta and Obagi. Many of our business units have lowered their revenue forecasts for the year from when they first put them together in the Fall.

We have launched our Branded Access Program with Walgreens and this is a piece of the good news in mid-January with our dermatology portfolio, following the mid-February with Ophthalmology Rx and Addyi. Negotiations are underway to add networks of independent pharmacies.

The program itself is off to a terrific start. Within two months of launch in dermatology, approximately 30% of our dermatology scripts are flowing through Walgreens. This is approximately 2 times the volume flowing through Walgreens from when we started. More importantly, well over 90% of our doctors who were using Philidor are now using Walgreens and many new doctors are also using this channel.

Walgreen's senior management, whom we met with last week, is equally excited about the program and we continue to fine-tune it to better serve our physicians and patients and improve the economics. Our brand for generic program is on track to launch sometime this summer.

Finally, another piece of good news, we are continuing to focus on improving patient access as well as improving our relationships with our channel partners. We have strengthened our managed-care organization with several key hires and we have been in active discussions with the payers to ensure continued patient coverage and access. I will address this point in more detail in a minute.

During the past two weeks, we have already taken steps to restructure a number of our underperformance of our smaller businesses and we are taking steps to launch a broad-based cost reduction program. These actions will be partially offset by increased investment in key functions, such as financial reporting, public and government relations, and our managed-care organization. We are also currently exploring divestitures of non-core assets which will enhance our liquidity.

Returning to market access. Maintaining US market access is critical for our entire portfolio and is critical to our success. To achieve this goal, we are investing more in rebates and building our organization's managed-care capability. The increases in rebates are due to more competitive pressure in response to our store price increases for our late life cycle products.

Our US market access team, led by Sandy Loreaux, who joined us in January of this year, continues to have productive dialogue and negotiations concerning access for our entire portfolio with national health plans, PBMs and regional plans. These negotiations include our Part D and commercial bids for 2017, response to ad hoc therapeutic area reviews by payers, and requests for price inflation protection agreements.

Through these negotiations, beginning late last Fall this year, we have been able to maintain good coverage of commercialized for our key brands and franchises including dermatology, GI and ophthalmology franchise. We are working hard as a team, including the senior management team sitting here in this room today, to continue to improve our relationships with PBMs and health plans as well as access for our current portfolio and importantly, future launch products.

We have made a great deal of progress and feel confident that we will improve our access in 2016 and 2017 and are laying the strong foundation for access to our expected new product launches. We are committed to engaging with these important customers more broadly across our organizations, building back trust through our actions and strengthening our capability to collaborate with them on initiatives involving our products.

Turning to our revised guidance. With the first quarter now updated, our new full year 2016 guidance as compared to what we previously reported, is expected to be $11 billion to $11.2 billion in revenue and adjusted EPS of $9.50 to $10.50. With our change to a different tax presentation, we expect to report adjusted EPS of $8.50 to $9.50.

As we are moving away from adjusted cash flow from operations, we will now report an expected adjusted EBITDA number of $5.6 billion to $5.8 billion for 2016. As we look at the budget we prepared in December, several factors have changed our outlook for 2016.

First, as Rob covered, the key one underperformance is expected to reduce adjusted EPS by $1 due to the higher-than-expected inventory reductions that transition from Philidor to Walgreens and the cancellation of almost all price increases. In addition, there has been negative impact from FX.

Next, we are taking a more conservative approach to our revenue assumptions and we are assuming lower growth rates for most of our franchises and geographies, including a slower rebound in dermatology, more modest growth in GI and underperformance in Women's Health, Commonwealth and Western Europe based on current expectations from economic factors and the current managed-care environment in the US.

This conservatism is expected to reduce adjusted EPS of approximately $1 in 2016. As previously mentioned, any future price increases will be more modest and in line with industry practices and managed-care contracts. We have experienced increased competitive pressure at the payer level, resulting an increased rebates for access for our key growth products, like Jublia, and this accounts for a further $1 reduction from our budget in the Fall of last year.

Other items that have reduced our outlook for 2016 include increased investments in select functions, FX headwinds and continued organizational distractions that will be cause of -- we estimate another $0.50 in 2016.

Finally, the new tax presentation will reduce reported adjusted EPS by another $1, although it has no impact on either the actual taxes paid or the cash flow. To assist in the walk down from our revenue guidance in December to today, we have bucketed the main areas: GI, dermatology and neurology portfolios represent the bulk of the change due to the items already mentioned.

Underperformance in certain US business units accounts for approximately $300 million and ex-US, $200 million in revenue reduction. In terms of FX, we estimate that to be $110 million and the remaining $90 million covers the rest of the decrease.

As we look out to the next several years, we wanted to highlight our growth expectations for our major business units. We expect double-digit growth from GI, Dendreon, dentistry, contact lenses and Women's Health over the next three years.

Single-digit growth should be realized in dermatology, emerging markets in Europe, Asia, Latin America, US consumer, Ophthalmology Rx Canada, surgical and our aesthetics businesses. Finally, we expect our neurology and other Western Europe and US generic units to have flat to declining revenue growth over this three-year period.

I do want to highlight that we do have some very exciting products that are either in the market and are new launches or we hope to get approved over the next year or so. We continue to be very excited about the prospects for Xifaxan and you've seen this continue the script growth.

We're also excited about growth opportunities in a number of our emerging markets and are Ultra and Biotrue contact lens lines. Potential opportunities lie with several R&D projects such as Latanoprostene bunod for glaucoma, which we hope to get approved later this year; IDP-118, a topical for moderate to severe psoriasis, which we hope to get approved next year ; and Brodalumab for moderate to severe psoriasis, which we hope to get approved at the end of this year. A number of these growth products have $1 billion-plus potential.

In terms of the next four quarters' guidance. With the weak results for the first quarter of 2016, we are providing a forward-look at the next fourth quarters, taking us through the first quarter of 2017.

On a roll-forward basis, we expect to realize between $11.6 billion and $11.8 billion in total revenues, and approximately $9.65 to $10.15 on adjusted EPS under the new tax reporting. We expect to realize approximately $6 billion in adjusted EBITDA over this time period. At this point, let me turn the call over to Linda LaGorga, our Treasurer, to discuss our balance sheet.

Thank you, Mike. First, focusing on our liquidity. We are comfortable with our current liquidity and expect strong cash flow generation from our business for the remainder of the year and beyond. Currently, we have approximately $1.2 billion of cash on hand, including the proceeds from recent revolver draws.

Our revolver is currently drawn at $1.45 billion. We most recently drew our revolver to fund cash timing related to ordinary course needs for operations, including anticipated upcoming debt payments.

We are expecting to close the sale of the Synergetics contract manufacturing business in the second quarter, providing additional cash. To date in the first quarter, we have completed the Sprout payment of $500 million in January and have repaid $405 million in term loans, including our Q1 $145 million mandatory amortization and $260 million in term loan maturities.

We have approximately $520 million of remaining mandatory term loan repayments in 2016, including $417 million of mandatory amortization and an estimated $100 million mandatory excess cash flow payment, which is an annual calculation under our credit agreement, which will be due at the end of March. We believe our term loan amortization and term loan and bond maturities in 2017 and 2018 are manageable.

Next, turning to some covenant highlights. Based on preliminary unaudited 2015 financial information and our 2016 guidance, we expect to remain in compliance with the financial maintenance covenants and our credit agreement for year-end 2015 and throughout 2016. There are no financial maintenance covenants in our indentures governing our bonds.

Our credit agreement includes two maintenance covenants, a secured leverage ratio and an interest coverage ratio. For the year-end 2015, we expect our secured leverage ratio to be approximately 2.1 times and our interest coverage ratio to be approximately 3.3 times, both within credit agreement requirements.

Our net leverage to pro forma adjusted EBITDA for the credit agreement expected to be approximately 5.8 times at year-end 2015. A couple of key factors contributed to the increase of our Q4 leverage ratio relative to our Q3 leverage ratio. First, for our last 12 months adjusted EBITDA per our credit agreement, we no longer have the benefit of the Allergan gain from Q4 2014 of approximately $287 million.

Second, also for our adjusted EBITDA per our credit agreement, our Q4 adjusted EBITDA was impacted by $100 million by our Broda transaction which is treated as cash IPR&D and reduces adjusted EBITDA in our credit agreement. Based on our 2016 guidance, we expect our net leverage to pro forma adjusted EBITDA per our credit agreement to be approximately 5 times by year-end 2016.

Now moving to some covenant highlights related to financial statement reporting. Both our credit agreement and our bond indenture contain financial reporting requirements which are impacted by the delay in the filing of our 10-K.

If we do not file our 10-K by March 30, a default will occur under our credit agreement. We will have 30 days, or until April 29, to cure this default by filing our 10-K. If our 10-K has not been filed before March 16, a breach of reporting covenant occurs under our bond indentures.

At any time after this breach, the trustee or holders of at least 25% of any series of notes may deliver a notice of default. From receipt of this notice, we would have 60 days to file our 10-K and that's to cure the default. While the failure to file the 10-K before March 16 does not have any immediate implications under our bond indentures, it does result in cross-default under our credit agreement.

The credit agreement lenders do not immediately have the right to accelerate on account of this cross-default but our ability to borrow under the revolver is restricted while the default continues. We now -- next week, we intend to launch an amendment process with our lenders to waive this cross-default and also to extend the time period for delivery of our 10-K and our Q1 10-Q.

Moving now to cash available for debt repayment and other purposes. One of our key 2016 priorities is to focus on our balance sheet. We remain committed to using the vast majority of our cash flow to pay down debt. At our Investor Day in December, we said we expect to pay down more than $2.25 billion of permanent debt in 2016.

Based on our revised guidance, we remain committed to debt repayment and now expect to pay down more than $1.7 billion of permanent debt this year. Relative to our prior guidance, the reduction in cash available for debt repayment and other purposes is less than the reduction in adjusted EBITDA. This is primarily due to less use of cash from working cap and less taxes based on our reduced sales expectations.

I will now turn it back over to Mike.

We have received several key questions from many of you so we thought we would address a number of them during our presentation. First, our approach to pricing. We have already committed to reducing pricing on our brand-new dermatology and ophthalmology products within the Walgreens' portfolio, on average, 10%.

This price reduction is on WAC and will impact and will be taken across all channels, not just Walgreens. Other price increases will be modest and in line with market and payer contracts.

In terms of divestitures, as a public company, we continue to review our assets in order to maximize shareholder value. We have no current plans to divest any major platform; however, we will continue to look at non-strategic assets and make appropriate decisions.

The ad hoc committee. The ad hoc committee has provided the following statement. I quote -- the ad hoc committee has completed a substantial amount of work related to Philidor and certain accounting and financial reporting matters. The committee and its advisors are working diligently and hope to complete the committee's work in the near future -- end quote. As noted, in light of the ongoing nature of these matters, we will not be providing any further comments on the ad hoc committee at this time.

Finally, we have a subject to several ongoing investigations. These include investigations by the US Attorney's Office for Massachusetts and the Southern District of New York, the SEC and Congress. We are cooperating in these investigations and have provided and will be providing documents, information and testimony in these various investigations, whether pursuant to subpoenas or otherwise.

We're also subject to shareholder litigation in both the United States and Canada, which we intend to defend vigorously. Given the ongoing nature of the investigations and litigation, we do not intend to comment further at this time.

So in summary, our business is not operating on all cylinders but we and I are committed to getting it back on track. We have a set of terrific products and brands and a loyal set of physicians, patients and customers.

Through both revenue enhancement and cost reduction, we are confident that we can and, again, will be able to begin to deliver the cash flows our shareholders and debt holders are accustomed to. With that -- with this, I will open the line to questions.

(Operator Instructions)

Louise Chen, Guggenheim

Hi. Thanks for taking my questions.

I had a few here. So first question I had was on your weak GI sales in the fourth quarter related to Walgreens. I was wondering if you could give more color there since our focus was on derm, as you mentioned before, on Walgreens. There was only 15 days left in the quarter and there was already some destocking from the Salix deal.

And then second thing, I was wondering if you could talk about the changes in your managed care contracts that you mentioned in your press release. And the last thing, maybe more color on the gross margin and how we think about gross to net for the Walgreens drugs?

Thanks.

Sure. Let me talk about the weak GI sales. I'll have Anne Whitaker talk about the changes in managed care. I will come back and address the Walgreens economics.

So at the end of the fourth quarter, a number of orders were canceled of Salix products. This was sort of at least -- we were told, based on reducing inventories in some distributors and some retailers, there was a negative reaction initially to the Walgreens program and some aspects of it. The managed care team has done a terrific job working with the payers to modify the Walgreens program to make it acceptable and so we feel good about that.

You can notice the script trends in the GI franchise will continue to be very strong so we think that will even out over time.

Anne, managed care?

Sure. As Mike mentioned, with regard to our contracting since last Fall, we have been involved with submitting our bids for the Part D program for 2017. We've been going through the process of renewing contracts for 2017 and some of those, we have -- did extensions for 2016, even last Fall.

Payers, on a routine basis each quarter, pick categories that they do reviews of; therapeutic areas, they do reviews of and so we've been responding to some of those reviews. Dermatology is one of those reviews that many of the payers are undertaking, because as they look back and their clients look back at last year, dermatology was one of the biggest trend drivers for them. So they've picked that category to focus on this year.

We also have been engaging in discussions as part of the process of our contracting in these ad hoc reviews on price inflation protection. We've had price protection agreements in place with payers. We've been negotiating through that process on specific rates, and those range depending on the volume and the particular product.

So I will just echo what Mike said. I feel very good about the progress that we are making as a Company, with really rebuilding our relationships with the payers and working through this negotiations process. And I think we're building a strong team here at Valeant with some of the new folks that we have brought in. We have brought a number of them in over the past few months. To really beef up that capability and I'm confident we have good prospects for laying a firm foundation for the launch products that Mike mentioned as well.

Let me address sort of the way the Walgreens economics work, and thus the gross margins, gross to net, et cetera. The way the contract is negotiated, it's an activity-based fee that we pay Walgreens. What I mean by activity-based is that they get paid different amounts based on different scripts.

If it's a cash paid scripts, it's one fee; if they adjudicate insurance, we pay a little bit more. If they do a prior auth, we do a little bit more; if they do work around refills, we pay a little bit more. So it's an activity-based fee.

The early experience with Walgreens compared to Philidor is that there is more cash pay than what we had -- what we saw with Philidor, but that's largely a function of prior auths. That's not a capability that Walgreens currently has, so what we'll be doing is using a third-party. We agreed with them last week. We use a third-party until they either build that capability or we'll continue to use a third party.

We expect the economics, as I mentioned, to improve over time. What we've been focused primarily on is volume. The key is to get scripts, and through Walgreens and to make sure the physicians have a good alternative to Philidor and many physicians really like the Philidor program.

And again, as I mentioned, well over 90% of the physicians that were using Philidor are currently using Walgreens, but perhaps more importantly is the number of new doctors that, given Walgreens' great reputation and national brand, are now using Walgreens that weren't using Philidor.

So we've been focused on getting our physicians comfortable with Walgreens, and then we will continue to tweak the program with Walgreens to better serve patients and doctors and also improve the economics to both companies.

Next question.

Annabel Samimy, Stifel.

Thanks for taking my question.

First, I want to go back to the adjustments that you made for GI with regard to the Walgreens program. Originally, it was supposed to be only derm and ophthalmology, so can you just explain a little bit more what the issues were that they were upset with and what specific changes you made for GI within Walgreens, because originally, it was not going to be included.

Also there were a lot of inventory changes within GI in the first quarter and I guess in the past, it was thought that the Salix inventories were going to be -- the destocking for Salix was going to be finished at the of 2015, so is this destocking now related to those cancelled orders and that continues into the first quarter. And do you see more normal growth after that second quarter forward? And then finally on the divestitures, can you just detail what businesses you generally believe are non-core to Valeant and how much that might be able to contribute to debt paydown going forward?

Thank you.

So, first of all, to clarify that is -- GI is not part of the Walgreens program. But I think that maybe we weren't clear on that. Therefore, it did have -- the announcement with Walgreens did have an impact on GI, because I think just like you probably assumed GI was going to be part of it, so did other players.

We probably -- we should take responsibility, I will take responsibility, we probably did not communicate the Walgreens program as well as we could have to payers and channel partners. We've done that. They had some suggestions in terms of how we can modify it that they get more comfortable. I'm not going to go into the specifics of those.

We have accepted their suggestions. Walgreens and us have -- we've been working well together so the comfort level is much higher now. So, but GI is not part of the Walgreens program. In December, we -- I think we tried to be clear and if we weren't clear, I apologize but in terms of destocking, we talked about destocking taking place, both in the fourth quarter and first quarter.

For example, we didn't turn on the Walgreens program until January 15. At that point, all the inventory in Walgreens that they were carrying converted to consignment. So by definition, there was a destocking element. We do expect that both the dermatology and ophthalmology franchises will return to growth in the second quarter once the destocking will occur.

We were unable to measure precisely how much would happen in fourth quarter and how much would happen in first quarter, so we gave our best estimate in December. Turns out a little bit more happened in the fourth quarter. We've given you our first-quarter estimates, but going forward, in the second quarter, we expect that destocking to occur.

In terms of the divestitures of non-core, we do not want to give specifics. We are in discussions with other parties. We have confidentially around that. But it will be things like Synergetics where when we bought Synergetics, the part that we were interested in and that was strategic was the ophthalmology versus the franchise. What we sold was a contract manufacturing and surgical neurology, which is not an area that we compete in. We had no sales force and rather than build a sales force and get into an entirely new area, we ended up selling it to a company that was in that area.

Then if you look the net price, we ended up paying for the ophthalmology assets, it was less than $[15] million. So that it is an example of a non-strategic asset that there we were able to monetize. Again, we will only do this if we believe that the cash flows that we would expect from our franchise are less than what someone's willing to pay for the assets. Next question, please.

Marc Goodman, UBS. Mr. Goodman.

Hi, Mike. A couple things. Number one, I didn't see you talk about the emerging markets at all. Can you talk a little bit about what's happening there? And, obviously, those markets have weakened a little bit. You didn't really talk about them.

Second, what happened with Solta and Obagi relative to how you were thinking about this two or three months ago? Did these businesses just slow down just dramatically, or is there something going on there?

Third thing is, can you give us an update on the contact lens capacity? I know this is important to you as you ramp up capacity, are you going to be able to sell your lenses just in the US, or is the new lens still just going -- is it still just going in the US? Are you able to sell it in Europe this year? I'm just trying to get a sense of how much capacity is ramping up?

And then last on tax, can you just explain to us, like, why the change in tax now? Thank you.

Sure. So, emerging markets. Two things are happening in emerging markets. One, FX continues to work against us, which in a sense, doesn't necessarily have an impact on market demand, but does have an impact in terms of gross margins, because as you guys know, most of the API is sourced either from the US or Europe.

So there -- it's either Euro-denominated or dollar-denominated, and as the dollar continues to strengthen relative to the emerging markets, it puts pressure on the profitability. In terms of -- it's sort of by market. Russia continues to be a challenge. Some of the Eastern European markets are -- continue to be influenced by Europe and they continue to be challenged.

There are some bright spots -- our Middle East, and in particular, our Amoun acquisition continues to grow very robustly. Mexican continues to be a strong market for us. And Asia continues to do very well. In particular, China, which is a real strength for us. So I think emerging markets will always be a mix. I think one of the advantages of being in many of the emerging markets is there's always some that are outperforming and some that are not performing.

So we do continue to expect to have high single-digit growth in the emerging markets. But in terms of actual dollars, as FX continues to strengthen, both on the revenue side, the dollars will -- it will be depressed and then in terms of profitability, because of the API issue, it will continue to hurt us if the dollar stays where it is or it continues to strengthen versus where we were in December.

Maybe I'll have Ari talk a little bit about Solta and Obagi, which he just took over recently, and maybe he can also talk about the Ultra capacity. And then Rob, maybe you can address the tax issues.

Yes, Marc, on the contact lens capacity, we've said before that we will have three to four lines of Ultra up and running this year. We're out of capacity through Q1 and Q2, but we have capacity coming online Q3 and Q4. So we actually are going to be expanding sales into Europe and other parts of Asia, and we are fortunate to have additional capacity on the sphericals. We've also launched a multi-focal and that's gaining a lot of traction in the US.

So there will be a good amount of Ultra that will be able to expand outside the US in Q3 and Q4, while still doubling sales of Ultra in the US this year. On Biotrue, we're adding several lines. There we're still tight for capacity; the demand has been very strong in North America and elsewhere in the world. So there, it's really catch-up, but we're investing heavily in capacity.

Turning to Solta and Obagi. Obagi is a nicely profitable business. We were at the American Academy of Dermatology last week, spent several days there talking to many key opinion leaders across medical dermatology and anesthetics, and we actually have a lot of public suggestions and encouragement across both of these businesses.

So Obagi is profitable. I think what we need to do a better job on is expanding our focus across the national accounts, bolstering leadership and basic sales execution. We have a terrific team across marketing and sales. I think we probably have not put enough focus against this business. This is a great set of products with a great brand and we think we could do a better job and we are accountable for that and we'll do the job that we need to.

Likewise on Solta, we had our machines on display at the AAD. We actually had a good number sales there. Again, we have a terrific team with Vlad, who is well-known in the business. There we have work to do. We have to restore this business to profitability. The good news is we have a new Thermage system coming online. We have also recently launched the pelo hair loss -- hair removal system, which again, we expect to do well in North America.

But we also have representatives from the Latin American region and we're going to be setting this system across the world. There again, it's just restoring profitability, getting focused in the field, improving sales execution and again, we're -- we believe we have a good set of products and it's our job to make sure that we support the appropriate demand in the field.

Hey, Mark, on the tax issue. We have had ongoing dialogue with the SEC. It has been quite productive from our perspective. We think this is an appropriate presentation. I point out that it has no impact on the cash flow or actual taxes paid.

Next question, please.

Andrew Finkelstein, Susquehanna.

Good morning. Thanks for taking the question.

Could you talk a bit more about the cash flow guidance for the year and some of the level of clarity around the individual moving parts, given both the operational factors with destocking and uncertainties on pricing, as well as the additional adjustments? You talk about restructuring and the other things that don't affect the non-GAAP P&L.

What is the level of confidence in achieving that level of cash generation in 2016? And then as you approach these payer negotiations particularly for 2017, can you talk a little bit more about the process, in particular, to what extent are you able to leverage your portfolio of products in trying to maintain access for some of the categories that have been more of a focus for payers to show savings to their clients?

Thanks very much.

Sure. I will take a shot at these, but I'm going to ask Linda and Anne and to expand if I miss anything. In terms of cash flow guidance, we've tried to be conservative. You can do the math. You can take our guidance and do the arithmetic and see how much cash flow we -- that guidance levels.

And we've tried to -- I think we feel quite comfortable at the $1.7 billion that we now have good line of sight on price for our entire portfolio for the year. Managed care, we have good sight, line of sight. Most of these negotiations have either been completed in terms of managed care or close to completion. We're not embarking on the negotiations. We're finalizing them and we're in final rounds and they've been very constructive.

We've done a lot of listening to the payers. We have tried to be very accommodating and Anne and her team has just done a terrific job changing the momentum from a managed care standpoint. And as we talked about the whole Company is involved and in on this. It's moved from sign that was lowered out in the organization to the -- with Anne's joining the Company to a top-level priority for the Company.

That's the highest level. I know, Linda, any other comments on the cash flow? And then Anne --

Just to be clear, if I can interrupt, when you're talking about the visibility, you're talking about visibility for 2017?

Correct. 2016 and 2017.

So to make a couple of quick comments, you asked about cash restructuring. This is our estimate at this time. We had previously estimated $200 million. We reduced it to $175 million, based on getting to the end of the year and having more information now that it's March.

As you might remember from a prior call, or more than a prior call, the Salix severance is a big piece of that. There's a lot of Salix charges that were paid out for over year. So that is still flowing through just based on how the severance was structured.

On contingent consideration milestones and payments, again, that number does include the Sprout payment, which is done. The other big payment is there is the $150 million milestone payment for the drug that's listed on the page. What I would say is depending, there's some things that's scheduled for fourth quarter, and if they don't happen in fourth quarter, they could happen in first quarter but that's our best estimate.

So I'll add -- this is Anne.

I'll add a few comments just on managed care, to add to what Mike had said. So I do want to emphasize, as Mike said, the payer negotiations are going very well. The process is you usually get your Part D bids in the first quarter of the year, and then you have the negotiation process until the plans have to submit into CMS and you're usually notified in the third quarter of the decision.

So we feel good about our submissions. We've been going back and forth with the payers. The commercial contracts are on different schedule based on the terms of our contract, and I mentioned the ad hocs, or therapeutic reviews.

With regard to your question around portfolio and how our portfolio helps us, well, number one, Valeant has a sizable portfolio now in the US with over $8 billion in sales. So we are important payers, as they are important to us. We evaluate with each payer how we build our contract with them based on their needs and how they go about it.

Where it makes sense, we are leveraging our portfolios like in ophthalmology or dermatology and GI and various formats. So, I think that covers your questions on the payers.

Thank you.

Next question, please.

Tim Chang, BTIG.

Hi, Mike.

Could you talk a little bit more about the non-core assets that you would consider selling? I mean, certainly, you've got a lot of debt on your books. You're trying to revamp the business and I realize you've just gotten back, but it just seems like given how the stocks reacting in the pre-market and all the investors' concerns, wouldn't that repayment be one of your largest priorities right now?

It is. Fully agree. We are very committed, as Linda said, in 2016 and -- to reduce our debt. That we have not changed that commitment. We will do that through generating cash flow.

We hope to generate more cash this year than what we're projecting at this point, but projections are projections. We'll be looking at revenue enhancement. We will be looking at further cost reduction because what we've done is taken revenue down significantly. We have not attacked the cost space in any major way, and that's something we will do.

We will continue to look at opportunities to raise cash through divestitures. As I mentioned, I'm not going to get into specifics, but you should expect that there will be a series of non-core divestitures over the course of the year, which we will use that cash to pay down debt, and to accelerate the debt paydown.

Mike, is the fact that your tax rate is going up or you're changing your reporting, especially on your tax rate, is that part of -- is that tied to the fact that you're deleveraging the balance sheet at all?

No, no. Every year there is a comment letter from the SEC. It is not the investigation. It is a comment letter that all companies get. We sit down with the SEC ; it's a change, as Rob said, that they suggested. We thought their suggestion made a lot of sense. But I think the key, from an invest -- from an equity investor standpoint and also from a debt standpoint, is that it has zero impact on our cash flows, right?

It's -- so the reported tax rate will change because the NOLs -- it will be pre-NOL in terms of what's reported, but in terms of the actual taxes paid, our previous guidance still stands. We expect it to stay in the 5% range. So it's purely a presentation, a difference that has zero impact at all in terms of generation of cash flows.

Okay.

Why don't you get back in queue, just because we have a lot of names on the board here.

Okay. Will do.

Chris Schott, JPMorgan.

Great. Thanks very much. Just two questions here.

First, I know you ran through in a lot of detail, the reasons for the updated guidance, but more broadly, how did so much change so quickly with the business? I think what investors are trying to put their hands around is, how much of this guidance is conservativism, or just difference approach to guidance, given the management disruptions and controversies as compared to a deterioration of fundamentals over the last three months? So any color there would be really helpful.

The second question is just coming back to the divestitures. I know you're not planning to divest core assets, but as you're just thinking about the evolution of Valeant, once you address some of these near-term challenges, if the stock doesn't recover, what would cause the Company to go down a path and consider a broader break-up of the Valeant business units. Thanks very much.

Sure. So in terms of, if you look at what's happening, the -- one of the big differences and the reduction in guidance is Q1. In a sense, we've lost a quarter. So Q1 is -- and that's -- which is why we tried to show Q2 through Q1 of next year where we made very conservative assumptions on Q1 of next year. All we did is took Q1 of this year, what we expected and added it to it.

So on a going forward basis, and I don't think there's been a big deterioration at all in the business. If you see the script trends, things like FX, you just live with, so that's a piece of it. I think we have the managed care environment was something that we certainly needed to address. So that is -- certainly has led us to, I think, a more conservative outlook on revenues than what we had before. So hopefully, those are numbers that we can meet and beat.

There was a pretty high deductible planned impact in the first quarter. It's at now up to 26% of our lives, so each year that increases, so first quarter will always be tough. So I think it's a first-quarter phenomenon. We feel good about the rest of the year; the fundamentals are good. And probably, we have taken a little bit more conservative approach on forecasting.

In terms of if the stock price does not recover, I think that will be a function of not delivering the cash flows that we're promising and/or exceeding the cash flows. And then the Company should think about other moves, as I think, as we're here to serve shareholders. I know the Board is committed to that.

I know management is committed to it, but we do think we have a plan that will generate strong cash flows and allow us to reduce debt and we can demonstrate real growth, organic growth in our businesses. I think we believe as we're successful doing that. The stock price will start trading more on fundamentals, which is not right now.

Thanks for the questions, Chris. We'll move on.

Corey Davis, Canaccord Genuity.

Thanks very much.

Just probably two questions. Number one, would you be willing to give Xifaxan-normalized run rate ex-inventory on an annualized basis to $10 million in Q4. But I suspect that once inventories are normalized, starting in Q2 of this year, it's going to be much higher than that.

And the second question?

The second question is how do you think your retention program is going now and will be going over the next six months to ensure that you keep, retain and empower all your key employees, not just at the upper levels, but all the way down the ranks?

So let me tell you about retention and that I'll have Ari talk a little bit about Xifaxan. So far, the retention program is working. We've had very few losses. We've obviously lost Deb Jorn and that -- we're disappointed. It was interesting. On the EMT, at the very senior level, we don't have a retention program, right?

We did not put that in place for -- we had nothing in place currently for the EMT. Well, she was a member. What we have is below the EMT, we have about 70 people that are in, what we call, AIP, which are sort of our next level key. We've had minimal, if any, losses there. We just paid bonuses for the year on Friday. So this is -- we'll see what happens in the next few weeks.

There is a sort of a camaraderie. We have a meeting with the AIP group every week, where we have an open discussion and with the leaders of the Company and there's a very positive attitude in the group that were committed.

I think they know how strong our brands are, how strong our products are. They have spent a lot of time with our customers, be it physicians, be it retailers, and many of them have been at other pharma companies and have gotten through similar types of experiences. So I think there is an esprit d'corps. We're hopeful the Board was very supportive of what we believe is to be a pretty generous retention program for this level. So, so far so good. But as you probably point out, it's tough. Right now, it's a bit of a tough Company to work for. So I really thank our employees for their commitment and dedication.

Ari, on Xifaxan?

On Xifaxan, I believe we said, back in December, we expect it will be greater than a $1 billion drug this year. We obviously expect that to be the case. We have over 400 reps in the field promoting Xifaxan, and we continue to believe that we will see growth across both IBSD, and increasingly HE, where as we've said before, the medical indications for permanent use of Xifaxan with lactulose is in the guidelines and we're just put -- we're putting in another 100 reps into the field.

They have just gone through training. So we're putting a lot of energy behind the drug. Scripts are, as Mike said, you see them, they're running north of 12,000 a week. In total this year, we expect to see in and around 50% growth in total Xifaxan scripts.

Thank you, Corey. Next question.

Thank you.

Shibani Malhotra, Nomura Securities.

Thanks for the questions. I've got a couple.

The first is, Mike, can you just clarify, you were saying that the reason the Salix inventory or Salix revenues are being brought down is because managed care didn't read the Walgreens press release correctly? Is that correct? It's a bit -- that's a bit difficult to fathom that it would have such a big impact on your sales.

And then second, over the last six months, we've been talking to you and investors have as well about the fact that management needs to rebuild credibility with investors. And we've been through a spate of negative news that started with pricing and then Philidor, then just general communication and now the guidance, which I would say is lowered far more than any investor anticipated.

The question is, how can we be confident in what you're saying today about the business, given that you were positive in December and January? How do we get comfortable that Valeant is able to execute and deliver for shareholders?

Thanks.

Maybe I misspoke. In terms of the first one, it's not managed care per se, because managed care doesn't actually order any product. Distributors and retailers order the product, which lead to revenue recognition. So and -- again, I think Walgreens did not do a very good job explaining and then there were aspects of the Walgreens program that people didn't like.

So I think we've done a better job explaining. We've modified the program to accommodate important channel partners. I don't think it would be -- and then there was some lack of clarity of whether GI was part of the program or not. So on that one, I wouldn't necessarily agree that it was completely unexpected, the negative response to the GI. But I would point to the script. In end, demand is based on scripts written and filled.

I point to the continued strong script growth across the sales portfolio, as being the leading indicator of how that's doing and we're quite pleased with the growth that we continue to see. As Ari said, we are putting more resources behind it, because we think there's a lot of untapped growth in Xifaxan, in particular, in the HE indication.

In terms of management credibility, we have to earn it. You raised some terrific points. I would argue January, I don't think we said -- I don't think I said a whole lot in January. I think I was in the hospital then, but I do accept your point and it starts with me. So our teams have been working hard and we obviously have to deliver on our commitments.

The world has changed to some degree since December, but we have to do a better job. We've got some underperforming businesses; that's on us, right? That's totally on us. So we have to earn back the credibility. We have to deliver on our results. We have to meet or exceed this guidance, and I think we all recognize that.

So it's a bit of a starting over point at this point for me and the Company. Clearly, if we don't deliver, then again, I'll -- that's on me. But I can assure you I'm completely committed to making sure that we do deliver and I do think we have a lot more line of sight in terms of managed care at this point. We have a lot more line of sight in terms of pricing at this point.

I think we have a better line of sight in terms of script practice. So I think that -- all three of those helps. There are certain things we don't control, like FX. But we have built our guidance so we hope that's manageable as well. But thank you for the questions, Shibani. And we'll go to the next one.

Umer Raffat, Evercore ISI.

Thanks for taking my question. I have a few today, if I may. I just really want to focus in on the -- some of the changes and fundamental business that seems to be coming out in first quarter. So first few for Mike, if I may. Mike, how different is the guidance number today versus what you came out -- versus when you first came back a couple weeks ago?

And then on the Xifaxan, what I'm trying to understand is, if orders were cancelled towards the end of first quarter but the TRX continues to grow, that would imply to me that there's more inventory in the channel than expectation. Am I on the right track there?

And then on Ophthalmology RX, I don't see any disruption on IMS, so I'm trying to understand, what is it that you're seeing disruption-wise. And the first quarter base business trends, too, Mike, how does the January plus February compare to what you're seeing in March?

And then Rob, I'm sorry, if I may, a couple things. Number one, free cash. On EBITDA to free cash flow bridge, you previously mentioned working capital change of $600 million; it's now $200 million, so what's driving that? Is it just Walgreens?

Secondly, Rob, tax rates, Howard previously said, if you do delever cash taxes going to the low teens versus about the mid-single digits that it used to be. So my question is if you do delever, would the non-GAAP tax rate approach 20%? And then finally on EBITDA for 2017 -- for the next four quarters, so the press release says that adjusted EBITDA for the next four quarters will be $6.2 billion to $6.6 billion but the Slide 16, I believe, says it's $6 billion. So I just want understand that. Thank you.

That's a lot of questions, Umer. Let's try to pick them off. I'll start. So guidance design that we have had -- been having a lot of debate within management and with the Board, in terms of where we take guidance and quite frankly, we've had -- continue to have discussions. We've made a lot of progress with managed care over the last couple of weeks.

So again, we have -- some of the numbers -- some of the negatives have increased. But there's certainty around them. And then the first quarter, we've gotten a lot more clarification on first quarter as the quarter has progressed. We feel comfortable with the guidance that were -- we gave out this morning.

In terms of inventory, as you said, if scripts continue to grow, but people aren't ordering as much product, it's one of two things. One is there is more inventory out there than we thought. The second is, people are holding lower levels of inventory, right? Those are the two possible explanations.

And actually, we think it's a little bit of the latter in terms of both distributors and retailers. They also focused on cash management and we do think inventories throughout the channel continue to go down. But by definition, it's scripts continuing to grow. At some point we do believe as we get into the second quarter, everything will be normalized.

Ophthalmology, again, I don't think we said there's a major change. There is not a major change. What we have is a set of older products that, alone, are -- where we're experience a slow decline. This is not -- actually, our branded share is increasing; this is largely due to more and more generics is what's growing, and the pool of branded ophthalmology products in the areas we compete is going down.

Now we have not included in our guidance any new launches. If we get approval on our glaucoma drug, then we would expect that, that would be help bolster ophthalmology. Similarly, in dermatology, if we approval on some of our pipeline products, that we'll enhance there, so what we're forecasting now in our guidance is products that are currently on the market.

We don't have launched products in there. In terms of progression, January, February, March, March was always the much larger month than January or February. It's even more in the first quarter. Because of these high deductible plans, it's even more acute in terms of what we see in March, but -- so clearly, March is a much better month than January and February.

Rob, there are number of --

So let me take yours in turn. Firstly, with respect to the working capital on Slide 20, the reduction reflects the lower growth in the updated guidance, and it's simply 30% of the change in revenue. In terms of the tax rate, I agree that, over time, it would increase if we were to delever the 10% to 15% that we are showing is to try to do it on a comparable basis to the 5% that we were showing.

I think we've always said that our -- over the longer term, our tax rate would increase and likewise and commensurate the 10% to 15% would increase. And with respect to the fourth-quarter guidance, which Mike presented on Page 16. The chart is correct. The adjusted EBITDA non-GAAP guidance is $6 billion and we will correct that.

Wait, Rob, to be clear, the next four quarters' EBITDA is $6 billion?

Correct.

Or $6.2 billion to $6.6 billion?

$6 billion.

Next question, please.

David Risinger, Morgan Stanley.

Thanks very much. I have 13 questions also. (laughter) but I'll keep it a little bit briefer.

So first, with respect to divestitures, should we expect them to be dilutive to EPS, given the fact that you'll be paying off low interest rate debt? Second, with respect to the rebates, discounts and channel fees, including Walgreens, could you just explain to us -- I'm assuming most of those are netted out of revenue and are reflected in net revenue. But any of those channel payments, et cetera, reflected in COGS, or SG&A? And then finally, with respect to launches, Mike, you mentioned that you're excluding launches from revenue guidance, are you also excluding launch expenses from your guidance, as well?

Thank you.

Thank you, David, for prioritizing your questions. I hope your colleagues take from your lead. So thank you very much.

Depending on the divestitures, some could be dilutive, some actually may not be. It kind of depends on the assets. If it's an early stage asset, if it's on -- obviously, it's not -- so as you know, it really depends on the asset and the price we get.

If we do anything major, it could be -- it could lower our EPS. There is no question about that. But we'll be clear, just like we are -- if, when in the past, when we made acquisitions, whether it will be or won't be dilutive. In terms of the launch expenses are also not included in the budget. But I will note that launches, in the area of dermatology and ophthalmology, we don't anticipate major changes to our infrastructure.

I think it will -- we would prioritize our call patterns differently. But the launch, we do have good strong critical mass in dermatology and ophthalmology and in GI in terms of our sales force capabilities, et cetera. I don't anticipate we will adding lots of people for -- as part of these launches.

In terms of Walgreens, in terms of revenue reductions versus COGS, I think we're taking the Walgreens costs through our SG&A, in terms of how that's how we're retrieving the Walgreens. They are doing -- we're basically paying them a dispensing fee based on activity. And that will run through, so it will not be in that reduction of revenue, it will be in the -- it will flow through SG&A.

Thank you for your questions, David. Next question, please.

David Amsellem, Piper Jaffray.

Thanks. I just have two.

So first, I -- on the tax reporting, the new tax reporting. And I know you made it clear that there's no impact on cash flow or actual taxes paid. But what I'm trying to understand here is under the old reporting, you had characterized your EPS guidance ranges and you reported EPS as cash EPS, so under the old reporting for past EPS, is that cash EPS not really, quote, cash EPS? I'm just trying to understand if there's an inconsistency here.

And then secondly, this is a high-level question. Can you -- I think one of my peers had talked -- asked about retention earlier. Maybe, can you speak to morale in the Company and you talked about distractions. Can you speak to that and how that potentially would impact the business, and is there an issue internally, in your view, in terms of confidence in your ability to lead the Company going forward, given what's transpired?

Thank you.

All right. So I'm going to ask -- let's take your second question first and then Rob, we can talk about the tax.

I'm going to ask Ari and Anne, because I've already commented a little bit on morale. I'd like to get their takes. And the large portions of the Company report to both of them in terms of the people side. So I will address the personnel question, but Ari and Anne, why don't you -- Ari you can go first and talk about what you think about morale?

Look, I think, Mike, as you said, these are challenging times as we truly have an amazing bench of general managers and leaders of functions in the businesses and you've heard that names repeated again and again. I think we have strong and talented leadership and people who are committed to GI to derm to ophthalmology, Solta, Obagi, Latin America, the BNL businesses and thinking across the teams and these incredibly talented people.

We come to work every day, obviously, we have to return money to shareholders, but we come to work worrying about patients, putting quality products into the market, and serving our doctor customers compliantly and to the best of our ability. I think that's what motivates our team. I think we believe in our mission. We believe in what our Company is trying to achieve. That's what we do day to day.

The issues surrounding us are distracting and it takes courage to forge ahead to execute our mission day-to-day in the face of all that. So all I can say is we have fabulous people. We're blessed to have them. We believe in them and we think they will do the right thing for the Business.

So I will just add a few comments to what Ari has said. I think he described it well. When you talk about morale, I think people have worked through the process internally, through a typical change process and people now are actually -- they're angry, I think more about at the outside. They see the Company being described in a way that they know is not what they experience at Valeant.

So I am encouraged that I've really seen people trying to move to action. They want to help. They want to help change the image of the Company and we have really strong leaders who, I think, are channeling that energy into the best thing that everyone can do in this organization to really change and shift the organization is performed every day.

And that's what we are emphasizing each and every day is that really delivering performance is going to get us out of the situation that we're in. I think the tenant that Valeant has really built the organization around a decentralized approach helps us here. Because we have some new businesses who have an identity with a select set of customers who are really building their image even in their onboarding as a Valeant company. One of those being Dendreon, that I think is doing very well.

And then just a couple of other points. I think we have one of the best incentive comp programs in the industry for our sales representatives, and so that keeps them motivated on clear goals that they can achieve and we're working to shape the environment such that they can do that.

And I will just end with, I think, Ari's point around people really believing in the products that they're selling. When I talked to our sales reps, when I talk to our marketers, R&D folks, they are very committed that these products that we brought to market and are bringing to market make a real difference in patients' lives.

So I think keeping that commitment, that conviction and that determination to really change our image and perform our way out of this, and will keep our organization and the morale going in the right direction.

Anne, that's a good point. If I could just add to this.

There's important functions that enable our front line people to do their work and that specifically manufacturing and R&D and I think [T]age and his team in R&D are cranking our products that are going to fill our pipeline. We talk about put down on a map, IDP-118, and these things are being worked on by this terrific team while remaining focused on the future. I think Dennis, Angelo, and their team in manufacturing as we travel around to the operations, you couldn't hope to bring a team of people more focused on just driving quality and efficiency day to day.

David, you're being polite. The question is, am I the appropriate person to lead this Company. It's clearly up to the Board. I do think we have a great Board. We've made a number of new additions to our Board that will provide even more independence.

We basically have representation from two activists investors, Pershing Square and ValueAct. I think we have two major investors also on our Board. Our Board interacts with investors, and so I can't comment on, or I'm not going to choose to comment in terms of -- that is up to the Board. But I do think our Board is a lot closer to the investors than many Boards, both given the composition of the new independent directors, as well as representation from a couple of activists. Tax?

Importantly, our tax presentation on Table 2a and 2b show the single number and it was the combined tax effect for a non-GAAP adjustment, as well as the use of tax attributes and other timing issues, such as NOLs. What we've done in the Q4 unaudited preliminary presentation is to break that out into two pieces, the tax provision plus the effects of the non-GAAP adjustments, as well as the tax effects of use of tax attributes and other timing items.

We're reporting that the combined amount of that as 5%. Going forward, we're just going to report the tax provision, plus the effects of the non-GAAP adjustment only on T 2a and 2b. We will continue to note, in a separate table, the tax effect of tax attributes and other timing effects. So there's, as we mentioned, there's no impact on cash flow or actual taxes paid. Our approach has been to match the actual cash tax that Valeant paid each year. But again, it's been made up of those two terms which we historically combined.

Next question, please.

Ram Selvaraju, HC Wainwright.

Thanks very much for taking my question. I have two. One is in a general sense, whether you can comment on your philosophy of curtailing price increases versus what your peers in the speciality pharmaceuticals arena are doing? And how high your conviction is that going forward, this is the best approach to take given changes in the managed care environment, i.e., get rid of as many price increases as possible versus pursuing a judicious approach to maybe increasing prices on some products or not.

And then the second question is specific to what you previously commented on back in December regarding converting written prescriptions to filled prescriptions on Addyi. Could you give us an update on that, please?

Sure. So I think we've tried to be very clear on our approach to pricing, which is that going forward, and this is been in place since September, we will take single-digit price increases across some of our portfolio, in line with managed care contracts. What we made was a commitment as far as the Walgreens deal this year to reduce prices on dermatology -- WAC prices dermatology and ophthalmology, the brand products 10% this year.

We are no longer in the market for underpriced assets out there. If you actually -- WAC price increases are public knowledge and if you actually look at us versus competitors, both in the specialty and in the big pharma space, and with what WAC price increases have been this year, you will see that we're actually below what most, if not all, the other companies have done.

So I think we've talked about that and the question is how committed are we? We are very committed. In fact, that's been one of the keys in the managed care. Is that commitment and they are applauding and appreciating the approach we're taking and they're using that when they talk to other companies.

I think one of the very smart things that Anne and her team have done is offer something that the rest the industry has not offered yet, and that has played a big role in terms of improving overall relationships. Is that fair, Anne?

Yes, I think that's very accurate. What the payers lead, and they are very clear in this, and I understand this, after being in the industry for 25 years with other pharma companies, they want predictability. We are working with each of the payers, whether they a health plan or a PBM, on contracts around price inflation protection and as Mike said, aligning our price increases with more modest industry standards.

So I think you had that Addyi question. So with Addyi, you're right. We see the number of written prescriptions versus filled. And in the beginning, back in the fourth quarter we were only seeing between 25% and 30% of the prescriptions actually get paid for or filled. That number is now up to, in the most recent weeks, 57% of those prescriptions are being filled and paid for.

Really that sort of ramp up with a number of prescriptions is being impacted by, one, having a complex risk program. This is the first time that we're, according to our knowledge, that there been a pharmacist and physician certification process. And so really working through that has been a challenge, but we've certainly addressed it with the pharmacies. We're down to around anywhere 10% to 12% of scripts being kicked back from pharmacists.

We're still working through the physician certification and making sure that those that are writing are certified. And part of that has to do with this is a new product and we weren't sure exactly who the targets and the writers of the product would be. We have much more clear information now on who the targets are, whose training HSDD and other diseases like that. So we're taking more targeted affect.

And then lastly, the managed care process has changed dramatically, just even this past year. All of the large PBMs now [lost] new products, in most cases, from launch. They take six to nine months to actually do the clinical review and then enter into negotiations. And so it has taken us that time as we transition from Sprout to Valeant and our managed care team here picking it up, to really work through that process.

And I feel very confident by mid-year, we will have improved access for Addyi and we'll start to see the prescriptions that are coming through being filled and then based on the enhancements we've made to our commercial organization and filing of actual marketing materials this month to OPDP, that second half will be a much better, I think, time period, to really judge the performance of this product.

That being said, we take full responsibility for reduction in the -- we probably didn't move quick enough. That's my fault, but I think to Anne's point, we have not given up on this product. We've -- there's some -- clearly, we have to demonstrate our ability to have success and we have not done that yet. So that's on us. We are working hard to deliver.

And just last comment. The testimonials we hear from physicians and patients each day inspire us and every day to keep going with Addyi and really educating around HSDD. As Mike said, we haven't given up. I have a lot of confidence in this product.

All right. Next question, please.

Alex Arfaei, BMO Capital Markets.

Thank you for taking the questions. Most of my questions have been asked and answered. Looking at some of your top 30 products, specifically Jublia on Solodyn, it looks like much of the Solo business isn't being made up from other channels. Could you provide your outlook for these products, specifically for Jublia, which was thought to be a growth driver? And just to follow-up on Addyi, do you still expect it a $100 million to $115 million drug in 2016?

Thank you.

Well, in terms of Addyi, no, we don't expect it to be $100 million to $115 million in 2016. That's one of the products that we've reduced the forecast significantly on. What we are is hopeful and if we -- we're hopeful that we will get it to that level, but certainly not in 2016.

In terms of Jublia, it is one of the products that is -- there was a question earlier about leverage. Can you leverage your portfolio? And as Anne said, or mentioned, that derm has been one of the reviews that the managed care companies have really focused on and Jublia, in particular, so we have needed -- the net of many of our negotiations is we sacrificed the price on Jublia in order to ensure access to the rest of our portfolio.

So we would expect and we have better access for Jublia, as a result of this, than we had before. So we would expect scripts to continue to grow on Jublia. We think it's a great product, but the average price will come down. In order to return it to growth, we will really need to expand the number of scripts.

But it has been disproportionately hit in terms of managed care in order to protect, because that's what many managed care plans were looking for. Again, as Anne said, each negotiation is specific; it's not the case of every managed care plan. Every one has their own needs. But that's what we're seeing in Jublia. Next question, please.

David Maris, Wells Fargo.

Good morning. I have a few questions. The first, Rob, why no GAAP guidance? And then a bridge to non-GAAP, since the investors could make a decision on what to include and what not to include? Second, on the text effects -- I want to get it right, use of tax attributes and other timing issues. I know a few questions have been asked about this. But does this relate to deferred tax liabilities and use of recovery of income tax, or anything else like that. I know I asked that when I met with you about a month ago. So I was just wondering if that's related to that.

And then the second half guidance seems to be a dramatic increase. Other than the inventory drawdown, is there anything else that we should expect, that should account for that? And then lastly, I think Mike, you just mentioned that launch expenses for a couple of these launches are not included in the guidance. Why would they not be included?

Well, let me -- we have no launch -- until a product is approved, we don't include it in our guidance, so we don't include the revenues or the launch expenses. Now because most of our products are in -- the new launch products are in categories where we already have strong sales and marketing, the net impact of launching these products, we believe, will be neutral, at worst, in terms of our EPS.

So this just the way we treat it. We don't put in the revenues and we don't put in the costs, because they are not approved yet. And that's always been what we've -- that's always been the approach we've taken to guidance, and at least from our vantage point, that make sense, is -- . To include revenues and not costs wouldn't make sense. To improve the costs but not the revenues wouldn't make sense. So we choose not to include either. Rob --

But is it fair -- just as a follow-up to that, Mike, is it fair to say that if they're approved, since products aren't usually profitable in the first year or two, that we'd see an increase in the expenses just for the launch expenses? Not for the infrastructure or the new salespeople, but just for launch expenses?

For the net -- our belief, at least for the products this year, we would not expect it to have an impact on overall guidance, for example, if that's the question. So we will have ophthalmology, we hope to get approved --

I believe it is July

July. We believe we will have enough revenues to cover any of the launch expenses, and Broda, we do not expect to get approved til November/December. So again, it should have minimal impact on our guidance. So we don't expect to be taking down guidance until we get products approved. Is that --so Rob?

I'll take your question first, tax effects are largely NOLs, and the use of deferred tax assets, not liabilities. With respect to the GAAP guidance, as we explained in the footnote of the press release, due to the inherent difficulty in forecasting and quantifying certain amounts that are necessary to do it, we find it more accurate and better for our investors to guide to the non-GAAP measures that we do.

Next question, please.

Luca Salvero, Neumann Capital.

Next question, please.

Alan Ridgeway, Scotiabank.

Hi, good morning. Thanks for taking the questions.

I just have question about the bridge to the 2016 guidance. I'm trying to just get a feel for your reduced revenue expectations for both the derm and the Salix business and then the managed care contracting piece, as well.

Can you speak to in your reduced expectations from a revenue perspective this year, what the split between volume declines, or decline in your expectations for demand versus your expectations on pricing? And then how that may have changed in the last little while, as you've contracted with managed care, and I'll leave it at that. Thanks.

Great. Well, the managed care is just all price, right? That's -- we've quantified that. Hopefully, what we hope to be able to do is to with this better access is actually drive more volume. We have not built a lot of that into our forecast and that should be upside. But in terms of managed care, that is basically price.

In terms as we think about prices captured there, obviously, with -- there is some price in the revenue side. Ex -- not the managed-care piece, partly through the price reductions that we're giving in ophthalmology and dermatology, as well as the fact that we are sort of price increases, we're more limited in what we can do. In some cases, some of the commitment to managed-care was to keep price increases lower than we have historically so there's a price element.

We actually, and then there's first quarter where demand has been lower. But we do expect, if you actually look at the scripts, we're running ahead of last year in dermatology and so we are quite pleased with that. We are seeing -- experiencing great script growth in the GI franchise.

In terms of ophthalmology, again, there we have a decrease in scripts, but we're increased in share in the branded portion and those are the three main franchises. So, overall, we expect demand to continue to increase over the course of the year. Next question.

Gregg Gilbert, D.B.

Thank you.

First, Mike, when you talk about script growth for derma, are you talking about scripts of IMS plus Philidor, so i.e., real prescriptions, or just those that we see on IMS, which might be inflated due to the Walgreens shift away from Philidor?

Secondly, when do you expect to be able to file the 10-K and can you share your game plan with us? I.e., what is in your control? What is in the Board's control, or gated by the Board? And are your auditors in agreement with your game plan and your timeline? I suspect a lot of people are going to wonder after this call when you expect to get the K done and all the implications that come with that.

And lastly, Mike, can you comment on the situation, specifically with Deb and Tanya, given that we only have media reports to rely on and clearly, you know at a personal level, what happened in those cases.

Thanks very much.

Okay, so script growth, Ari, do you want to --

Derma is running year to date roughly 10% ahead of last year, all in. We are now using Symphony IDB data, so just so you know that's what we're going to be tracking. So far, all in, derma is growing the access program is still relatively new, as Mike described, and we're expanding into networks and independents, so we will continue to expect good TRX growth through the course of the year.

In terms of the 10-K. Certain things are within our control and certain things aren't, as management. We have the ad hoc committee continuing to do their review. So partly depends on that; partly depends on us. We have to do our work in terms of submitting a 10-K. And then we are in constant conversations with PWC in terms of they have to do their work.

That's the best estimate that I can give but again, we don't control it -- it's -- we hopefully get this 10-K filed sometime in April. But I can't commit to that. But that would be my best estimate of -- based on everything that I know.

In terms of Deb and Tanya. Deb, as we said, resigned. She was a valued employee. She led a lot of the marketing initiatives. She led our derm business and did a great job. We were disappointed that she left. As I mentioned, she was part of the EMT, where we had no retention in place, so because they are executive officers of the Company. We wish her well and we were quite clear that had nothing do with the ad hoc committee or anything else; it was a decision that she made.

And then Tanya. Again, that happened when I wasn't here, so I can't comment on the Tanya -- I don't have information on that so I can't comment on that.

Thanks.

David Steinberg, Jefferies.

Thank you. You mentioned destocking quite a few times on the call, in particular, for some your key brands. I was wondering if you could help us with inventory levels. I believe in the past, you said normal levels in the US were about two to six weeks and two to four months globally. Are -- can you confirm you're within that normal range, and perhaps pinpoint in the United States, given the last public forum, are you higher or lower than you were last time you spoke to the investment community?

Secondly, Valeant has benefited from the lowest tax rate in your industry. I was just curious. Could you remind us how long that tax rate is ironclad? There's a tax treaty. If there's a period of time when it will be reviewed and if -- when that time is?

And then lastly, bigger picture question, Mike. On your corporate culture, do you think elements of it need to change? Do you think there's some components that incentivize sub-optimal behavior? And then could you comment on, are there any changes that -- the top-level management was not part of the retention plan. Have there been any changes to the compensation package? Thank you.

So in terms of compensation package, there's been no changes in terms of the senior management. In terms of inventory levels, those continue to be our guidelines: two to six and four, outside of that. Although that varies by country. Gregg, I think we've been completely flat in terms of inventory levels in terms of the US. Outside the US, I think actually inventories have been down a little bit.

But so no changes in inventory levels. Since the volume has increased through Walgreens, that -- in terms of absolute dollars, that means our inventory levels have come down, because what we're talking about that flat, we're talking about in terms of weeks. Since Walgreens is consignment, the absolute level of distributor inventories in the US for dermatology, for example, has come down, although the weeks have remained in the same. So hopefully, that's clear.

In terms of tax rate, we do not know of any imminent or any changes that are coming down. So again, we will see that space on governments. But we were unaware of anything that would change our tax rate.

In terms of -- we've talked about bolstering -- in terms of corporate culture. It's interesting, when we meet with AIP, I think there's a couple variables that we are investing in. We will continue to try to upgrade our financial reporting, certainly from a PR and government relations side.

We are committed to investing or in the process of investing in those functions. As, we said in the press release, we are, as all pharma companies do, we are continuing to emphasize compliance. We are continuing to emphasize, from a quality standpoint, and continuing to fill that capability quite a bit. I think we've almost more than doubled our quality department, corporate in the US. We make big investments in quality in terms of headcount and capability and we feel very good about that. We will -- so we've grown pretty quickly.

We are going to continue to invest in the core functions to make sure that we deliver high-quality products to physicians and to patients and work in the most compliant way in the US and beyond the US.

Next question, please.

Randy Raisman, Marathon Asset Management.

Hello guys.

How are you doing? Can you just provide us a little bit of a bridge on the cash balance? Because when we look at it, we see you had roughly $600 million of cash at Q4; it looks like you drew down $1.2 billion on the revolver, so it will take you to $1.8 billion. You paid $900 million between the -- for the term loan and then there was another payment that you made.

So that should left you with about $900 million of cash, and you're saying you have $1.2 billion of cash so that would imply then that you generated $300 million of cash in the first quarter and that doesn't really line up with the guidance for $2.2 billion of cash flow for the year.

How do we get comfortable that you're going to generate an extra $1 billion of cash than where you're currently running?

On the revolver, we ended the year with $250 million drawn on the revolver and we're now at $1.45 billion. We obviously are generating cash in the first quarter. We did have, however, some large payments in the first quarter that we discussed. $500 million for Sprout that we talked about.

We paid early; they were not due until April 20, $260 million of maturities. I mentioned the excess cash flow payment of about $100 million, which we will be due at the end of March 31. And those are some of the big payments. But again, we -- without these large payments, we were generating cash this quarter.

Right. But my question is based on my math, it looks like you generated maybe $300 million of cash quarter to date from what you've disclosed, and you're telling us we should think you're going to generate $2.2 billion of cash for the year. So where is the ramp going to come from, from Q1? That's a big jump.

It is, but we took down revenue in Q1 considerably because of -- we've gone through that explanation in starting in Q2 and Q3 and Q4. Cash generation will be stronger than it has been in Q1.

That is correct. Obviously, cash generation depends on working cap, so we're not quite done with the quarter, so that's going to impact. I can't confirm, specifically, but it's exactly $300 million, but you should think of it as cash generation before these type of payments.

And then just on a leverage covenants, so if you're look at 2.1 times and the covenant is 2.5, is that something you're going to look to amend, as well, when you go out to the bank group, because there's not that big of a cushion there.

Right now per what we spoke about before, we're thinking about amending or we going to amend for cross-default, as well as timing.

Okay.

We've done stress cases on our covenants, based on our guidance. And we are comfortable, as we said in the past.

Great. Thank you.

Irina Koffler, Mizuho.

Thanks for taking the question. Just curious -- sorry, phone issues. What would you do in the future once your business is normalized? I mean is it more going back to buying additional assets. You mentioned you're not going to buy inexpensive or mispriced assets in the future, but what can we look for from the Company once this period blows over.

Thanks.

We are going to work hard to get this period to blow over. We're going to reduce our debt. We've made a commitment to get under 4 times. Until we get under 4 times, we will -- we're not looking to make any acquisitions, so that's our -- we are excited about our launch products. We're excited about many of our products, that we've recently launched, like Ultra and Biotrue and we want to demonstrate we can drive growth with our current portfolio, and our R&D pipeline, which we feel that we can.

If we fast forward to the period, through that period, which is probably a long time from now, then we will continue to look for assets that fit into probably the areas where we have strengths today, which will be dermatology, ophthalmology, GI and emerging markets. But as you mentioned, we will not be looking at acquisitions that involve sort of the mispriced assets that will not be part of our agenda.

Okay. Thanks.

Next question, please.

David Common, JPMorgan.

Terrific. Thanks for the fixed income question opportunity. My question relates to any non-core assets sold. Can you tell us whether you are currently required or expect to be required to pay off secured debt with those assets? To the extent that you've given us an expected debt reduction for 2016, does that presume any asset sales?

And also, you previously, I believe, plan to pay off, I think it was $800 million you had in your revolver at December in addition to a, I believe, $2.25 billion of other debt. Could you tell us what your expectations are for reduction and the revolver balance over the next 12 months, or in this fiscal year? Thank you.

Sure, David, first on asset sales, to our private agreement, we have 365 days that we could reinvest the proceeds. But as Mike said, we are very focused on debt paydown. So, I expect we will use some of those proceeds to pay down debt further. Secondly, the $1.7 billion that I mentioned in the slide is permanent debt reduction.

It doesn't include any additional debt reduction we would do from asset sales. And to answer your third question, going back to the JPMorgan slides, and I know exactly what you're referencing on the $825 million. That $825 million was paying down year-end revolver balance, as well as discretionary cash. The year-end revolver balance was $250 million, so I did want to clarify that, that wasn't implying we were going to pay down $825 million of revolver.

Lastly, we are committed to the $1.7 billion of permanent debt. We also want to bring the revolver balance down significantly, but through the course of the year, but I don't want to commit right now that it will be zero at the end of the year.

Perfect. Thank you.

Tim Chiang, BTIG.

Hi, Mike. I had one follow-up. I know that you guys had said that you were going to lower your cost structure on the SG&A set for some of these niche divisions, whether it's Solta, Obagi. I know that these groups have been pretty -- they've been run pretty lean already. I'm just wondering how much additional cost-cutting can you really do in these types of groups here?

I think we talked about cost reduction, both in terms of some of the smaller businesses, but we also had to step back and look at the overall SG&A, which, as a percent, has increased and we have to take a look at that with, again, the caveating of reinventing core functions that we want to build capabilities in.

Some of these expenses, quite frankly, have grown some of these smaller businesses. And as Ari mentioned, we're not in the business of running unprofitable businesses. So Solta, we are taking steps to make sure it's profitable and delivering cash flow to our investors. So it's not like Solta, there will be cost reduction. We are spending too much in terms of, relative to the revenues in the US.

Obagi is a different issue; it's more around sales. It's making money and there, it's focusing on and increasing the growth rates. We have a great franchise there, et cetera. In terms of businesses like Commonwealth, we had a plan to expand sales and marketing quite a bit. The demand is slower. It is growing.

It continues to grow, which is positive. But we are not going to increase spending at the same rate that we were planning on increasing spending. We are going to be more moderate in terms of our approach and as the revenues build, then we'll continue to invest. But we'll do it in a profitable way.

It's the same approach as launching any new product. You can choose to spend a lot of money in the short-term, and in hopes of accelerating revenue, or you could take a more measured approach, and that's what we're going to do in these businesses to ensure that we continue to grow the businesses, but we also continue to put dollars to the bottom line.

Mike, just one follow-up. I think back in December, you had originally thought -- this is on Xifaxan, by the way, that you were originally going to hire another 100 reps to support Xifaxan's growth in HE; is that still part of the plan in 2016?

Yes. It's on that -- as Ari, I think mentioned earlier, those reps have been hired and trained. When do they get on the field, Ari?

In the next couple of weeks, they will be --

Next couple of weeks, so certainly by second quarter. But we have -- by the end of the second quarter, up running and fully trained. That has not changed.

Okay. Thanks.

Derek McGirt, Marathon.

Thank you. My question has been answered.

Thank you. Next question.

Cindy Quan, Goldman Sachs.

Hi, thank you. I wanted to ask, have you bought back any bonds in 4Q or 1Q in the open market? I think I saw the senior note balance is about $35 million lower from 3Q but is that just translation for the Euro tranche or was any debt bought back on the senior note side? Thanks.

Cindy, note that has been bought back in the open market for bonds and you're absolutely correct, that it would be translation. Because the Euro bond needs to be marked to those current FX rates.

Any comment in 1Q, if there was any debt bought back?

No. There have been no bonds bought back in 1Q to date.

Thanks.

David Maris, Wells Fargo.

Sorry about that.

Mike, one of the questions that an investor asked me to ask has to do with the speed of the business and the decline of the market cap and all the rest. They had seen that in a news report, that the Board had thought of bringing in a new CEO, a new management team to start things afresh but one of the pushbacks was that there was a large parachute or downstream payments.

Is that true to your knowledge? And second, are you -- given the way the Philidor thing and all the rest has played out so far, are you willing, if the Board said to, that they wanted to bring in a new management team to forego those, what are sometimes called golden parachute payments.

I'm not aware of a golden parachute payment, so --

Any termination-related payments.

Again, I don't think -- I'm not sure. I don't know if everything in that article was correct; I wasn't on the Board. So I can't speak to that. I do not -- maybe I should wish I could get $200 million if I leave but unfortunately, I don't think that's the case. Fortunately, from an investor standpoint, it's not the case.

Actually, I think I'm pretty modest. If I got fired, it is pretty modest. They may be referring to some stock that is vested that's not delivered until the future, but that's been divested. That was -- so David, I'm not aware of any golden parachute that I have.

Okay. Thank you for clearing that up.

Henry Reukauf, Deutsche Bank.

Just had a quick question on the forward-looking guidance for the next 12 months. I think you said it's going to be $6 billion instead of $6.2 billion to $6.4 billion that was in the press release today. Did I hear that correctly? If I did, what's the reason for the change? And one more after that.

The current was correct and what was in the press release was an error.

Was it -- it definitely looks like it was switched kind of intentionally? Is there -- was there any other further comment on that or no?

No, it wasn't switch intentionally. It was just a wrong number and we apologize.

Okay. And then the last one is just on the debt, you want to get to debt to 4 times. You mentioned no more acquisitions; does that also include share repurchases? So can we assume that basically all the free cash flow is going to repay debt?

Again, that's probably our current intent is to do that. We reserve the right to change that but what we are 100% committed to is reducing debt to 1.7. And our focus is on debt repaid down.

Thanks a lot.

Dmitry Khmelnitsky, Veritas.

Hi, Mike. Thanks a lot for taking my call.

So I have two questions. One relates to the $58 million restatement. I was wondering if you can elaborate whether that restatement primarily related to Q4, and if you could break out the deals by products, what products is related. Now if you can potentially quantify that.

And the other question has to do with the change in tax presentation. So, can you please clarify on Slide 6, when you talk about Q4 2015 on order of results there. Is this the old presentation, or is that the new presentation? I'm talking about the middle section of the slide.

And if you can also elaborate what you mean by tax provision there. Is that tax provision that includes both deferred, as well as current income taxes? Or is it something else? And the same thing obviously applies to FX or non-GAAP adjustments; is it related to deferred or current taxes? Thank you very much.

So in terms of the ad hoc committee, I think, put out a press release that talked about the timing in 2014 of what was $68 million -- $58 million, in terms of Q4 2014 versus Q1 2015. So that is what happened.

So it's all Q4, really.

The second half. But is primarily Q4. In terms of the mix of products, we took a look at that. It's a normal mix. It would -- you may referring -- there was some -- I had heard some speculation that it was all Solodyn or something like that, which is not true. It was a normal mix across our dermatology, primarily our dermatology product portfolio. Rob, tax?

Two things. The middle part of the chart is the way we are presenting the press tables that were released this morning. Where we're breaking out for the first time, the tax provision plus the FX, the non-GAAP adjustments, which are there both current and deferred on an ongoing basis.

From the other going forward, what we will report is just that first term. So if you look at Tables 2a and 2b, it's the first term that we will report and we will apply that to calculate our adjusted EPS. And so therefore, our reported tax rate, again on a comparable basis, and this will change if we delever and reduce our NOLs, would move from approximately 5% to approximately 10% to 15%.

My understanding, that's the last question. So we appreciate everyone's patience. We look forward to our next call. Thank you.

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