Bausch Health Companies Inc (BHC) 2016 Q1 法說會逐字稿

Good morning. My name is Jonathan and I will be your conference operator today. At this time, I would like to welcome everyone to the Valeant first-quarter 2016 results conference call.

(Operator Instructions)

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

Thanks, Jonathan, and good morning, everyone, and welcome to Valeant's investor conference call where we will be discussing our first-quarter 2016 financial results. Participating on today's call are Joe Papa, Chief Executive Officer; Rob Rosiello, Chief Financial Officer; Dr. Tage Ramakrishna, Chief Medical Officer; Dr. Ari Kellen, Company Group Chairman; Anne Whitaker, Company Group Chairman; and Linda LaGorga, our Treasurer. In addition to the live webcast, a copy of today's slide presentation can be found on our website under the Investor Relations section.

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

In addition, this presentation contains non-GAAP financial measures. For more information about the non-GAAP financial measures, please refer to slide 1. Non-GAAP reconciliations can also be found in the press release issued earlier today and posted on our website.

Finally, the financial guidance in this presentation is effective only as of today. It is our policy to update our firm guidance only through broadly disseminated public disclosure. With that, I will turn the call over to Joe.

Thank you, Laurie, and good morning, everyone, and thank you for joining us. Today we'd like to cover the following topics: First, I'd like to share some thoughts following my first month at Valeant then we'll cover the results of the first quarter. Next, I'll walk you through our plans for stabilizing Valeant in 2016, including updating our 2016 guidance. Then we will address the areas of improvement, as well as areas of opportunity. And finally I'd like to tell you why I'm confident in Valeant's future.

In addition to today's prepared remarks we have several slides at the end of the deck in the appendix that we will not cover in today's presentation. Beyond the prepared agenda on slide 3, what I want to do today is really simple. I want to answer four questions: Why did I join Valeant? What is the current situation I found, both the good and the bad? What is our position related to our debt, our liquidity, and the regulatory filings? And why I believe Valeant will be successful in the future.

Now, let me comment first on that question about debt, liquidity and regulatory filings. We'll have more to say about this later but let me spend a few minutes now. Based on our guidance, we have a solid position with our liquidity. And I expect to be in compliance with the debt covenants throughout 2016 and beyond.

Also, we are now planning to file our quarterly information in a timely fashion for the regulatory SEC filings. Time will be our friend at Valeant as we work to improve the Valeant business and, importantly, to pay down debt.

Now, let me start about Valeant and what I found as I was doing my due diligence and joining the Company. I believe that Valeant has a diverse collection of leading healthcare franchises and brands such as Bausch & Lomb, CeraVe and Salix.

As I did my due diligence I discovered Valeant had a very broad geographic global footprint. I believe that our commitment to bring innovative products to the market through an exciting new product pipeline continues to be under-valued and misunderstood and I hope to change that perception.

Finally, in my 30-plus years in the pharma business in both branded, generic and OTC parts of the business, I knew many of the Valeant employees before I joined. And now I know even more. In my first 30 days, I've also had the pleasure of meeting many of the talented and dedicated employees that work at Valeant.

Globally, we have 22,000 Valeant employees that drive to work every day to focus on improving people's lives. I'm delighted to join the team that focuses on improving people's lives on this mission.

Like those of you on the phone today, I've also read many of the articles on Valeant. Some have not been favorable. I know it's been a difficult nine months for the team, but I also know we have dedicated leaders who know what is right and necessary to turn this Company around. We'll re-engage our workforce, we'll rebuild our relationships with providers, payers and regain the trust of our debt holders and shareholders.

And during the 30 days that I've been with Valeant, I've done just that, met with employees at all levels of the Company, sales leadership, key opinion leaders, many of our key trade partners, prescribers, managed care, GPO. And I've even had a chance to have a couple trips to meet with Congress. In summary for today, my hope is I can capture some of the excitement that I see in Valeant as I walk through today's first quarter but also some of the challenges and the opportunities in front of us.

Now, turning to slide 4. We have the Q1 2016 summary, the first-quarter results. Our total revenue was $2.4 billion versus our guidance of $2.3 billion to $2.4 billion. GAAP EPS was a loss of $1.08.

Adjusted non-GAAP EPS was $1.27 which falls within the guidance range. GAAP cash flow from operations was $558 million and adjusted EBITDA non-GAAP was just over $1 billion.

Now, let me turn the call over to our CFO, Rob, to discuss the quarter in greater detail. Rob?

Beginning on slide 5 is a financial summary of our GAAP results. As Joe stated, we had a net loss of $1.08 per share for the quarter while GAAP cash flow from operations was $558 million.

COGS was 27% in the quarter with SG&A at 34% and R&D investment was just over $100 million, a record for Valeant. I want to point out that SG&A included $37 million of incremental cost related to Valeant's former CEO of which $25.3 million was for share-based compensation. However, since the performance threshold was not met, no value or shares were ultimately received by the former CEO. SG&A also included $29 million of legal and professional fees in connection with various investigations and related activities.

Turning to slide 6 and following our GAAP presentation, I'd also like to provide a non-GAAP summary. We reported adjusted non-GAAP EPS of $1.27 for the first quarter and you can see the historical adjusted non-GAAP EPS numbers for the past five quarters all under our new tax presentation.

Compared to Q1 2015, revenue increased just over $200 million or 9%. The impact of 2015 acquisitions provided $572 million of growth in the quarter. This came from Salix, Marathon, Dendreon and Amoun. This growth was offset by the negative revenue impact of FX of just over $50 million and divestitures of approximately $20 million.

The base business in Q1 declined by $289 million, driven by dermatology including the genericization of Targretin and the transition to Walgreens, the continued decline in our neuro business and declines in our ophthalmology Rx business. COGS increased 3 percentage points, primarily driven by lower derm revenues and the unfavorable impact of gross margins from FX in emerging markets. SG&A increased from 26% to 31%, driven by revenue declines described above as well as an increase in advertising and promotion, for example, DTC advertising, and employee retention of $20 million.

On slide 7, as you know, Valeant currently reports under two segments, developed and emerging markets. Revenues in the developed market were $1.9 billion, an increase of 11% year over year, while operating income declined 8%. While the increase was largely due to acquisitions completed in 2015, we experienced slower uptake in the dermatology recovery than expected. Revenue for US dermatology, and I'm including Obagi and Solta, was $229 million as compared to $399 million in the prior year.

Following the launch of the Walgreens program in January, we saw volume flattening and ASPs declining post launch. Overall volume challenges were exacerbated by the loss of refills following the shut down at the end of January of our previous specialty pharmacy relationship, as well as the negative external narrative and some internal disruptions which Joe will cover in more detail later in the presentation.

Revenues for the US GI business were $343 million for the quarter, with gross margins at 85%. Revenues for Xifaxan, the largest Salix product, were $207 million for the quarter which corresponded to a retail TRx increase of 32% over the prior year.

Other established brands also showed growth in the quarter and we're pleased the channel inventories for the Salix business have been reduced to 1.5 months and we are now selling to demand. Other areas of note in this segment included continued growth in our US contact lens with Ultra, which was up 58% year over year, aided by a national TV campaign and the launch of Ultra for presbyopia.

Our US consumer division was awarded the supplier of the year by Walmart, an achievement not easy to attain, while also launching several new products, surveys, ointment and preservation eras MV. Overall vision care was up 9% versus market growth of 1%.

Several units achieved strong organic growth, including Provenge, which grew 6% over the prior year and our generics portfolio which grew 14% year over year. There was strong growth in France and the UK, particularly in sales of B&L surgical. We also saw positive momentum from Jublia in Canada which currently enjoys roughly a 60% share.

On slide 8, revenues for the emerging market were $442 million for the quarter. This increase in revenue was driven by the 2015 Amoun acquisition, offset by unfavorable foreign exchange of $44 million. The fall in gross margins was driven by FX in countries where the purchasing or manufacturing of goods are in a different currency than where products are sold.

Same store organic growth was 2% but would have been nearly 10% if not for the $30 million inventory draw-down in Russia and Poland. Several countries delivered strong organic growth such as Mexico at 8%, China at 19%, and India in double-digits. We did see inventory levels successfully decline in Russia and Poland to approximately 3.5 months from the 4 to 5 months seen throughout 2015.

With that, I will turn the call back over to Joe.

Thank you, Rob. On slide number 9 what I'd like to do is try to quickly summarize Valeant's current state. We have leading dermatology brands and GI brands and a strong pipeline. We've got great global Bausch & Lomb platform.

We've got a durable, sustainable business model in both consumer, ophthalmic and branded generics and we have strong cash flow. But we have experienced some significant challenges in our dermatology business as we transition to our access program with Walgreens. We continue to strongly believe in the program and both Walgreens and Valeant are working diligently to correct the issues.

Our Salix business is currently running below original expectations but we continue to believe that there remains a sizable opportunity and significant unmet medical need in this area. Unfortunately, negative external attention continues to adversely impact the business and our reputation with patients, physicians and all of you, our shareholders, as well as our distracted organization.

On slide 10, to further emphasize how the business is performing, the following chart illustrates that nearly all of our businesses are performing at our expectation, with the exception of the US dermatology and the Salix business.

On slide 11 we are confident we have a plan to go forward. We have to be realistic as to the impact all this has had on our operations and our financial expectations for the year.

Our new full-year 2016 guidance as compared to what we previously reported is $9.9 billion to $10.1 billion and adjusted non-GAAP EPS of $6.60 to $7. We expect an adjusted EBITDA number of $4.8 billion to $4.95 billion for 2016. Assumptions surrounding this guidance can be found in the appendix of the presentation posted on the website.

Now, I'll turn the call back to Rob.

Slide number 12 shows where the change is taking place. It is primarily US dermatology and GI with other various small changes attributed to other factors.

Let me start with dermatology. The current budget represents a $410 million take-down of revenue. This reduction is driven by lower script volume, lower fill rates, speed bumps in the access program, combined with lower ASPs and overall higher managed care rebates.

For Xifaxan, it represents a $390 million reduction, relative to our previous expectations. Xifaxan has delivered strong growth but it is less than our expectations and, we believe, the potential. Disruption, sales force turnover, changes in leadership, shifts in strategy, an increase in enrollments in high deductible plans which we believe for the first time extended into the second quarter, have contributed to our lower forecast. The third bucket of roughly $300 million includes other units, additional pricing reductions, such as the GPO rebates for Nitropress and Isuprel.

Slide 13 shows what drives the ramp to the mid-point of our guidance. Let me walk through it. So the first is today we're announcing $1.27 in Q1. The second would be assuming a Q1 run rate performance for the rest of the year, pure math, would add $3.81. If we add to that the historic seasonality and typical second-half ramp characteristic in our business, what we might call the typical 40/60, that would add an additional $1.25 and we net out the GPO rebate that we recently announced for Isuprel and Nitropress.

The fixing derm and Salix and growth acceleration would provide additional $0.50. Again, that would net out the new managed care contracts. Other markets, particularly emerging growth, which we feel very good about, would deliver an additional $0.17. And then we would net out of that subtraction of generic erosion, for example Zegerid, and other potential pricing actions that we might take.

Take this together, this would deliver the mid-point of our guidance. And we see upsides in improving the ASPs in volumes, particularly in our dermatology business through engagement with independent pharmacies, adjustments to co-pays and buy-downs and improvement in the prior off process.

Now I'd like to turn the call over to Linda, our Treasurer, to discuss our debt and liquidity position.

Thanks, Rob. First, focusing on our liquidity. While we have revised our guidance for 2016, our current and forecasted liquidity position remains solid. As of March 31, we had $1.3 billion of cash and as of today we have approximately $1.2 billion of cash.

We remain focused on reducing our permanent debt which includes our term loans and bonds. Year to date, we have repaid $730 million in term loans through various maturity payments, amortization payments and payments using asset sale proceeds. We have $273 million in mandatory payments remaining in 2016 with minimal amortization requirements in 2017.

Our credit agreement includes two maintenance covenants, a secured leverage ratio and an interest coverage ratio. We are in compliance with both financial maintenance covenants in the first quarter and we continue to expect that we will remain in compliance with both financial maintenance covenants throughout 2016. There are no financial maintenance covenants in our indentures governing our bonds.

Reducing our total leverage is one of our priorities. Based on our revised 2016 guidance, we expect our net leverage ratio to be approximately 6 times or less by year-end 2016.

Moving to slide 15. We remain committed to using the vast majority of our cash flow to pay down debt. Based on our revised guidance, our cash flow available for debt repayment and other purposes has decreased by $500 million from the $2.2 billion in our March investor call and is now $1.7 billion.

The reduction in our cash available for debt payment and other purposes is less than the reduction in adjusted EBITDA, primarily due to a reduction in the use of cash for working cap. In the first quarter, our working capital was a source of cash. Based on our revised guidance, we are projecting working capital to be approximately neutral to cash flow for the year.

The projected cash flow for debt payment is weighted towards Q2, Q3 and Q4, as we completed the Sprout payment of $500 million in the first quarter. In our March investor call, we said we expected to pay down at least $1.7 billion of permanent debt which is our term loans and bonds. We remain committed to repaying $1.7 billion of permanent debt through our cash flow and proceeds from potential non-core asset sales.

Based on debt repaid to date and our upcoming yet-to-be-paid mandatory Q3 and Q4 amortization payments under our credit agreement, we will have paid over $1 billion of term loans, leaving an incremental $700 million of permanent debt repayment to meet our goal. We continuously monitor the market and will remain opportunistic across our bank debt and senior notes to pursue the best approach to meet our goals. As we look forward into 2017, our cash flow available for debt repayment will improve, as we would expect it to be greater than $2 billion, as we do not expect to have payments similar to the Sprout payment as we focus on our existing operations and reducing our leverage.

With that, I will turn the call back over to Joe.

Thank you, Linda. On slide 16 you see Valeant's stabilization plan. I've been at Valeant for approximately one month now and I'd like to outline on this page the areas that we need to address and improve.

I believe it's a three-step process, to be clear. First, the stabilization process of Valeant which I think will take three to six months. That would be followed by a turnaround stage and ultimately a transformation stage that will take a multi-year process for Valeant. Today's discussion's really going to be limited the stabilization plan and what we think are the important elements of that stabilization plan.

Number one. We need to drive engagement in the Company. We need to re-recruit Valeant employees back to the Company. We need to add some additional outside talent. And we're going to work very hard to re-engage with our partners, the patients, the prescribers, the payers and investors.

Number two. We want to reallocate strategic resources at Valeant to fix the dermatology business, accelerate Salix growth which is already quite good, as Rob mentioned, but I just want to clearly reaccelerate that growth.

Number three, we want to refocus R&D dollars into investment for core assets of ophthalmology, dermatology, GI and consumer. We want to manage the neuro and other business for cash generation and to pay down debt.

Finally, we want to execute on the priorities that we already know to exist. We want to improve patient access and address pricing issues. We want to execute on non-core asset sales to help reduce the complexity of Valeant business. We want to focus on debt reduction and intend to cooperate with all government inquiries and seek expedited resolution.

On slide 17 we have identified an action plan and begun its implementation for dermatology. First, we must repair our corporate reputation and regain trust with all of our stakeholders. This will be done through a number of initiatives, including CEO actions of customer engagement and overall pricing and access. We also will reiterate our support to the fields of dermatology and podiatry, both R&D and corporate investment.

We also must rebuild the access with the Walgreen program and the independent pharmacy. We've been launching a new coupon program with independent pharmacies in June and we will continue working with Walgreens to improve the patient and prescriber experiences.

We must restore profitability at Walgreens through the implementation of reimbursement and prior authorization support via qualified third parties. We have contracted with a third-party vendor that will take over this process in June.

With respect to dermatology, I want to make sure that you're aware a significant portion of our Walgreens prescriptions have profitability significantly below our internal projections and meaningfully below non-Walgreen prescriptions. In some instances, these prescriptions actually have a negative average selling price. The vast majority of the revenue shortfall in dermatology in our revised guidance relates to this average selling price shortfall.

The good news is that we believe this problem is fixable and we are working collaboratively with our partners to address these issues. It is in Walgreens' and Valeant's interest to fix this problem. If we are successful in improving the Walgreens ASP there will be an additional upside to our current derm latest estimate. We will continue to advance our rich pipeline and demonstrate our commitment to the field of dermatology also in terms of the action plans for dermatology.

Now, on slide 18 there are some early indications of recovery. We've begun to see the process to stabilize this business and see some early indications of recovery. We've seen an uptick in prescriptions in May, which obviously is an encouraging sign but we still have a lot more to do. We are just about to launch an access program for independent pharmacies that will improve the patient experience.

On slide 19, as with dermatology, we have a plan to accelerate the Salix franchise. The problem with the Salix franchise, we had significant sales turnover with the Salix integration over the last 12 months. We have appointed a new leader to stabilize the organization and accelerate growth.

We have also launched a new hepatic encephalopathy education and sales material to both doctors and patients. And we have also deployed an additional 67% incremental sales reps for hepatic encephalopathy to drive growth. We have also reached out to 12 major teaching institutions and launched a new educational program about HE. In addition to education, we are improving patient access and adherence through the optimization of our reimbursement hub and other patient assistance programs.

On slide 20 you can see that Xifaxan retail TRx was growing 32% versus last year. But we see tremendous opportunity for the brand given the new indication and the continued potential with HE. There remains a significant unmet medical need in HE patients, as experts estimate that up to 5.5 million patients in the US have cirrhosis. Of this population, it's estimated that up to 2.2 million are at the risk of developing overt HE.

Annually, over 600,000 patients are discharged from the hospital with HE being the primary diagnosis. We estimate the total market revenue opportunity in the US for HE is at over $5 billion.

On the IBSD opportunity, roughly 10% to 15% of the US adult patient population suffers from IBS and 65% of these have a diarrheal component. Despite new treatment options, many of them are undiagnosed and are not treated. This represents another Xifaxan growth opportunity.

On slide 21 we continue to see steady growth in Xifaxan scripts on a year-over-year basis but to be clear, they are below our previous expectations. The performance of the new sales team should accelerate the franchise in other Salix brands to continue to show additional growth. Finally, we continue to invest in the pipeline opportunities to sustain long-term growth, including oral Relistor.

Moving to slide 22. Although Valeant has areas that need stabilization and improvement, I believe that we have a solid future ahead. We have a strong global portfolio of brands. We have a plan to fix dermatology and drive momentum in Salix.

We have a steady performance in consumer, contact lens, dentistry, oncology, generics and in Asia. We have an attractive R&D pipeline that will drive future growth. We have improved our US market access and a strong cash flow generation.

Let me talk about a few of those. Slide 23 provides a brief view of our numerous Valeant brands and the magnitude of our franchises.

On slide 24 we summarize we have approximately $3.5 billion of consumer-oriented durable products that collectively have operating margins at roughly 37% and growing in the mid single-digits. This would include the Bausch & Lomb products, lens, solutions, as well as CeraVe and other topical products. I will let others speculate on the value of this part of our Valeant business but a durable global growing business with a 37% EBITDA margin is certainly a very valuable asset.

Slide 25, Dendreon's another valuable but under-appreciated business within our portfolio. Provenge delivers a statistically significant benefit, a 38% improvement in three-year survival rate versus control. Over the past year, the team has turned the business to a profitable, growing business by targeting the right prescribers and improving the gross margin by more than 10%. We expect to see this business continue to grow nicely as urologists now make up 49% of the business and have increased their enrollments for Provenge infusions by 22% year over year in Q1.

On slide 26, over the past few months there has been much discussion about managed care access across our portfolio. We have made significant progress in forging new relationships with our partners and feel that things are stable for our products. We are improving our commercial access with several key brands, as well as improving our Medicare Part D coverage in the second half of 2016.

Beginning June 1, Jublia is now covered on AARP without a prior authorization and the Lotemax family of products moved to a preferred brand on the Aetna Medicare Saver Rx plan. Finally, our managed care team is now focusing their efforts to maximize formulary access for our upcoming launch of products.

In summary, from a US market access perspective, we are well positioned for 2016, 2017 and beyond. Now I'm going to turn the call over to Tage who heads up our R&D operations. Tage?

Thank you, Joe. On slide 27 you will see a summary of our R&D development programs. I continue to believe that Valeant has one of the most productive R&D organizations in the industry. Unfortunately, our R&D organization is misunderstood because we focus on the results of our pipeline rather than the financial investment.

This slide is a testament of our output-driven R&D model. We have a significant number of active programs in all of our core therapeutic areas. It is the output and results that matters for patients and physicians which enable us to bring new and improved treatments to patients' lives.

In 2016, we plan on launching 20 new products. Additionally, on slides 28 and 29, you will see our drug development success rate in dermatology is significantly higher than the rest of the pharmaceutical industry, with 100% success rate in our Phase 3 dermatology development programs as noted on slide 29.

Slide 30. We currently have three products under review at the FDA, two with PDUFA dates next month and one in November. Relistor Oral, which as you know, is the oral formulation of our currently approved Relistor subQ injection for the indications of opioid-induced constipation in patients with advanced illness and patients with chronic non-cancer pain.

Latanoprostene bunod is for the reduction of elevated IOP in patients with open-angle glaucoma or ocular hypertension. And finally, Brodalumab is our monoclonal antibody that targets the IL17 receptor antagonist. It is for the treatment of moderate to severe plaque psoriasis for patients who are candidates for systemic therapy or photo therapy.

As you may know, we are currently preparing to go before an FDA Advisory Committee sometime this summer. Brodalumab MAA has also been accepted by the EMEA.

Finally, on our website you will see a quick snapshot of some of our key R&D programs in development. You can also find where we'll be presenting upcoming development data and abstracts at this year's medical conferences.

I will now turn the call back to Joe.

Thank you, Tage. In closing, I believe that Valeant is an exceptional Company with a diverse collection of leading healthcare franchises and brands that will make a difference in peoples' lives. We have a steady performance in the majority of our business and we have an attractive R&D pipeline that will drive future growth. We have a stabilization plan and we will execute on this plan.

We've hit a few speed bumps in certain businesses that we need to you address but we also have an important catalyst for later this year and next year and we are generating strong cash flow. The past year has been tough on everyone but we will work through this period, do the right things and be a stronger Company in the future.

Now, operator, let's open up the call for questions. Operator, please.

(Operator Instructions)

Louise Chen, Guggenheim.

Hi, thanks for the question. My question is on Bausch & Lomb. We get a lot of questions on this business and there hasn't been an update in a while. So just curious how we should think about the EBITDA for this franchise and the growth going forward.

Thank you, Louise. So I think probably the best thing I could say on it is relative to the slide that we had in the presentation. It's a $3.5 billion Company or segment of our Company.

Now, to be clear, that also includes some other parts of the business that we think are consumer-oriented, things like the CeraVe, the dermal products, some OTC products, et cetera. But the Bausch & Lomb, the majority of that is ballpark in that $3 billion, $3.5 billion range in terms of a business for us. I do expect that we'll be able to provide some additional guidance as we look at how we do our future guidance but for right now I think best probably I can give you the size of it.

In terms of the growth rate, I think if you look at the words that we used, a mid single-digit growth rate, the number we used in the presentation was 4% but I think that's the kind of growth we're seeing in it. And as I said, what I think about it most specifically since I joined the Company, it's a very durable business. It's a consumer-oriented business. If you think about the contact lenses, what's in the solutions for all the patients. We've got some vitamins in there in terms of for patients that have ophthalmic vitamins and things like that.

We think it's a very stable business. It's growing somewhere in the mid single-digits, 4% is the LTM number for it. And we hope to provide maybe a little bit more guidance on that as we give a little bit more segmentation information as we go forward in the future. Operator, next question.

Tim Chiang, BTIG.

Hi, Joe. I know you've been at the Company only about a month or so, but I think there's been a lot of questions in terms of whether or not you would pursue a sale of key segments within the Company. Are you guys still focused on just selling non-core assets at this point? How does the guidance reflect the potential for some of your assets being sold at this point?

Sure. That is a question that I've heard a couple different times now. I think the way I'd have to say it is that based on 30 days -- and I have to put it as a caveat, it's only been 30 days now -- my review of the business is that really there are some very important core assets within the Company. The core assets that we see are clearly the Bausch & Lomb franchise, the Salix franchise, the derm franchise and the consumer franchise. We view those as core assets where we want to spend behind those, spend behind them both in R&D, capital expenditures in terms of what we're looking at.

Having said that comment, there are some areas of the Company that I would refer to as non-core. I don't want to go into the specifics of them, but the non-core area are places where we will look to potentially look at asset sales.

We think those asset sales there can help do two things. Number one, it can certainly generate cash to pay down debt. Number two, I think this is also very important one, is that it can reduce some of the complexity of our business by selling off some of these assets that are good assets but they are complex and they do result in a more complex business for us.

I would say right now our view of this is we'll look to sell non-core assets to reduce complexity, to pay down debt. That would both be, I would say, mostly in the area of non-core is what we're going to look at this time. And non-core could be both products and/or some geographies of the world are the areas that we'll look at for, what I would call, non-core asset sales. So I think that's probably about as far as I can go relative to my first 30 days, Tim, with the answer. Operator, next question.

Gregg Gilbert, Deutsche Bank.

Thanks, hi, Joe. I want to try to contain myself to one two-parter. Your largest revenue line, neuro and other, in the quarter was pretty robust. Can you offer any color there and talk about how durable you expect that to be?

My second part is, Joe, have there been any offers to acquire the Company? And were they above or below the stock price? Perhaps you can describe your philosophy on the independent future of Valeant and how you would handle such approaches if they occurred, particularly in light of media speculation. Thanks.

So let me start with the first part of this question, in terms of revenue and the robustness of the neurology. I think Rob talked a little bit about that in terms -- and I'll probably talk about it. Rob may want to add some more comments.

Certainly, as we put together the plan for neurology and other, it's a very diversified business. It's a business that has a number of different products in it and clearly the performance there has been acceptable. We've got some areas where on product A or product B we're going to do some things.

For example, as we built our guidance out here, we built into the fact that for two products in there, Isuprel and Nitropress, that we've announced a rebate, a volume discount rebate. And that volume discount rebate will be between 10% to 40% discounts for hospitals that are acquiring Isuprel and Nitropress. We had to build that into the numbers beyond the first-quarter results.

Secondarily, there is an expectation that Nitropress may go generic sometime in the next 12 months. So we had to build that into our concept for the full year. Rob, anything you want to add to that part?

I'd just add three points. One is Xenazine which there now has a generic has been going down but actually holding up quite well. And as you point out, Gregg, the business had a very good first quarter.

TRxs have continued to come down and we obviously announced the GPO rebate of 10% to 40%. So this is a strong business but those are three headwinds that it will have for the rest of the year.

Then the final question, Gregg, on acquiring the Company, obviously you know I'm limited to what I can say in answer to that question. I think we've got a very strong future as a Company. As I said, there are some non-core assets that we will look to divest and specifically if they can help us to reduce complexity and also to help us pay down debt. But I think as I've really tried to lay out the story here, I think we've got a very bright future.

Clearly we have some challenges. I mentioned the challenge with the dermatology program and what we're doing with Walgreens and some of the negative ASPs, the average selling prices we're dealing with in dermatology. But I think all those things are fixable. Once we get that behind us, we think the Company has a very bright future and one based on comments Tage made, on our pipeline which I think is misunderstood and I look to move that forward and try to change perception of our pipeline for the future.

So I think I'm going to probably limit my comments on any acquisition of the Company other than to say we will look to sell some non-core asset sales, specifically to help us to pay down debt and to clearly to reduce the complexity of our overall business. Operator, next question.

Chris Schott, JPMorgan.

Good morning, this is Wendy Lin on for Chris. Thanks for the question. Can you talk about the few challenges in the dermatology franchise and the Walgreens implementation that need to be addressed? What is driving the profitability challenges? What are the next steps towards stabilizing the franchise? How long do you think it will take before we see meaningful improvement? Thank you.

Thank you for the question. I think it is a very important question in terms of what we're trying to do with dermatology. Dermatology, there's two real issues, I think, is the way I'd probably say it. One issue with the program is just ensuring that we continue to get access as we've seen some change in the channel dynamics as we switch from a specialty pharmacy to putting together a program with Walgreens.

The Walgreens program is a great concept but it is a new program. With any new program there are speed bumps that you go through as you put together the program. I think both what I've seen so far is that Walgreens and Valeant are very committed to getting these speed bumps ironed out.

I've already had several calls and in-person meetings with Walgreens in my first 30 days. And I've got a meeting next week with the Walgreens CEO and the US leadership to talk about how we can work through some of these programs, activities that are part of the issues with both the prior authorization, as well as the average selling price.

The average selling price, though, is an issue and I tried to lay that out in my comments. The issue is that there is a percentage of the business where the average selling price is significantly below what we had previously expected as we put the program together. And in fact, in some places that average selling price is negative. By that means, every time a prescription goes out the door we're taping dollar bills to that prescription as it goes out the door.

That's something that we have to get fixed. I'm confident that it will get fixed. It doesn't make sense for it to continue as is. But until we get that fixed we tried to be realistic in our looking at the dermatology business for the future. Once we get this fixed, and when we get this fixed we are very confident that we'll generate some significant upside to dermatology.

But I be careful about how long it will take because I think that's still something we're trying to work through with our partners. I probably don't want to go into the exact details but I do hope to have meetings in the very near future with our Walgreens counterpart to talk through some of the issues there for that program.

The other program clearly is to make sure we have sufficient couponing out there for independent pharmacies and that's going to happen in June. So that clearly, we think, will be another important part of the program to be fixed.

So I think that really tries to address the questions you had relative to the key challenges with our dermatology program and some of the -- speed bumps is the word I use for the Walgreens program. Operator, next question.

Annabel Samimy, Stifel.

Hi, thanks for taking my question. And a little bit along those lines, both in dermatology and in GI, we're talking a lot about ASPs being down. But it seems like you had improved that market access for these promoted products in 2016, both for some of the key dermatology products and some of the key Xifaxan products. And the volume trends seem to be stable, if not going up a little bit. So what is it -- maybe more address dermatology but maybe more specifically on Xifaxan, what is it that's causing the net revenues to be much lower than what would be indicated from some of the visible metrics that we see?

Well, first and foremost, I want to make sure I address -- the dermatology, let me talk about that first, then I'll get to Xifaxan. On the dermatology, really it is this issue that I talked about, some of the ASPs, or average selling prices, being below what we had expected. But it goes back to the comments that I made on the Walgreens program on the previous call.

So I'll probably leave that one aside and spend a minute talking about what we're seeing with Xifaxan. I also have Anne Whitaker here who may want to add some additional comments. She's been the individual that's done a great job -- her and her team -- on improving our market access.

Suffice it to say, I think that we are very excited about what we see with Xifaxan. But we have to be candid. The perception, or certainly the situation we find ourselves in right now, is the product is under-performing where we expected it to go. But to be clear, it's up 32%. So I think 32% is a great number year over year in total prescriptions.

But as we looked out for the full year, we have seen some disruption. The disruption was in the sales force. Over the last 12 months we had sales force disruption. As we looked at that sales force disruption we addressed it. We put a new leader in. We put incremental sales force effort behind Xifaxan. We think that's going to be an important part of the solution.

But there is some ASP questions that were really as a result of some of what I would refer to as gaining some additional access and gaining preferred access which we think are good tradeoffs. But Anne, you may want to make a comment a little bit more about that.

I think we've improved the access. Of course, Xifaxan had good access but we had some cleaning up to do to ensure that all the plans had the full labels, including the IBSD indications as well. And so we do see a number of prior authorizations for Xifaxan.

What we experienced, I think, as we came into the first part of the year was just a transition actually with the vendor who was supporting us with our PA process. And then, secondly, we know that high deductible health plans that more patients enrolled in them this year than previous years. And when a product like Xifaxan you see the impact there as well.

So I feel good about the access going forward. I feel good about our hub services going forward as well. I believe we cleaned up some of the label issues, or labeling that the plan did not have updated.

Thank you.

Thank you. Operator, next question.

Andrew Finkelstein, Susquehanna Financial.

Good morning, thanks for taking the question. I was hoping you could address a bit more about some of the trends outside the US. There's certainly a lot of focus on key products you have here. You talked about the importance of the larger global footprint. I think you gave some details on the amount of destocking in the first quarter, preferably on an organic basis.

The Amoun acquisition was a sizable contributor offset by the destocking. If you could talk about what that business looks like going forward and how to evaluate what the run rate is forward and how you think you can leverage it as you move forward (technical difficulty).

Thank you, thanks for the question. You were breaking up a little bit. I think the real question was to focus on what's happening outside the US, what's happening with emerging markets and where are we with that relative to both the growth rate. But also just how we are looking at it when you take out the headwinds and the tailwinds out of the emerging markets numbers and some of the products there.

So number one, the Bausch & Lomb franchise in the emerging markets continues to perform very strongly. One of the things that we had to do is add some incremental capacity for some of our new contact lenses because the performance has been very strong with the products. We are very pleased with that.

Number two, I would say -- that was especially in Asia -- number two, I think one of the comments Rob made I think is really appropriate here to say. Although GAAP revenues were up 4%, if you take out some of the normalization of the inventory question, same-store sales would have been growing at about 10%. So we think that's a really strong performance in emerging markets.

Number three, what I'd probably say that I think is an important comment before asking Rob if he wants to add anything, is that the other important point I would say about our ex-US or emerging markets segment, is that much of it is either Bausch & Lomb brands which is obviously, we think, has a very durable business or they are branded generics. The combination of both of those, we think, are very durable assets. And I think that's one of the real important points about the Valeant ex-US business.

It's either in Bausch & Lomb which has many consumer-type assets which we think are very durable. Or it's in the branded generic business which also has a very durable business.

So I think for both those reasons, as we think about the future, we're very excited about what the opportunity is there because the durability or sustainability of both these business segments of Bausch & Lomb and also branded generics. Rob, anything you want to add to the emerging market segment question?

I appreciate the question. From a regional point of view Latin America has seen continued good growth, as has North Asia. And then if you go inside the regions, you have bright spots, as I mentioned, in parts of Europe. I do think this is an area, and as we mentioned, when you make that correction of the inventory draw-down in Russia and Poland, you see overall emerging growth to the levels that I think we've had before, of nearly 10%.

Thanks. If I could slip in a clarification on two things on guidance. There was a change in the expected working capital build for this year. If you could clarify that. And does guidance include any revenue or costs for the key PDUFA products, the Vesneo or Relistor that could be approved and launched this year? Thanks.

Why don't I turn the first part of that question to Linda on the working capital and then I'll take the second part.

Sure. On working capital as we talked about before, we would expect -- we usually look at where revenues are going. And with the change to revenues relative to last year, while one could even potentially project there, we could have potentially projected a source of cash. At this point, looking at the year and how things have progressed, we're projecting it's going to be neutral to cash. Just think of it relative to where revenues were in 2015 versus now and the growth between those two years.

And Linda, the comment was about some of the milestones like for Verota and some of the other things. Those are also built in at this time.

Correct. So if you look on --

Sorry to interrupt. I was asking if there was any revenue or launch cost in the guidance.

Okay. It was more than the milestones. There is launch cost in there, but to be clear, the Verota product is a late in the year 2016 -- late 2016 PDUFA date. So I don't want to suggest -- there's no revenue at this time and we're going to get ready for launch, but there's not an actual launch. That will be planned sometime in early 2017, to be clear.

Thanks very much.

No revenue. Okay, next question.

Umer Raffat, Evercore ISI.

Thank you for taking my questions. First one for Rob, if I may. Rob, can you confirm the covenants on interest coverage are $4.7 billion, that you implied EBITDA currently? And more importantly, where do you think it is in 2017 starting second quarter? Does it approach $5 billion or not? That's the first and probably the most important question I'm getting as well.

One for Joe. Joe, I just want to understand what exactly is the EBITDA for Bausch and for Salix? I know there's that slide 24 in there that implies a certain EBITDA margin. But I just want to understand, in dollars what is Bausch and what is Salix right now?

And finally for Anne. Anne, where exactly are you guys right now with managed care conversations on the commercial side specifically? Thank you.

We'll try to answer your one-part question, Umer. (laughter) But try to get to it. First of all, the question on the covenants and, Linda, you want to take that part of the question, please.

Sure. Umer, there is not one number for the covenants as you would expect. It's an LTM calculation. It's going to vary by quarter. Most importantly, as we said, based on our current guidance, we expect to remain in compliance of our financial maintenance covenants for the remainder of the year.

What about 2017?

We have not provided 2017 guidance at this point.

Okay. But could it approach $5 billion, the covenant, starting second-quarter 2017 when the interest coverage threshold approaches 3X?

Umer, we have not given 2017 guidance and what you're asking is not clear to me.

Let me try to summarize a little bit. Linda, if I say anything incorrectly make sure you correct me. It obviously has a lot of variability based on the LTM. Ballpark it's in that -- for the 2016 -- ballpark it's in the range of somewhere approximately $4.7 billion. But there can be some variability and we've got some comfort with where we are versus that number in a very simplistic way. There's a lot more details that go into that but conceptually it's somewhere in that relative range.

I'm going to bridge to the next question about EBITDA on Bausch & Lomb and Salix. We're not at this time prepared to put forward the exact EBITDA numbers for each individual business. The reason I gave the Bausch breakout -- and it was really more consumer because it was both Bausch and some of our derm businesses -- is that I wanted to give a perspective on what I think is a very durable business in terms of what we have with Bausch & Lomb in terms of it being predominantly consumer. There's some obviously parts of it that are not consumer.

But I do think that durability is an important part of really a very valuable asset and that's why we gave the operating margins for the Bausch & Lomb business. I think by any stretch of any valuation model, that would be a very valuable asset for the Company and that's really the reason I gave it. We're not going to give out the specifics, though, on the Salix at this time.

Look to, though, the future that we will look to provide more detailed information as we look at the appropriate way to guide for the future. But based on the 30 days, I think we'll leave it at that. And then, Anne, there's a question on the managed markets you want to comment on?

Yes, Umer, your question was where are we in the discussions with the managed markets, the payers and such. And so we've had a lot of discussions over the past 9 to 10 months and I'm very proud of what the team has accomplished. I can safely say that I feel our portfolio is secure for 2016, based on the discussions that we've had with regards to commercial and then with any -- of course no changes with Part D for this year.

Now, I say that with a caveat that payers often will do category reviews on a quarterly basis. So we could get a notice from a payer that they decided to do a category review for Q4 or something this year. But that's the situation that every Company is in.

So our conversations today with the team and with our payer customers are focused on 2017. We have our bids in for Part D. And for commercial for 2017 it varies by plan. Some we're just doing extensions. Some we're doing category reviews as they come up. But I feel very good about the access we have today and that we'll be building on that for 2017.

Thank you, Anne.

Thank you very much.

Operator, next question.

David Risinger, Morgan Stanley.

Thanks very much. I have a question with respect to the negative ASPs. I guess it's multi-part and I apologize, but could you just explain why there are negative ASPs, how you will fix that, and then whether there will be any negative impact on Rx trends as a result of raising ASPs? Thank you.

Sure. David, this is a multi-part question that I'll try to give my best towards. What we've done is first and foremost, I'll say we are very excited about the Walgreens program and we think we've got a great partner in Walgreens and we're looking to work through some of these questions.

The program, as you know, is a very innovative program, it's a 20-year program. And naturally when you put something together that's innovative, you're going to experience some speed bumps. And that's the way I would describe what we see today, is just some speed bumps between as we put together different parts of the program.

The program -- and I'll try to do it as briefly as I could -- when you come forward there are different patients that walk in the door. Some are clearly covered by commercial insurance. Some of them are covered but there is a prior authorization in place. Some of them are just simply cash paying customers. Depending on which type of customer you are, you're going to enter into a certain pathway for how your prescriptions are reimbursed and what they look like.

The issue that we find is that as we went through this, there are some customers, patients, that as they go through this pathway we find that we're receiving a reimbursement or not receiving reimbursement depending on what's happening with that patient, what's happening with the prior authorization, whether the prior authorization gets rejected or not gets rejected. That is causing some of what we would refer to as a negative ASP. That is then driving down the ASP with the Walgreens program versus our non-Walgreens customers.

It is our you attempt, and the reason I believe it can be fixed is that we now have the data to look at that. We know exactly where it's coming from. We know the types of patient issues that we can address. And we can work towards that in terms of trying to improve the overall program and, importantly, the ASPs. That's the reason why I'm very comfortable I can fix this, we can work very closely with Walgreens to fix it.

I can't exactly give you what's going to happen with the Rx trends because that would be a speculation that I'm not yet prepared to do. But I will say that we understand what can be done with the ASPs and we know the types of patients that this is impacting and we'll put together a program in place and work with our partner to get that resolved. I do think -- the bottom line is we do think it's fixable.

Great. And then in terms of the second-half generics program, is that going to happen or not?

The generics, there is a generic program which we referred to, I think it was called Plan B. It is scheduled for later this year and we are working closely with the Walgreens team to make that happen.

Once again, it's a very novel concept. It's a concept that is based on having more dispensing of our branded products in place of a generic. We do think there's a large part of value, especially with the prescriber base. Because I think the prescribers -- I clearly believe there are some important vehicle differences with -- especially in dermatology products. So we do look forward to working through that program with Walgreens. But once again, it's slated nor the second half of the year at this time.

Thank you.

Operator, next question.

David Amsellem, Piper Jaffray.

Thanks. A question on the US neuro and other segment. A lot of these products are off-patent or going off patent. Can you talk about the extent to which we'll see generic competition, either this year or next year on some of the key products?

Put another way, for products like Nitropress or Isuprel. Should we think about generics coming this year or next year? And you how you're thinking about the erosion of that business due to competition. Thanks.

I'll start and, Rob, if there's things you want to add to this. This is something we have looked at very closely. We've looked at the total US neuro business. Really it's a diversified product business, is probably the best way, because it's not just a neurology business. As you point out, there are a number of products that are off-patent or soon to be off-patent.

We do expect the generic competitors specifically on Nitropress and Isuprel. We expect them really sometime in the next 6 to 12 months and that is the current expectation. There are some additional generics that we expect in our portfolio. They tend to be in some of the other areas, some dermatology products like Ziana and other products that we do expect some generics and we built that into our guidance for 2016 and beyond. Rob, anything you want to add to what I said?

Just the three. Zegerid, our current expectation is Q3. Isuprel, Nitropress and Virazole, our expectation is early in 2017.

Thank you.

Operator, next question.

Cindy Guan, Goldman Sachs.

Hi, thanks very much. I was wondering if you could give more color on the performance in ophthalmology Rx this year and what's the outlook there? Then secondly, have you had any conversations recently with the rating agencies in terms of what they're looking for in determining whether they would downgrade or remove the negative outlook? Thank you.

I'll start with the performance of the ophthalmic Rx. I also have Ari here with me. Ari, if you want to add any comments you're welcome to do that as well. I'll turn the rating agency question to Linda.

On the question of the ophthalmic Rx, I think probably the most important thing to say there is that we've got some new products coming into the portfolio. Specifically, the product that Tage mentioned, latanoprostene bunod, is we think, a really exciting product. The data on the use of products for glaucoma is actually that latanoprost or Xalatan, a product that actually came from my past when I was with Pharmacia, is still the market leader. It still has ballpark two-thirds of the market is in the treatment of glaucoma is in the area of latanoprost, otherwise known as Xalatan.

We have a product that is better than -- or we believe that will be better than Xalatan or latanoprost. And that is the reason that we're very optimistic in terms of the future.

Now, to be clear, we need to get it approved and we are awaiting the FDA process for the approval on that. But I do think, though, that latanoprostene bunod that Tage talked about, is really exciting part of our future.

Ari, is there anything else you want to talk about? I know we've got a number of programs we're putting together for market access with our ophthalmic business. Anything else you want to add?

yes, maybe a couple points, Joe. One is the three flagship brands or segments, the Lotemax franchise, Prolensa and Besivance. All performed well from a share point of view in Q1. Lotemax and Prolensa grew the monthly scripts 6% and 2%, respectively, both gaining share in the overall market. Besivance declined on a TRx basis 5% but actually gained share in the branded segment.

Okay, thank you. And Linda, there was a question on the rating agencies and recent conversations.

Sure, Cindy, we continue to have regular dialogue with both S&P and Moody's who cover us. And as you would expect, they will, from those dialogues and their individual work, make their individual assessments.

Thank you, Linda. Operator --

Were the two included in guidance or no? Relistor and latanoprost? Were those included in guidance assuming they get approved in July?

We did include them but at a very small rate. Obviously reflecting putting some type of probability weighting on -- we expect to get them approved. Exact timing you always want to make sure you're somewhat conservative in timing. But yes, they're included but very small at this time.

Okay, thank you.

Next question, operator.

David Maris, Wells Fargo.

Hi, Joe, my questions have to do with transparency which is what you started the call with. A few things. First, in mid-May you reaffirmed first-quarter guidance but didn't reaffirm the year. Can you walk us through why you didn't withdraw guidance at that point?

Secondly, why no GAAP EPS guidance? It seems like providing GAAP and then building to non-GAAP is more in keeping with the SEC's goal and use of GAAP and non-GAAP.

And then third, what did the SEC subpoena ask for? And what are they investigating?

Okay. I'll start with the commentary on guidance and then the commentary, Rob, if you want to make some comments specifically to the GAAP question that David asked. Let me start with guidance.

So transparency, I do believe it's a very important part and something I clearly continue to hope to improve the transparency of our numbers. Today we report in two areas and I hope to look at that in terms of both the developed markets and the emerging markets and look to provide some additional clarity. As what we did with today, a little bit of a start just on what we said about the Bausch & Lomb and consumer franchise and also Dendreon. My hope is to provide greater transparency over time.

On the specific question of -- I joined the Company on May 2. My first 30 days have been filled with, David, is to really get a much better understanding of the business. I've been doing business reviews with all of the businesses and I really wanted to make sure I understood what was up, what was down.

As with any business, and certainly the Valeant business is no different, there's some things that are going up and there's some things that are coming down. And before I made any changes in numbers I felt it was most important to really understand the businesses from A to Z, to really understand where are we with the business and why are we there and importantly what are the action plans. That's why to me, as I talked about it, I really talked about the concept of what I was doing with this business, really being a stabilization of the Company in the near term, then moving from stabilization to turnaround and then finally going to transformation.

My comments today are limited only to the stabilization portion of the program and activities because I think that is clearly the first area that needed the attention. I think that's a three- to six-month process. And then we'll bridge to the turnaround and the transformation.

But my comments about the guidance were it takes a lot of work to really understand what's happening in the business, especially one that has the complexity that the Valeant business has. And I've been working very diligently in my first 30 days to make sure I did that. Rob, also some questions on the SEC, the GAAP numbers and --

Let me start with the GAAP. We find for our investors it is more informative to guide to the non-GAAP. And we don't feel we can accurately predict the GAAP guidance. In terms of the SEC investigation --

If I could just interrupt for a second. What you're saying is it's easier to guide to non-GAAP adjusted earnings than GAAP earnings, or that's what investors want, which is that?

I'd say it the following way. I'd say our history has been, as with many companies, David, is that we've guided to the adjusted numbers and I think that's really the way we did it in the past and we'll continue to do it for the future.

The final part of your question, David, was the SEC letter that -- what's the issue there. The letter that we received concerned the Company's former relationship with Philidor, its accounting practices and policies and any public disclosures on the matters with the question that we had from the SEC. That was what we are addressing and will continue to work with the SEC.

As I said, as a matter of policy, we will work with all government inquiries and try to be cooperative and, importantly, get those resolved as quickly as possible to put those behind us and move forward. That's been my goal, as I stated in my previous comments, and I just probably reiterate at this point. Operator, next question.

Thank you.

Irina Koffler, Mizuho.

Hi, thanks for taking the questions. Can you talk about how you think about the cash reserves needed to address all the ongoing litigation? And if all of these potential legal expenses would impact your future debt repayment? That's question one.

Then wondering if you could comment on Addyi and how it's doing? And if there's any contractual reason why you can't stop promoting that or why you want to be in this business? Thanks.

Let me start on the cash reserves. Linda, you can add anything. I think there's two parts to this question. Number one is some of the issues that we're dealing with to address the litigation. And I said number one, we can't predict the exact outcome of any litigation. Obviously these are more longer-term in duration. But you I do expect, as I said in the call earlier, we're going to absolutely cooperate with all government inquiries and, importantly, we're going to try to resolve them as quickly as possible and put them behind us.

On the question, though, in terms of cash reserves, I think the important point I will add to the question, because I think it's getting to your question's really important, is that the real important issue is we get beyond 2016 and get into 2017. We'll have less, what I would call, contingent payments and milestone payments from a business development point of view. So we'll have actually more cash to put towards debt repayment as we think about the future.

And I think that's probably an important comment as people think about where we are with our liquidity, where we are with our debt covenants a as we get to 2017. We won't have some of the milestone payments and/or contingent liabilities that we've had in the past. We'd be able to pay down more debt for the future.

On the final question, part of your question was Addyi. We think Addyi's still a very good product and we're excited about what the opportunity is. It candidly needs some additional activities and Anne and the team are working hard and trying to make those happen. And Ari and the team, everybody's working to really take a look at what's required there and what's going make that product a successful product for the future.

And I think that's probably about as far as I'll say right now. We still think it's a very good pruned we'll look forward to continuing to put more resources behind it in the future to make it a successful product. Operator, next question.

Douglas Tsao, Barclays.

Hi, this is Morgan Williams on for Doug. I was hoping to dig in a little deeper to the managed care contracting. I was wondering if you could provide some clarity on whether you're still focused on bundled contracts or whether you're now looking to contract on a product-by-product basis? And then on that point, how you can we start to think about expansion and rebates as you try to improve access in derm and GI?

And then one quick follow-up on a previous question. Does the negative ASP that you're seeing through the Walgreens program affect the Walgreens activity fees or what they would receive from Valeant? Thanks.

Sure. I'm going to ask Anne to first address the managed care contracts. The only thing I'll say up front on that is clearly that Anne and her team have done a great job of getting the access that we need for managed care today. So we're in good shape with where we need to be today relative to -- as you're thinking about trying to model our business, we think we've got what we need today going into the future. But Anne, anything you want to add?

I just want to reiterate that as well. I feel good about the position that we're in today. We're secure for 2016 and I'm optimistic about expanding access for 2017.

Specifically on your question around are we bundling versus individual contracts for each of the products. Historically Valeant and the companies it has acquired has really managed individual rebates for each of the products. As we go forward, we'll work with our payer partners and understand that there's value in really leveraging our portfolio.

You might imagine in areas like ophthalmology, as we prepare to launch new products there, or dermatology, it could be advantageous us to leverage our portfolio. We'll take that on a case-by-case basis and really understand what the payers' needs are as well as our own needs and present a contract offering.

I'm sorry, I know the second part of the question was the negative ASP and Walgreens. Remind me, I'm sorry, I --

(multiple speakers) service.

Does that affect the activity fees?

No, the simple answer is no. It's a separate negotiated agreement. But I would say certainly as we go and talk to Walgreens about the program, as I said, we think it's a great program. It's a long-term program, it's a 20-year program. But there are going to be these speed bump things that we have to work through. But the negative ASP does not have an impact on the service fees.

Okay, thank you.

Operator, next question.

Doug Miehm, RBC Capital Markets.

Good morning. I'm sorry to beat this to death, but I just really want to truly understand how we're getting negative ASPs in the Walgreens business on the derm side. You did mention that you got covered lives, you got prior authorization and some cash pay. But could you walk through an analysis of how that actually occurs to get a negative ASP? And then what you can specifically do to address it.

Sure. So let me start once again and try to -- I appreciate the question and I need to be more clear on it. Partially reflects my fact that I'm only here 30 days, I think. With the Walgreens program, what happens is that patients come in three different categories.

You're either a cash paying customer, you are a commercial covered customer or you have commercial coverage but there's a prior authorization process. The issue that we come forward with is that in some cases we're actually sending out the product before the prior authorization is being approved.

And in some cases the prior authorization may be approved, in some cases it may not be approved. As you get to that situation you find yourself in a situation where there is a potential negative ASP when you go across the entire category. That is part of the issue we find ourselves in. There's also within that category we have different co-pays. The different co-pays have an impact on what the actual ASP, or average selling price, is. It is a multitude of factors that come together.

The reason I believe this can be fixed is that we clearly have the data now. We've got the first quarter behind us. We understand what's happened. We have data. We can look at that data and make decisions about what's the right way to go forward with the program. And that's the reason I have the confidence that it's in Walgreens' interest, it's in Valeant's interest to solve this. And I look forward to trying to solve this with the team at Walgreens.

Okay, fine.

Operator, next question.

Just a follow-up question with respect to your launches. We'd expect to see latanoprostene and also Relistor Oral. Can you tell us what plans are in place for the launches and when you expect those actual launches to occur? That's it, thanks.

Sure. So I think the first thing I'd refer you to is the slide that Tage went through in terms of the timing where we have PDUFA dates for Relistor and latanoprost in July and Broda is in November. Obviously we've got to work through the final stages of getting an FDA approval. I don't want to say exactly when it will happen but we do have PDUFA action dates that we would look forward to interacting with the FDA on those products. So that really is the primary metric in terms of getting the products approved -- or the biggest milestone is getting it through the FDA process.

Beyond that, we've got other action steps in place for preparation for it. We had our -- if I talk about latanoprost, for example, we had our entire sales leadership in just, I think it was 10 days ago. They were in to talk about the you launch programs and some of the things we need to accomplish. We've clearly been working on the different prior authorization process and other coverage process that will be required with the product. So we've got a number of series of steps that are built in.

We have been somewhat, I would I say, conservative on what we put in for the sales for those for this year until we get more information on exact timing, exact labels, et cetera. But we think that the action steps of getting ready for the launch are under way. It will just be a result of really trying to get to that final labeling, get the product through the final FDA process. I'm going to offer, Tage, do you have any other comments about approval process? I think I've answered that.

I think you've covered it.

If anyone has any other relative to marketing programs or the access.

This is Anne. I would just make one comment with regard to market access timeline. We recognize that in the glaucoma space it's largely a Part B patient population that we'll be going after. So we'll be working through those timelines to hopefully have the product added to formulary next year. We'll be in doubly a solid position for the portfolio and managing that the following year.

For Relistor Oral we'll be working through market access opportunities as well, on the commercial as well as on Part B. I would just caution us a bit that it takes a little longer to get access these days than it used to. We will build that into our planning for each of these launch products.

That's why we've been conservative on what we put in for sales numbers, what we did put in action steps to get ready for the launch in terms of expenses. Operator, I think we have time for maybe two or three more questions. So next question.

Alan Ridgeway, Scotiabank.

Good morning, guys. I was hoping we could drill down a little bit more on Xifaxan and what you guys are seeing. If you could potentially provide us with some more color on where the growth is coming from, as far as what you're seeing as far as on the HE side or the IBS side. And if either of those markets is particularly responsible for the under-performance versus your models.

And then as a follow-up on that, could you talk to us a little bit about what percentage of the covered lives which you now have really good percentage of covered lives, could you maybe give us some information as to how many of those still require pre-auth or don't require pre-authorization for each of the different labels. So we have a better understanding of how this market might progress. I'll leave it at that, thanks.

Sure, thank you. I want to be clear Salix. It's an interesting comment. We talked about Salix's prescriptions being up 32% year over year. That's in any stretch of any Company, that's a great product performance. So we're very excited about that.

The issue is, though, that we are seeing some disruption that occurred in our sales force over the 12-month period. That disruption was significant and, therefore, we wanted to make sure that as we thought about the future of this product, that we wanted to be realistic in what it meant for the future. And that's the primary issue.

It has less to do with the performance of the product with HE or the performance with IBSD. It had more to do with we saw some disruption in our sales force because of turnover, because of some of the changes. So we felt we needed to be realistic in how we looked at the future performance of the product.

On the question, though, I think the answer is we find both HE and IBSD as both being very important aspects. The reason HE is really is the best drug for treatment of HE patient in terms of what it means. It's a chronic utilization. So the HE patient is a very important patient for us and one that we think we can make a significant difference in the lives of HE patient and therefore we're going to continue to try to get that message out.

The clear take-away, though, from our slides has to be that if you think about what we're seeing, is that there is not -- there's a large majority of patients that have HE or have the potential to develop HE, are clearly not getting the product yet. And that's something we think that through good programs with physician education, with key opinion leader support and with working with actual patient understanding and sales materials for patients and education materials for patients, we think we can do a better job. And that's really what we're targeted to do.

But to be clear, it was not performing for the rest of the year at the level that was previously expected and we needed to reduce the number consistent with that. On the second part of the question on the covered lives, Anne, do you want -- we do have a good position with covered lives but maybe comment on the prior authorization.

Right. So again, we have 98% covered lives. I think with a product like this, to be expected, the payers have utilization management packages in place. So about 40% of the claims that come through for Xifaxan have some sort of utilization management. Most of those are PA, prior authorization, to label. In some cases it might be a quantity limit, given the new IBSD indication. The most common PA that we see is really the PA to the label.

With regard to your question around IBSD versus HE and the different rates or just different coverage, today we contract Xifaxan as a molecule. We are in conversations with payers about how to differentiate the two indications and provide different access solutions for those different indications. But as of today, we largely contract the molecule.

Thank you, Anne, for that comment. Operator, we have time for maybe one -- two more questions.

David Common, JPMorgan.

Thanks for squeezing me in. I think it would be a worthwhile confidence-building measure if you would be prepared to share the actual numbers, the numerator and denominator, the figures that go into the ratios for your two debt covenants.

And my second question which really has nothing to do with my first, if I may, I wonder if I could just characterize your guidance. Would it be the sort of guidance that you're equally likely to exceed and fall short of, a 50/50 case? Or would it be a set of numbers that you're highly confident that you can meet and/or exceed? Thank you.

I'm going to address the second part of your question first and then I'm going to ask Linda if she wants to make any comments on the guidance part. On the second part of the question on guidance, I think I've got to use the word that I used during the commentary, that we try to take a realistic view towards guidance.

However, in some areas where there is some uncertainty about exact product launch timing or exact product launch approvals, about things that we don't know exactly when it's going to happen, we try to be somewhat conservative there. Things like the average selling price, we tried to be conservative relative to -- we can get this fixed but we didn't want to build in all that fix because sometimes things like this take some time. So we tried to be conservative as it would relate to areas where we know there's some things that need to be fixed. Because once again, there's a timing question on it.

But I think in total we've tried to be -- I would phrase the guidance comment as we tried to be realistic with what we know. Where there's some uncertainty on things that need to get done, we tried to be conservative so that there would not be any over-statements in what we're trying to accomplish.

If we get a quick resolution of ASP, there's clearly some upside. If we get a quick approval and get ready for these launches, get them launched on time, there could be some upside. I think we tried to be conservative in those assumptions where there's some uncertainty in the marketplace. On the question of the -- the first part of the question on the numerator and denominator, Linda, do you want to --

David, we appreciate your feedback. What we've tried to do this quarter and we said we would do this in a prior call, is we've included adjusted EBITDA which will help people understand that metric. And while I appreciate it's not identical to our credit agreement, I hope it's a helpful piece of additional information.

It is. I appreciate that. Could I also say in the context of this guidance question, since we are about five weeks past your normal release of March quarter figures, I thought it might be worthwhile just to ask how is the June quarter?

So I think the answer I'm going to say is that we see the June quarter as being favorable to Q1, so clearly that is the first comment I'd offer. I don't think I want to say too much more specifics on it because there's still a lot of moving pieces in the quarter but we do see it is favorable to the first quarter at this time.

I will point out, though, that Rob did a nice job of showing the bridge of how we're going to build to the guidance for the second half of the year. And the second half of the year has the normal growth that we'll see in the business and the seasonality that we see in the second half of the business. So I don't want people to get too far ahead of us relative to the second quarter. Rob, anything you want to add?

Thank you.

Operator, I think we have time for one last question. Gregg Gilbert, Deutsche Bank.

Yes. Can you comment on your cash tax rate in the mid single-digits, Rob, and how sustainable you think that is? Is there a rule of thumb to think about where that can go over time and based on different variables? Thanks.

Gregg, I think we're very fortunate that we have Rob here to answer this question. We have some other additional tax expertise. So Rob, I'll turn it to you first.

Cash taxes made up the two factors which we're not breaking out the -- we're only breaking out the effective tax rate of the non-GAAP measures. Our cash tax rate includes the effect of the NOLs that will last roughly -- and I'll let Jeremy comment on the timing of those.

So our cash tax will be reflective of the use of tax attributes such as NOLs and credit as well as other timing items. Our NOLs are projected to last for the next three years or so within the US and about 10 years in Canada. So we think that will be from a cash tax perspective, an effective tax rate in the single-digits for the next five years.

Thank you, Jeremy. If we're going to bring this call to a close, I first of all wanted to thank everyone for joining us today. I understand there's a lot more information I need to provide and we tried to make today a little bit more than just an average quarter because I really wanted to talk about some of the things we are looking at strategically in terms of the stabilizing of the Company and what we're trying to do.

Having said that, we know there's a lot more we need to answer at a future call. I look forward to talking more about the turnaround program and the transformation program of the Company.

But I wanted to keep my comments today mostly to what I would refer to as a stabilization program and how we're going to fix the derm business, how we're going to accelerate the Xifaxan growth, how we look at the business on the Bausch & Lomb assets and what we think is a very durable nature of those assets. To me that's what was one of the important things.

I also wanted to make sure we had a chance to make people comfortable, that they understand the liquidity and that we have a strong liquidity position. We are comfortable with our debt covenants relative to how we find ourselves.

And there was an interesting question that I probably want to spend a second on. The question is our GAAP projections for earnings. We clearly have those but I think what we've tried to do is give people an understanding of our adjusted earnings because that really is what we think is really important for people to understand going into the future.

So I think I tried to cover all the items but I, once again, would say thank you very much. I look forward to getting out there and telling you more about what we see as some of the excitement in the future, especially with some of the things that Tage talked about, which I think is the real exciting, is how we're going to improve people's lives by launching new innovative products that make a difference in people's lives.

To me, that's the excitement. I look forward to having more conversations with all of our shareholders and debt holders in the future. Thank you for joining us today. Have a great day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.