Bausch Health Companies Inc (BHC) 2016 Q2 法說會逐字稿

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

(Operator Instructions)

Thank you. Ms. Laurie Little, you may begin your conference.

Thank you, Lisa. Good morning, everyone, and welcome to Valeant's Investor Relations' conference call, where we will be discussing our second-quarter 2016 financial results. Participating on today's call are: Joe Papa, 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. For more information about these measures, please refer to slide 2. Non-GAAP reconciliations can be found in the appendix to the presentation posted earlier today and posted on our website.

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

Thank you, Laurie. Good morning, everyone, and thank you for joining us. Today we would like to cover the following topics. First, we are reaffirming our 2016 full-year guidance. Next, Rob will cover second-quarter 2016 financial results. I will then cover the progress we have made since the quarter one call in June. Then lastly, we will unveil our plans for the new Valeant.

To begin, on slide 5, we are reaffirming our 2016 full-year guidance of total revenue of $9.9 billion to $10.1 billion and adjusted non-GAAP EPS of $6.60 to $7. We continue to expect an adjusted EBITDA number from $4.8 billion to $4.95 billion for 2016. We've made significant progress in the last 60 days in identifying our challenges and have begun executing on our plans to accelerate growth and profitability in the second half of 2016. We will talk more about this later.

I would like to turn the call over now to Rob to review the second-quarter 2016 financial results.

Thank you, Joe. Before I begin, I want to point out that our GAAP and non-GAAP financial summaries can be found in the appendix of this presentation and in our press release issued earlier today. For the second quarter of 2016, our total revenue was $2.42 billion, an improvement from the first quarter of 2016. When combined with the first quarter, this represents approximately 48% of the midpoint of 2016 full-year guidance.

Adjusted COGS was $630 million in Q2, or 26% of sales. This was slightly higher than the first quarter due to unfavorable product mix. Adjusted SG&A spend of $662 million improved on a sequential basis, and represented 27% of revenue for the quarter.

In Q2, adjusted SG&A excluded $10.2 million in legal and other professional fees associated with legal and governmental proceedings or investigations related to our distribution, pricing, and related matters, including our former relationship with Philidor. As a comparison, in Q1, this number was $29 million. We do not add back legal expenditures for ordinary course of business, but these represent extraordinary costs.

Our non-GAAP operating margin improved from 39% in the first quarter of 2016 to 42% in the second quarter. GAAP EPS was a loss of $0.88 and adjusted non-GAAP EPS was $1.40, which when combined with the first-quarter results, accounted for approximately 39% of the midpoint of our first full-year 2016 guidance.

As we stated on the Q1 call, we expected a 40%/60% earnings split between first-half and second-half 2016. Cash flow from operations was $448 million. Q2 adjusted EBITDA was $1.09 billion, which when combined with Q1 of $1.01 billion, accounted for approximately 43% of the midpoint of 2016 guidance.

On slide 7, we compare our Q2 2016 financial results to current consensus. We believe the variance is attributable to slower recovery in dermatology and increased investment in R&D. Revenue was impacted by our dermatology business, where we have made good progress and continue to work with our partners on further enhancements.

Our gross margin was down by $69 million due to the same factors that impacted revenue, as well as out-performance in emerging markets, which carry lower gross margin to the overall mix. As mentioned previously, our non-GAAP SG&A spend came down sequentially to 20% of revenue, while non-GAAP R&D was $108 million, excluding a charge of $15.5 million in connection with a settlement to resolve certain disputed invoices related to transition services.

Our R&D spend was higher than analysts' expectations due to the incremental investment associated with the [FD] panel for Broda, an expense we all agree was well worth it. Our effective tax rate of roughly 15% this quarter reflects our updated tax reporting, which we have spoken about in the past few quarters. But to be clear, actual cash outlays for taxes remain below a 5% rate. Finally, the bottom line reflects results reflect increased R&D investment and a slower recovery in the higher margin dermatology business, which Joe will discuss in more detail shortly.

We increased our investment in R&D, as we believe we can earn attractive returns on this incremental capital. Our R&D spend was $108 million in the quarter, a record number for Valeant. We plan to offset this increased investment through rebasing our cost structure and reducing our SG&A spend.

Although Valeant had been run on a decentralized model, we have found duplicative costs that can be eliminated, vendor rationalization that can be realized, and other efficiencies that will increase the profitability of the Company. We continue to be expect that SG&A will continue to decrease throughout the latter half of 2016 through these cost reduction initiatives.

As we move into the back half of 2016, slide 9 shows what drives the ramp to the midpoint of our guidance: $1.27 for Q1 plus a $1.40 for Q2 totals $2.67 for the first half of 2016. Using Q2's run rate performance for Q3 and Q4 would add $2.80. Tailwinds for the second half include: historical positive seasonality in Q3 and Q4; dermatology growth; Salix acceleration; the launch of oral Relistor; and growth in emerging markets, which will add roughly $1.15.

Headwinds we are expecting include generic erosion, e.g. Ziana and Zegerid, an increased effective tax rate, which would remove roughly $0.20. Planned efficiencies in COGS, SG&A rationalization, and R&D timing, given the front-loaded first-half R&D investments and regulatory efforts, would account for roughly $0.38.

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

Thank you, Rob. We have been actively addressing the identified challenges in our dermatology portfolio and have made significant progress on these issues since our last call. Most importantly, we have restored net profitability to new dermatology prescriptions starting on August 5. This will improve the overall derm-selling price.

We launched a new prior-authorization process with our partner on August 4, which should improve the adjudication experience. On June 27, we rolled out our program for independent pharmacies, which has been positively impact our prescription volumes. Enhance training and education for pharmacists is also expected to contribute to the improvement in volumes and profitability.

We've also been reaching out to the physician community to restore their trust in Valeant's commitment to dermatology and have hosted meetings with more than 50 key opinion leaders and prescribers to listen to their feedback. I will speak more about Brodalumab later, but have said on numerous occasions that the pipeline is the new key to the Valeant.

We're very pleased with the successful outcome of the Brodalumab FDA panel on July 19 and look forward to progressing with this important drug through the approval process. Finally, we continue to improve our managed-care position and are happy to see that we maintained key product access on the ESI and Caremark exclusion list.

We have made significant progress in accelerating the growth of Salix portfolio. On slide 11, you see that Xifaxan monthly [TRX]s grew 28% year over year and we see an increase in the refill rate for the hepatic encephalopathy indication. The chart on slide 11 shows the current script trends as compared to past years.

Our new GM, Mark McKenna, and his team, have done a great job engaging with our sales force and we've seen a reduction in the sales force turnover rate through June, which is important to the success of this portfolio.

In addition to Xifaxan, we have seen strong growth in other products in the GI franchise, with three key products, Uceris, Relistor, and Apriso, all growing in the mid-to-high single-digit range. Finally, the recent approval of Relistor Oral provides us with the opportunity to sustain long-term growth in this product and we're working towards a September 2016 launch.

We remain committed to pay down at least $1.7 billion of permanent debt in 2016, as we illustrate on slide 12. Our cash position at quarter end was approximately $850 million and we have repaid $1.29 billion of permanent debt year to date. That includes approximately $880 million in debt reductions since the end of the first quarter.

We have now completed all 2016 scheduled amortization payments, as well as the first quarter of 2017 amortization payment. Looking forward to 2017, we have only approximately $475 million in remaining mandatory term-loan amortization.

On slide 13, we have made progress with the business since our call in June. On the commercial front, we have now launched a prior-authorization program on August 4 with CoverMyMeds for the dermatology products, which should improve the adjudication process for our Walgreens portfolio. We have stabilized our sales team and importantly relaunched Ofloxacin Otic.

On the R&D front, we have recently partnered with the Wilson's Disease Association and will be funding research efforts with them. In addition, we have initiated new formulation activities for Xifaxan and licensed a novel bowel cleansing product that expect to file with the FDA in 2016.

We also announced the approval of Relistor Oral and the positive FDA panel vote for Brodalumab. While the complete response letter for Latanoprostene Bunod creates a delay, we are working towards a solution within the next six months.

Finally, as we work towards streamlining the business, we have sold or have entered into agreements to sell Brodalumab EU rights, Synergetics US OEM assets, and Ruconest for a combined upfront payment of $181 million, and additional milestones of up to $329 million for achieving specific approval and sales milestones. Ruconest is a specialty orphan drug product that was non-core to the enterprise and we received a fair price.

Now I would like to turn to the future and the new Valeant. As you can see on slide 14, we're setting the Company on a new path with new strategic imperatives, changes to the Management Team and structure, and new business segments, and a new direction.

Valeant will be embarking on a new vision and mission on slide 15. We want to be a trusted healthcare partner and to improve people's lives with our healthcare products. The foundation of this will be upheld by five pillars that represent our core values. If we adhere to these core values, I believe that Valeant will be successful.

On slide 16, we will be focusing on five strategic imperatives as we move forward. They include: one, focusing on specialty-driven markets, where the relationship with physicians is critical. This will include core physician specialty areas such as dermatology, GI, and global eye care, where we believe we can make an important difference.

Also, we want to focus on markets with above average growth rates, where there is an unmet medical need and the aging population will ensure that market dynamics will be positive into the future. Three, we'd like to focus on building our leadership position and pipeline where we have a strategic advantage due to the breadth of our current product portfolio, and importantly, the investment we're making in R&D and our future new product pipeline.

We also want to drive efficient resource allocation where we invest in R&D productivity and appropriately streamline our cost structure. Finally, we will plan to build durable brands in key geographies across our global consumer, eye care, and branded generics across our emerging market footprint.

Yesterday, we announced several new hires and internal promotions to align management to our new strategy. I want to welcome Christina, Scott, and Sam to the Company and thank the Management Team for taking on their respective new roles. We will continue to build and add to our team, but this is an important step in re-recruiting our top, top talent and aligning our leadership for the future. I want to also express my gratitude to Rob Chai-Onn, Laurie Little, and Dr. Pavel Mirovsky for all of their efforts over their many years at Valeant.

In the past, Valeant has been organized primarily by geography. We intend to structure the Company through three new segments as we note on slide 18. First, a Durable Growth segment representing approximately 50% of our revenue. This will encompass the Bausch & Lomb franchise, global consumer, and most of our international markets. Second, a Growth segment, representing approximately 30% of our revenue, will include our branded Rx products, where a majority of our future investments will occur.

Finally, our Cash Generating segment, representing approximately 20% of our revenue, will encompass those portfolios which we will look to optimize as a high-margin and low-investment business. This new structure will provide our investors with greater transparency into our business, with margin and profitability profiles. We plan to roll out this new segment structure in the third quarter.

Now I'd like to turn the call over back to Rob.

On slide 19, our Durable Growth segment will include global eye care, global consumer, and our international markets. These are franchises with durable product characteristics. We expect 2017 and 2018 revenue growth in the range of 6% to 8% and EBITDA growth in the 8% to 12% range.

We expect our R&D spend in this area will be between 3% and 6% as we invest in future growth. Finally, non-GAAP EBITDA margin is expected to be in the 32% to 36% range for this segment.

Our Branded Rx portfolio represents our Growth franchises, specifically GI, dermatology, dendreon, dentistry, and Canada. We expect 2017 and 2018 revenue growth in the 5% to 10% range and EBITDA growth in the 7% to 10 % range. We expect our R&D spend in this area will be between 7% and 9%. The EBITDA margin profile for our Growth segment is expected to be in the 50% to 55% range.

Our final segment represents portfolios that are declining assets, that will be optimized for cash return. This includes our neuro and other portfolio, generics, and several other smaller businesses. While growth rates in this segment reflect the impact of near-term LOEs, we expect the longer term growth rate to be more moderate. The segment is expected to have EBITDA margins in the 65% to 75% range.

Now I would like to turn the call over to Joe.

Slide 22 illustrates our growth path from our 2016 guidance to 2018 adjusted EBITDA. While we will provide specific 2017 guidance at another time, we want to illustrate the important drivers for 2016 to 2018. For example, we will face negative headwind from loss of exclusivity, but which will be more than offset by four factors: base business growth, derm and Salix growth, new product launches, and annualized cost efficiencies.

As we work to stabilize Valeant, we have already seen the success from our R&D team with a unanimous FDA AdComm vote for Brodalumab on July 19. As you can see on slide number 23, the panel voted 18 to zero in favor of this approval. This was a drug that many did not believe would receive a favorable panel recommendation, but the facts supported the unanimous vote, and our R&D team did a great job in the preparation and presentation of the material.

This drug showed statistical superiority versus Stelara, which Stelara had worldwide sales of over $2.7 billion in 2015. Brodalumab also demonstrated impressive clearance rates and has a rapid onset of action. We will be working with the FDA as they continue the review process towards the PDUFA date on November of 2016.

As with all R&D programs, approvals can sometimes be delayed and this occurred with Latanoprostene Bunod, when we received a complete response letter on July 21. The concerns mention the CRL pertain to the CGMP at our facility in Tampa, Florida, following a February 2016 FDA inspection.

We've been working with the FDA to resolve the open issues and we hope to complete activities required for an FDA re-inspection within six months. Importantly, the CRL did not identify any efficacy or safety concerns for Latanoprostene Bunod. Additionally, I wanted to be clear that this inspection and the resulting observations have not disrupted any manufacturing or shipment from the Tampa site and we do not expect any recalls of existing products.

Our cash flow remains strong, as you can see on slide 25, and we have committed to using the vast majority of our cash flow to pay down debt. We expect cash flow to increase in 2017 as our contingent and milestone payments are expected to decrease and business development payments, which occurred in 2016, will not occur in 2017.

For example, the deferred purchase price for Sprout of $500 million does not recur in 2017. We also do not expect to have large milestone payments in 2017 for approvals and potential approvals, such as this year's payment to Progenex for Oral Relistor and the potential payment for Brodalumab later this year. We expect that free cash flow and proceeds from non-core asset sales will help us to reduce debt by more than $5 billion during the next 18 months.

Since I became CEO of Valeant, I haven't had a meeting with shareholders or analysts in which the topic of debt covenants is not raised. As you know from our guidance, while we will continue to be in compliance with our financial maintenance covenants under our bank debt through 2016, our cushion is not as large as I would like it to be.

I believe this is one of the most important reasons why our stock price trades significantly below its intrinsic value. As a result, we have decided to seek to modify our interest coverage financial maintenance covenant with our lenders and will be launching the amendment process shortly. As you may know, our bank debt has traded at well over the last few months and is currently at around $0.98 on the dollar.

This reflects a substantial asset value coverage in the quality of our asset base in cash-generating capability. Once the amendment is complete, I am looking forward to spending more time talking about our products, improving patients' lives, our growth trajectory, and pipelines, and less about our bank debt.

On slide 26, we're currently evaluating strategic alternatives for a number of our core and non-core businesses and geographies that represent revenue greater than $2 billion. Let me be clear, that is we are looking at alternatives for a number of non-core businesses and geographies that represent revenue greater than $2 billion.

These assets represent a transaction value of up to $8 billion based on a weighted average of 11 times EBITDA multiple. This excludes core assets. We have received indications of interest on these assets and we have engaged respective banks and advisors to assist us in exploring our options.

We fully intend to make decisions regarding our asset base in the best long-term interest of our shareholders. We expect to simplify the business and reduce our debt through strategic measures and cash generation over the next 12 to 18 months.

In summary, on slide 27, we have began the process to stabilize, turn around, and transform Valeant, creating a new Valeant. We are well into the first phase, stabilization, and have begun to pay down debt, attract talent, re-recruit our employees, fix the dermatology business, grow the GI franchise, and now, we will be officially launching new segments in the third quarter.

2017 to 2018 will bring the turn-around phase, where we focus on our efforts on specialty-driven markets and those with above-average returns. We plan to focus on creating leadership positions in our core areas, with good products and a future pipeline. We will also concentrate on efficient resource allocation and strengthening our balance sheet and continue to pay down debt.

In 2018 and beyond, we will transform this Company by leading in our respective categories, launching new products, balancing our growth through organic and inorganic means. Valeant and [stakers] have gone through a lot over the past year and I'm confident that through our focused strategy, smart investment, and a solid execution, the future is bright.

Operator, now let's open the call for questions.

(Operator Instructions)

David Risinger, Morgan Stanley.

Thanks very much. Joe, thanks for all of the commentary and color.

My question relates to what is assumed in the second-half guidance, so this is for Rob. In your second-half guidance, do you have any list price increases assumed? And also is there launch spending that is reflected in second-half guidance? Or if you launch new drugs, would the SG&A costs go above your current guidance? Thank you.

Rob, why don't you address this; and probably best to take him to the slide on a path to adjusted EPS guidance, in terms of the beginning part of this question?

I'd say two things. Firstly, the SG&A -- we plan to meet the original guidance of 26%. We were at 31% last quarter, 27%, and we have done the calculation and have our plans to hit that number. In terms of pricing, there's both a reflection of the discount, as well as potential modest price increases that we might take for the rest of the year. And the launch costs are embedded in our budgets. What is driving this -- just to go through it -- is the tailwinds, which are about [half] derm and Salix, the new product launches, the emerging markets, which have continued to grow with 10% growth again this quarter, and the typical seasonality, which we've always had. But the efficiencies provide an important path, and again, they are in the context of duplication and other costs, which we think we can easily address.

Thank you.

We're sticking with our 26%, and as Rob said, we are going to finance the incremental expenses for any new product launch through that efficiencies column that Rob is referring to.

David Maris, Wells Fargo.

Good morning, Joe.

I want to raise three different issues and then see if you can reconcile them. Valeant had testified in a Senate hearing that it was going to do business differently, and at the same hearing, you were criticized by a Wilson's Disease patient and senators, giving Cuprimine's high -- 330% -- price increase. Yesterday, you had a press release mentioning you are donating $100,000 to the Wilson's Disease Association.

You quoted Mary Graper, who I spoke with last night, and what she said is, she thought that Valeant, what they did by raising price would be criminal and that the donation was just a drop in the bucket; and that if you wanted to make a real difference, you should lower the price. Separately, you also mentioned in a press release yesterday that you reintroduced an Otic product, but missing in that was that, according to Price Rx, you also raised the price of that product in July by 31%.

Then third, Valeant confirmed that, during the last month or so, one of your very prominent Board members held a dinner where selected Valeant owners could hear a discussion about Valeant's plans, including -- and again, I heard it second-hand, I wasn't there -- something you raised for the first time, changing the debt covenants was mentioned.

Based on these three things and your prior statement in the call that business is changing, you're ushering in a new period -- to me, it sounds like these are all symptoms of the same old Valeant. Maybe if you could address each of these, but also the bigger picture item of -- are things really changing? Or is it just new paint on the same old shed?

David, thank you for your questions and your three different comments. Let me try to address them one at a time. First and foremost, let me say that I am absolutely confident that we're making changes at Valeant today. First and foremost, I will illustrate what we've done with the Management team in terms of taking new roles, bringing on new people into the Company. We brought on a brand new Board of Directors for the Company. At this point, we are at 12 Board members, 10 of which are new individuals. So there's clearly a new direction with the Company, as mentioned by both the Management team, as well as what we're doing with our Board of Directors, and importantly, the programs that we will take.

You did point out one product that we reintroduced, Ofloxacin Otic, but I don't think I've heard you mention of the fact that, other than the product prices that occurred in January, I do not believe there's been really any pricing to note at all since the time period of early in the year. We've made that, by itself, is certainly one evidence of some of the changes that have happened with the Valeant organization.

Number two, we've reached out to the Wilson Disease Association. We've realized that some of the pricing that was taken was a mistake and we acknowledge that mistake. We're working very closely to try to make a difference in patients' lives and that is exactly what we think our efforts with the Wilson Disease Association is meant to do. By working with the Wilson's Disease Association, we're working very closely with Mary and her team and organization, to make a difference in patients' lives. We will do it through investment and research and development. We will also do it through helping the patients with patient data, patient awareness information, patient ability to get even apps and be able to follow their disease more closely. We think that is an important message. We have characterized that very closely in our slides today, by really (inaudible) what we're doing to try to improve patients' lives.

Finally, I don't think I have anything to add to the comment about any of our Board members. I don't know the specifics so anything I would be saying would be just speculation and I don't want to add to that.

Umer Raffat, ISI Evercore.

Thanks for taking my question.

Joe, can you help us through where exactly you stand with that $8 billion in divestitures as per your slide? If you do go through with that, coupled with the debt paydown that is planned, are you effectively paying off 80% to 90% of your term loans? Where would the covenants stand if you do deliver on this over the next 12 months, number one?

Second, is the EPS hit from these only $0.50, if I'm doing my math right on the EBITDA? Then finally, for Linda, perhaps -- Linda, the covenant, at least the way it stands right now, is implying $4.8 billion as the trailing 12-month EBITDA needed during Q3. Will that change if you make the amendment? And if you could give us any color on Xifaxan and why is it not going up? Thank you.

I'm going to try to get all them (laughter). Let's try to start with where we are with our non-core asset sales, specifically happening in the covenants. I will start with that, and then Linda, you might want to pick up on anything that I miss on that.

First and foremost, as I said on the call, we're evaluating our strategic alternatives for a number of non-core businesses and geographies that represent revenue of greater than $2 billion. Based on what we've seen for comparable asset sales and/or some unsolicited indications of interest we've received, these assets represent a transaction value of up to $8 billion based on 11 times EBITDA. That's where I start with.

One of the things I want to say, though, that this excludes our core asset sales. What we've tried to do in thinking about the use of these proceeds is that, in addition to some of the EBITDA generation from our cash, we do believe that we can certainly pay down, as I said in the call, at least $5 billion over the next 18 months, and potentially could be higher, if we sell all $8 billion. I'm not trying to suggest on the call we are doing that. At this time, [what] we're doing -- we don't have a plan to sell them; we're exploring our strategic options with some bankers that we've asked to help us. So only looking at exploring strategic options at this time. That is probably the first part of the commentary.

Linda, on the question, the second question Umer asked is, if we paid down up to $5 billion plus some additional -- or let's say, up to $8 billion, that would take approximately 2/3 of the bank debt reduction from approximately $12 billion down to $4 billion, if we paid down $8 billion, is that correct?

That is correct.

On this second part of the question, really what you've done, Umer, I believe, is just take that 11 times EBITDA and try to determine the $0.50 of EPS? Is that correct, is what you're saying?

Right.

I'm going to tell you that I don't want to do math while I am on the phone, but directionally, that seems correct. But I want to get back to everybody on that question and get that confirmed, as we go through the call. I will try to get that answer by the end of the call. I just hate to do math while I am on the phone for an earnings call.

The last question was on Xifaxan. Remind me that one, one more time?

Basically, I was wondering, why isn't it going up? I wanted to clarify something on your $8 billion, too, but I will let you answer Xifaxan first.

First and foremost, let me be clear, Xifaxan is going up, in terms of the prescriptions. The prescriptions for Xifaxan were up 28%. It was up -- the sales were up 36%, but that's a harder comparison. We just talk about the 28% prescription difference for Xifaxan is probably the best way to look at it. As you can see on our charts, though, it's very important to look at what happened to Xifaxan a year ago, in 2014, 2015, as we think through that, because that certainly gives you the best trajectory of change in terms of looking at (multiple speakers). Page 10 is what I'm referring to it, looking at the retail TRx performance, you could see, 2014, 2015, and then the Xifaxan increased, we see year-to-date versus 2015 on the slide.

Got it. Joe, if I may just clarify.

First, on the $8 billion you mentioned, how much of that is unsolicited bids versus you guys doing comps analysis? If you could just give us, broadly, 1/3 of it as unsolicited business or not, number one? Then on Xifaxan -- Q1 versus Q2, just wanted to understand, why is flat to down versus being up? That's all I was trying to ask?

I'm sorry. Got it.

It's two things. It's an inventory burn that took place in the quarter, and slightly lower ASPs, although ASPs have now stabilized.

On the question on the unsolicited, we're probably not going to give you exact numbers, but I will say it's over 1/3 of it has been unsolicited offers that have come in to us, over 1/3 of it has been unsolicited offers. I probably don't want to go into it much further than that.

Thank you so much.

David Amsellem, Piper Jaffray.

Thanks. On Nitropress and Isuprel, can you remind us what is in the guidance in terms of generic competition? And more broadly, what are your thoughts on when we're going to see generic competition on both products? Then also just a follow-up on Xifaxan -- you alluded to ASP stabilizing. Can you talk about what you're seeing there, in terms of prior ops and actual scripts getting filled? Do you think that the early success of Viberzi has actually been a headwind for Xifaxan in playing a role in why the product has not been growing as much as you would like? Thanks.

Let me start with the Nitropress and Isuprel. We are expecting generic competition, as you noted. We believe that generic competition will occur some time in the next 6 to 12 months for both of the products, starting with Nitropress and then later Isuprel would experience a generic competition. But as I said, we expect it within the next 6 to 12 months. That was part of what Rob tried to illustrate on the loss of exclusivity, as he looked at some of the things that he had and certainly some of the things I talked about on the slide that looked at 2017, 2018 slide.

On the question of Xifaxan, we are very pleased with our position on commercial access. We believe Xifaxan has covered lives of more than 98% covered lives for the first half of 2016, so we think that's an excellent position to be in. Importantly, I can tell you that we've gotten a couple of very important wins recently with Xifaxan that has reduced the amount of prior authorization process that had to occur with Xifaxan. So for those reasons, we think we're in a very good position with Xifaxan. Obviously, some cases we had a chance to remove one of the step therapy that occurred, but we think the opportunity is very good.

On the question of Rx filled, we are seeing the improvement in the hepatic encephalopathy refills. We think that an important part of what we're trying to do, to improve the compliance of this program, and the team has put together some compliance programs for the future. The only real issue with Xifaxan is one that Rob mentioned -- there has certainly been some inventory adjustments between the first quarter and the second quarter as the primary major areas of difference. Go ahead.

Just to be clear: Nitropress and Isuprel generic are not in the second half of assumption for the guide, right?

We have them planned for the next 6 to 12 months is what we have got planned into this.

All right. Thanks.

Cindy Guan, Goldman Sachs.

Thanks. I wanted to ask on the sentence in the slide -- the restored new profitability to new derm scripts starting August 5. I was wondering, how does that timing compared to what was originally expected? Also related to that, the timing of the Relistor launch in September? And obviously the delay in Latanoprostene? On the first-quarter call, you mentioned there was some conservatism built in for both the new product launches and [fixing] Walgreens, so how does that compare to those original expectations? Are negative ACs no longer an issue? Or are there still some (inaudible) that need to be addressed?

And then quickly, secondly, on the $5 billion debt repayment over 18 months, does that include a revolver paydown, $1.35 billion? Or all of that $5 billion is loans? My understanding is, with asset sales, that needs to go to loans; so related to that, how are you thinking about addressing on year to date 2018 unsecured bonds? Thank you.

I will take the first two questions about net profitability with derm and the new products. Then, Linda, if you can help on that debt question specifically, and the paydown on the revolver question.

First of all, as we stated on the last call in June, I stated that we believed we would resolve the issues with the Walgreens program within 30 to 60 days. I will say that we have been very pleased with the cooperation we received from Walgreens. The teams are working together very well, and indeed, we did achieve the improvement in net profitability in early August. So that is right in line with the 30 to 60 days. And in fact, we actually got some of the couponing programs for the independent pharmacists out within the 30-day time frame. So everything has moved along very consistent with what we had said previously.

On the question of our pipeline, when I was on the call, one of the things I tried to illustrate is that we have three action dates within our pipeline that I was very excited about for the second half of 2016 on the first quarter call on June 7. Indeed, one of the things I said was that we would be very pleased and it would be good day for us if we received two out of the three, and indeed, that is what we did get. We got the Brodalumab recommendation by the advisory committee for approval, and also the Oral Relistor. It is a delay on the Latanoprostene, but we think we know what the important items are for that complete response letter. We are going to be working very closely with the FDA on those issues to get that one moving forward. But we have tried to be somewhat conservative in bringing those numbers into our plan. We're going to continue to keep that as a mindset. Until the products are launched and we are out in the marketplace, we want to be relatively conservative on new products.

Last part of the question, Linda, was on debt, and--

Cindy, on the $5 billion from free cash flow and non-core asset sales, we will use that to pay down a mix of revolver, term loans, and bonds, I expect. As you know, the asset sale proceeds do need to go to pay down secured debt, so that portion of the $5 billion would go directly to our secured debts. As far as the 2018 unsecured bonds, we're focused on that maturity and want to consider that in the mix as we look to optimize the capital structure and stay in front of our maturities.

Great. Thank you very much.

Lennox Gibbs, TD Securities.

Good morning.

As we think about turnaround in the existing dermatology portfolio, how should we think about the near-term revenue potential of that business? And how, perhaps, should we look at it relative to the pre-Walgreens revenue performance for the business?

One of the things that is clear is that we have been looking at the new prescription levels going back historically, and we've had good success on new prescriptions. One of the things that has occurred is we've seen a lowering of some of the refill prescriptions that have occurred, but we're seeing some progress with our programs with Walgreens to help pace with this compliance. We are going to continue to work with our partner at Walgreens. We're very, as I said, happy with the interactions between Walgreens and Valeant. We think, collectively, we are going to try to find ways that help make sure patients get the medications they need in a very compliant fashion, and indeed, to work through that.

But I probably don't want to go into any specific promises on exactly what is going to happen with refill rates and/or just how we think it's going to affect the entire dermatology franchise. We are going to continue to stick with the overall comments we have made on the guidance commentary for the year, in terms of looking at what we're going to expect. But I do think the program is working with Walgreens. We're seeing good receptivity to our programs with Walgreens and it's been a good interaction with Walgreens. Once again it is a 20-year relationship with Walgreens and ourselves, so we're looking forward to continuing to improve it as we go forward.

Thanks very much.

Annabel Samimy, Stifel.

Thanks for taking my question.

I wanted to go back to two of the areas that you cited as the big problem areas, the GI and the derm right now. In GI, you mentioned that you had some sales force turnover. Where are you in terms of -- you said you stabilized the sales force. Have you put a new sales force in place to be able to get that franchise growing again?

And for the dermatology side, with the prior authorization program with Walgreens, you've put this program in place where I believe you are trying to institute some co-pay for these dermatology prescriptions that had prior authorizations. Is that what you're talking about in terms of prior authorization programs? And if in fact it is a co-pay program that you've instituted, is that having any impact or do you expect that to have any impact on prescription fills or people walking away from prescriptions? Thanks.

First, on the stabilizing the sales force -- what my comments were really meant to say is that from the beginning parts of the year through June, we have stabilized the sales force and we've seen a reduction in turnover on the sales organization. That was really what my comment was meant to be.

But specifically, on your question, did we add sales resources -- yes, during that time period, we added some incremental sales reps for the Xifaxan organization. I believe it was an incremental 67%, but let me just check that -- for people who are promoting our hepatic encephalopathy. Let me check that exact number; but to be clear we did add some additional sales reps for our Xifaxan team for hepatic encephalopathy. 65% was added, the incremental number of sales reps.

On the second question of derm prior authorization programs, we have done a couple things. We did launch the program that we refer to as a prior authorization process with CoverMyMeds. They are an independent company that helps the patients through the prior authorization process, who try to make it easier for patients, easier for physicians, to receive the medications that their patients want to receive. So indeed we have launched that program. That program kicked off in August 4. That is the program I was referencing on the call. Indeed, we did look at, as we move to improve the net profitability of our dermatology prescriptions, we did look at co-pay levels and that was part of the program that we instituted in August. That did occur.

Relative to the impact of the prescriptions, probably the best answer to that is that we're going to be monitoring that and tracking it. We have not seen anything yet, but it is obviously less than a week, so it would be too early to make any comment specifically on any impact on prescription levels, but it is something we are going to monitor very closely.

Okay. On GI, the inventory impact -- can you quantify the impact and whether inventory should be stable on GI going forward?

The overall inventory levels did come down. The actual number, inventory levels in terms of months on hand, has come down by approximately 0.1%, so that would be approximately less than a week, I'd say. Just in terms of a general comment.

Thank you.

Chris Schott, JPMorgan.

Thanks for the question. A couple of quick ones here.

First, on the non-core asset sales, can you elaborate a little bit more on how you're considering what is core and non-core in the business? Is this based on what is able to be efficiently monetized right now? Or is this really going product or business by business, of what fits in with your vision for the Company going forward versus what is no longer part of the new Valeant?

Second -- this is a follow-up on this non-core side -- based on the sales and EBITDA multiples that seem to be referenced in that slide 25, these businesses seem to have margins more in line with the durable growth segment. Is that what we should be thinking about some of these assets coming from? Or is it really across the three new segments that you laid out? Thanks very much.

Maybe a couple comments on it, Chris, and I'll get to each parts of your question. First of all, I want to make sure I said this process is an exploratory phase at this point. I'm not going to make too many comments about it, other than the comments I've said, that we have initiated the process and worked with some banks to help us explore the options in front of us.

Relative to the questions specifically about core products and what is core and what is non-core -- core can mean, getting back to what I said before, are several areas. Number one, it is our dermatology business is core. Number two, our eye care, or Bausch & Lomb, business is core. And then number three, our Salix, or GI business is core. In addition to that, we've also specified consumer as being a core part of what we believe we can do in terms of, once again, building durable growth businesses for the future.

On the other part of the question, though, there's also a geographic question. We have specified that clearly the US and Canada, our home market, are core markets for us as a Company. So I will make sure I talk about both it from a core product, but also from a core geography, as important to us. On the question of where these are coming from, it really is across the portfolio rather than any individual business unit. We've looked across the portfolio at some of the assets that are potentially, as I would refer to, non-core or opportunities for us to look at future asset sales for the future.

Rob, anything you wanted to add to that comment?

Thank you.

Gary Nachman, BMO Capital Markets.

Joe, could you review how much you'll be able to enhance the profitability of the derm prescriptions through Walgreens? I know it just started, but order of magnitude on that would help. And how long it will take to really work through this and make all those prescriptions profitable? Then, do you still plan to do the second part of the Walgreens deal on generics later this year? Thanks.

I probably don't want to give exact details about the profitability because it's still very early. All I will simply say is, though, that we are confident that putting this program in place we are dramatically reducing the number of prescriptions that would be what I referred to previously as a negative average selling price. So we do believe that it is restoring net profitability, as I made comment in the call. On the question -- I'm sorry, the second part of this question was?

The original second part of the Walgreens deal was supposed to be in generic later this year?

The answer to that is, yes. We're moving forward with Plan B. We have said, though, we are working very closely with our partner on that Plan B. It is likely to be a gradual roll out of opportunities to look at the opportunity to sell our branded products for generic prescriptions. But that is a more gradual process than perhaps we had originally talked, but we are looking to move that one forward, as well, in the latter half of 2016.

Okay. Just a quick follow-up. Based on all the recent conversations, any new branded products that could potentially be added into Walgreens once you have made some of these fixes in dermatology?

I would say, in terms of new branded products, we're going to continue to work very closely with Walgreens. I don't think I'm going to identify any specific products at this time, but whether it be the Part B or other programs that we are thinking about, we will figure out, once we work through all these questions, if there's other things that will make sense to Walgreens, it makes sense to Valeant, and clearly, it makes sense for helping to improve patients' lives, by making healthcare products available. We're going to make sure we explore those options, but I don't want to go into any specifics at this time.

Okay. All right. Thanks.

Andrew Finkelstein, Susquehanna Financial Group.

Good morning and thank you for taking the question.

I was hoping you could talk a bit more about cash flows in the quarter. Were there any pushes and pulls and how you see yourself on track for the at least $1.7 billion in generation for the year? Then, as you gave that slide, and looking at the ability to overcome the impact of losses of exclusivity over the next couple years, are non-core assets sales contemplated in that? If you do go through with selling the $2 billion in revenue that you talked about, I assume a lot of that is the international segment that would be included, along with Bausch & Lomb, in your new segmentation. But any elaboration you could give would be helpful.

Two comments I'd make about the cash flows. Again, the cash flow for the quarter was $448 million. That did include a one-time legal payment around the Salix settlement. Working capital was better than it has been historically, so in that, we feel good about the cash flow.

On the question of the illustrative chart that we walked through from 2016 to 2018, we did not factor any sales at this time. Obviously, until we know specifically which products it would have an impact on -- potentially some of the products that have loss of exclusivity or it could have impact in some of the other areas. But we did not factor any assets sold at this time because, as I said, at this point, we are exploring those options, but we have not factored that into the specifics on that slide. Once again, that slide for us was mostly for illustrative purposes to help you understand how we plan to look at some of the headwind/tailwinds going into the out year.

All right. Thanks very much.

Gregg Gilbert, Deutsche Bank.

Joe, will the new reorganized Valeant have a new name? What will the costs be associated with the reorg and how long will it take? Then secondly, I have a question on Xifaxan. Joe, what is your view on the duration of Xifaxan, given the formidable competitor that presumably met the guidance and is challenging the patents? Thanks.

On the question of the reorganization, you're asking a question certainly on name. I don't have any further comment on the name. Our name is Valeant and we will stick with that name at this point. On the question -- obviously, that's something we will always continue to evaluate.

On the question of where we are with the cost of that, this reorganization is really meant to look at a couple things. Certainly, we are making some changes in the Management team and that is contemplated in our model. We're also looking at how we're going to structure our sales, but that really is more of a concept that really, this is how we think the best way to organize the Company is; how we're organizing it with these three segments of Bausch & Lomb International, the branded Rx, and then the diversified products.

We think those give us businesses that look at certainly sustainable, durable growth, also opportunity to grow with the Rx business, et cetera. So there's not any specific costs associated with that, other than just some of the personnel changes that we're planning. Most of that we think will be offset by the work that Rob and the finance team is doing to help us to look at as SG&A across the organization, which I would refer to as really more of a reallocation for us to open up and be able to spend more in research and development. But offsetting that by spending or getting some more efficiencies from some of the things that we think -- for example, as we look at a process where we have a chance to get cost of goods sold synergies because we are going to build one procurement organization versus the multiples that we have today. We think that is going to get us some savings that will help us to reallocate it and make it available to get a return on investment for our R&D programs.

On the question of Xifaxan, you asked some of the questions on relative to our position. As you know, we have patents that run from 2019 to 2029. We have 22 patents in total and we feel very good about that position. Having said that, I will be clear that we do think there is an opportunity to look at a reformulation of Xifaxan to improve the patient experience, and that's one of the things that I mentioned in the call, that we're going to look at a reformulation. Tage in my R&D team already has that underway. They have got some interesting data that they are looking at to help try to reformulate the product to make it a better patient experience for the future. So I would look to us to have more to say about that in the future, but that also could have a very meaningful impact on what we believe the future of this product looks like in the entire franchise for Xifaxan.

Thanks.

Louise Chen, Guggenheim.

Thanks for taking my question.

First of all here, can you give more color on your launch plan for Oral Relistor? How much incremental sales we can see from this product? And how confident you are that the sales force can effectively promote this product, given some of the disruptions that you talked about earlier in the call?

Secondly here, back on [lisnayo] for a quick minute. On the CRL, was the Tampa inspection a preapproval inspection or just a regular inspection? And can you give more color on the 483s? Then lastly, Joe, given your experience at Perrigo, what can you do to help enhance Valeant's OTC drug portfolio?

Okay, Louise, I'll try to get all of them. On Oral Relistor, our plan is to launch in September. There's a major convention or meeting in mid-September that we will plan to launch the product at Oral Relistor for. The marketing team have plans in place for that launch. We have got the sales force stabilized, as I mentioned you in the call, so we do feel there is stabilization of the sales force. Obviously, it is something we will continue to keep our eyes on because it is one of the most important variables as we think about the future success of any prescription branded market. On the question of disruptions, as I said, we've got that handled. Obviously, we will continue to monitor that.

On the question of the Tampa facility, it was both a general inspection and a preapproval inspection in February 2016. Both preapproval and a general inspection occurred to my knowledge, and it was during the preapproval side that they experienced some questions that they raised. We've been working very diligently since that February time to resolve those questions as to the situation we find ourselves today with the CRL. We feel that the changes that will be required for a reinspection is something that we can get accomplished within the next six months and be ready for a reinspection at that time. So this is -- we're working very hard to try to continue to move latanoprostene bunod forward in our pipeline and get it to the market for the patients that need the improved for lowering of intraocular pressure.

On the question of OTC, I will tell you that we have got a great team here doing the OTC products. I believe that they have done a great job here in the United States, but even around the world. I don't know if there's much I can add, but certainly it's an area of focus because one of the things I believe is very important, and that is part of why I have structured the business this way, is that I do believe, from a segment point of view, that we can structure a franchise of what we refer to as durable growth assets. Those would be the Bausch & Lomb assets, the global OTC assets, some of the things we do in our international markets. We believe what makes them and brings them together is this concept of the fact that they are brands that have a durable, sustainable business for the future and they have very nice growth characteristics. The OTC team has done well before my arrival, but what I'm going to simply try to do is bring that business together as a segment and look for building a sustainable durable business for the future.

I think I've got all your questions, Louise.

Thank you.

Doug Miehm, RBC Capital Markets.

It's Joel on for Doug. A quick question. I'm wondering if you can outline the co-pay changes to patients that were not receiving prior authorization approval, and outline how co-pays have changed for Jublia? We saw them increase from $0 to $35 now, that's correct?

We did need to make some adjustment in the co-pays, that is correct. I don't think I'm going to go through the specific ones because there is some variability, so it's probably best, at this point, to make mention of the fact that we did make adjustments in the co-pays. The co-pay changes were, once again, specifically for places where patients have a prior authorization process in before they receive the drug, and we were allowing Walgreens to fill that prescription. That's a place where we did make some changes in prior authorization and the co-pays required.

Okay. Thank you. Could you outline what the new process is for the PA patients now?

Sure. There is really essentially three types of patients. Patient A is a cash-paying patient. That cash-paying patient, we did put a price for our products that make it available on a cash basis for those patients. The second type of patient is a patient that has insurance. They may or may not have a requirement for prior authorizations. If there is a prior authorization requirement -- let's say there's no requirement, first. Those will go through in terms of a normal covered prescription. They have various co-pay requirements depending on their individual plan.

It is the third category where we had some previous negative average selling price, where there was a prior authorization requirement, and until that requirement was met, we were allowing the prescriptions to flow through. But at this point we're going to continue to allow those prescriptions to flow through, but there will be a co-pay requirement for that prescription. That is perhaps the area that had the most questions and in how we've been working with our partner Walgreens to resolve that.

Perfect. Thank you.

Douglas Tsao, Barclays.

Good morning. Thanks for taking the questions.

First, Joe, in terms of the reformulation of Xifaxan that you just mentioned, is that geared towards one of the indications, IBSD or HE?

Really what it is meant to do, Doug, is to look at the current Xifaxan formulation and look to find avenues of pursuit that will improve the patient experience with the product, whether it be for HE or IBSD. It is really intentive, because the action of this drug is predominantly local action in the GI tract and with very little absorbed, we do believe there's an opportunity to reformulate this and get an improved patient experience across any indication for Xifaxan. So look to us to spend more time and more comments on that, but that is the concept. What can we do this product to help improve the patient experience? We think a reformulation could help improve that for the future for patients and that is what we're spending some time and effort on. Tage and the team already has some early data and we will look to have more comments on that in the future.

Okay. Great. Then in terms of the dermatology business, what percentage of the overall volume is now going through Walgreens versus some of the other channels? Then also, ex-US business, both emerging markets, as well as developed, look to be much better than we were expecting. Was there any particular countries or product lines that are worth calling out so we can understand things and trends for the second half of the year? Thank you.

Right now -- let me answer the first question -- approximately 50% of our dermatology business is working through the Walgreens program. That was the first part of your question. Then, Rob, do you want to get this inquiry, it was the emerging markets question. Do you want to handle that particular question?

China continues to perform very well. Asia overall performs very well. Certain countries in Europe have gone very well. Mexico in Latin America, while there have been challenges in other parts of Latin America, Mexico has been a very strong performer.

Your expectation, Rob, that, that should continue into second half of the year?

As I mentioned, remember last time, when we corrected for the inventory shift that we made in Q1, there was a healthy growth in the emerging markets, and as you will see from the press tables, that has continued and we do expect that to continue for the second half.

Okay. Great. Thank you very much.

Irina Koffler, Mizuho.

Thanks for taking the questions.

Your developed markets business and your US business is actually flat to down, Q-over-Q, which is somewhat different from other companies in the sector, which traditionally have a weaker first quarter and then rebound back after deductibles have been eased off of. Just wondering why we should have conviction in the business rebounding in the back half the year when Jublia is down quarter-over-quarter, the GI business is essentially flat, and Xifaxan is down Q-over-Q.

So the first question is, what is really going to put the steam behind this business in the second half of the year? Then the second question I had was around the $8 billion in divestitures. You outlined some divestitures today in your press release and they were structured as a little bit in upfront payments and then a lot in backloaded milestones, so do we have conviction that if you were to get the $8 billion, you would get it all upfront in cash, or that a lot of it would be backloaded? Thank you.

Let me start with the question on developed markets and the sequential results. Number one, as we've looked at the revenue, just to be point out, the revenue, year-to-date, we are at 48% of the revenue guidance for the full year. It does not take a big increase in revenue, of course, to really reflect the -- while we expect some, we're at 48% and we're halfway through the year on revenue. Just first comment on revenue for the first half.

On the second question, though, obviously there other things we're taking steps to do. Rob made mention of some of things that we're looking at in terms of the -- one of the things that we're doing on SG&A and how we're looking at the SG&A in organization, and importantly, how we're reallocating some dollars towards R&D. Those are all things that we think are important parts for our second half.

The one other comment I want to reflect on is that, as we've made mention to a previous caller, we also did see some reductions in inventory month on hand, moving from the first quarter to the second quarter. That is not something we expect to see forever, so that when you correct for that, that is partially how you get some incremental opportunities to look at what is going to happen in the second half of the year.

I am going to go to your upfront milestones question, but Rob, anything else you want to add to this commentary on the first half or the second half?

I agree with what Joe said. Obviously, the steam will come from dermatology, as well as Salix; and overall execution, I'd say, across the business. There obviously were bright spots in the developed markets in consumer, US contact lens; GI, obviously, year-over-year, still having growth, but as we said on the Q1 call, we think there is more opportunity there.

Right. That is really what you've tried to illustrate in your guidance commentary on some of the tailwinds for that second half. O

n the question of the $8 billion and what is received upfront versus milestones, it's probably important to say every deal is a different deal. In the deals that we announced or we put into the presentation today, you are absolutely correct, there was much of it was in upfront, but there were some significant sales and approval milestones in the deal structure. I would say that, that was specific to the things that we had, that were in this particular segment for selling. Clearly, some of them, like Brodalumab, there is obviously sales milestones when the product is approved. That's something that is going to happen. It's not existing end-market product.

That differs dramatically from what we're looking at in terms of the $8 billion potential that we're exploring options for, where these are currently marketed products. So clearly, that is the difference in structure that is appropriate for what we announced today, but may not be appropriate for what we're thinking about in terms of the future asset sales that we are contemplating. Is that understandable?

Yes. Thank you.

David Steinberg, Jefferies.

I wanted to loop back on the subject of sales force turnover, given the importance of customer facing. What if anything have you done to retain sales people and how would you classify morale among the sales force? Then, broadly speaking, in the Corporation, what attrition rate have you seen this year? I know, give or take nine months ago, the Company instituted a one-year retention package, largely skewed towards senior executives. Have you had to re-up or are you considered doing that?

Just quickly, on your forecast, for Bausch & Lomb, you look at 6% to 8% revenue growth and for derm and GI, 5% to 10% for the next year. Just curious what the mix of price and volume would be on those forecasts?

David, I'm going to try to get all of them, but if I miss any, I'm sure you let me know, David.

First of all, turnover and morale, I do believe that we have made some improvements in the turnover, as I made mention, through the data that we have through June. It is something, though, that is very important. It's something that we are going to continue to track very closely because it is what -- the relationship that -- especially, in our very targeted markets where we have significant market share and also good relationships with our physicians, if we are going to be successful, it is because of those relationships we have with our physicians, in terms of how we bring our products to market and how we can help those physicians identify unmet medical needs. So it is important.

We have been monitoring it. The business unit leaders have done a very nice job of getting close to their individual district managers and regional managers. It's something that we're going to continue to work very closely on because I do believe, as I mentioned on my very first call, it's part of this rerecruiting our employees to the Valeant Company.

On the question of overall morale, I probably am not the best one to make mention of it, because I've only been here three months, but I do think that we have made progress. We've made progress every single day as we get new products approved, as we make progress in working very hard to improve patients' lives. I believe that's what's going to be the real important driver to this Company. Because yes, it's a job, but more importantly, it's about making a difference in the patients' lives. That is most important thing that I keep reminding the Company about, in terms of where we're going and what direction we are taking and how we're going to become a trusted healthcare partner. So I do believe that's the way I'm trying to address the question of morale and the challenges we face.

At the senior leadership side, there has been, with the exception of the announcements, some of the changes that I've announced just yesterday, there has been very limited turnover. But it is something, that, as I said, we're trying to make some changes in the new Management structure, especially as we look at the new reporting segments of the business and how we're putting together the business for the future. But I do believe that's very important to our future, because it will provide the investors and the analysts greater transparency into what we're doing for the Company.

Rob, did I miss anything that you want to contribute to?

Not on that one, but do you want to get to the segment growth on the--?

Yes, why don't you take that one?

On the two, what I'd say is both the B&L and international segment and the branded segment have strong, either high single-digit top-line growth and leverage to the EBITDA growth. The B&L is being driven by the emerging market growth, which we've talked about and will continue to drive it, as well as where we stand in terms of the various technologies.

In terms of the price volume, the price assumptions are quite modest, as we have said, but getting back on doing appropriate pricing is something that the Corporation will get back to. The second, I'd say, is that the two years that we picked out, you have the issue of where is the pipeline and where is the launch and where is Broda? Again, I would end by saying both of these will provide a good robust growth looking forward beyond 2018.

Thank you, Rob.

Alan Ridgeway, Scotiabank.

Good morning, guys. Thanks for taking the questions.

Two questions from me this morning. First of all, we are now over a year since Salix was acquired and pulled into the business and we're still talking about inventory. Is inventory now finally where it should be? And can we start to follow the Xifaxan and some of the other products more directly based on demand, as opposed to having these inventory issues every quarter? And maybe a comment on where rest of world inventory sits at this point because that was an issue in Q1, as well?

Then secondly, just on Xifaxan, you talk about 98% covered lives, but clearly they are prior auths and step therapy required for a number of those. Can you tell us what percentage of those covered lives have prior auth and step therapy? And on the one big win, Joe, that you talk about on managed care and having some of those step therapies removed, how meaningful is that win? How many patients, how many covered lives were covered by that win? I'll leave it at that. Thanks.

I'm going to try to take them each in order. I will start with the inventory questions, and I'll give you my comment, but Rob, please feel free to join in on this comment. Number one, on the inventory question, as I mentioned, what I was really referring to is the overall inventory. It was not specifically addressed to Xifaxan, but clearly Xifaxan being our largest product has obviously some impact. But as I said, the inventory adjustment was approximately 0.1 months, so it's not a big change. I said it was less than a week, so just to give you some sense of -- it's not a big change, but it did come down slightly in the quarter.

Rest of world inventory -- Rob, anything you'd add to the rest of world?

You'll read about it in the Q. We obviously talked and disclosed about it. We continue to monitor those around the world and they are continuing to come down, as we disclosed in the Q1 Q.

On the question of the 98% covered lives, you're absolutely correct. In the -- give you some specifics: we have 68% unrestricted, and that is approximately 20 million lives. But the prior authorizations largely are part of whether it's the hepatic encephalopathy indication or it's the IBSD. Specifically, on the question that the wins that I was referring to -- actually it was more than one win, I just pointed to a win, but it is actually wins with two very large customers. Those also affect somewhere around 20 million lives for two very large customers that occurred, starting on or about August 1 in terms of timing. So that's where we made progress with two very large customers, affecting 20 million lives, that removes some of the step edits, starting August 1.

Are those step edits specifically on the IBS side or on both the HE and the IBS side, in general?

They are actually on both. They are actually on both.

Great. Thanks.

In one case, it was a reduction of a need for a step edit for a loperamide or anti-spasmatic for IBSD prior authorization. That was one of the removal of step edits, as an example, for IBSD.

David Common, JPMorgan.

It's David Common. Thanks for the extended Q&A. I really think it's the right thing to be doing.

I have two questions and two clarifications. The two questions are, did the changes you just outlined to the co-pays resolve the negative ASP issue that you had for your derm products? My second question is, can you remind us, really, what is in your expectations on timing for competition for the handful of really highest margin neuro products, which became controversial on account of their pricing?

And then the clarifications: if I have this right, your $5 billion of debt reduction on the next 18 months -- is that $3 billion to $3.5 billion from cash flow, and then just assuming a very small subset of the potential asset sales you have called out? And this is for Linda: I see on the press really just a small reduction in the senior notes quarter over quarter. Is that possible that, that would be open market repurchases, and really, what is your view on that for free cash flow? Thank you.

Okay. First of all, thank you for the comment on the extended Q&A. We do think it's important to try to be as transparent as possible and why we've extended the Q&A.

On the questions, a couple of them -- the first question was do the co-pay changes reduce the situation with negative average selling price? The answer to that is yes.

On the questions of the expectations, you asked about the highest margin products, in terms of when we will lose exclusivity on those. As I mentioned, we believe we will lose exclusivity on those products really in the next 6 to 12 months. Most specifically, the product Nitropress is the one we expect to lose exclusivity on first, followed by Isuprel. Both of those are in the neurology business, or what we referred to in the call, thinking forward, the diversified business. But within the next 6 to 12 months is our expectations for Nitropress and Isuprel.

Finally, there was a question, Linda, for--

The $5 billion expectation assumes just a small portion of those potential asset sales. Is that right?

I'll take that one. Yes, that was both from operational EBITDA and asset sales, was the $5 billion, but it is a smaller portion that we felt was asset sales, that is correct. Your assumption is correct. Then, Linda, there was a question, though--

The last one, you asked about the senior notes. No, we did not do any repurchases of senior notes this quarter. The one thing to remember on the balance sheet is, it is book value and we have euro debt, which fluctuates based on currency.

All right. Good reminder. Thank you.

David Risinger, Morgan Stanley.

Thanks very much. I started off by asking one question and then since everybody asked six, I have to ask five more.

(Laughter) We appreciate your discipline in the first [one]. David, we appreciate the discipline.

I'll just ask a few here.

First of all, in terms of negative ASP, could you explain what you mean by that, Joe? I've never understood that -- how a product can have negative revenue? Then second, with respect to the improvement in net profitability in early August, obviously that was within a week. Could you just explain, maybe in more technical terms, exactly how the profitability changed overnight? Obviously, it has, because you have stated it, but I don't quite understand that, either? Finally, one of the slides indicates that you plan to return to inorganic growth in 2018 and beyond. Could you talk little bit about that, as well?

Let me explain the first comment, negative ASP. What I was referring to there -- and let be first and foremost very clear, that was referring to a comment that I made during the first quarter earnings call on June 7. What I was referring to at that time was a situation where we were allowing prescriptions to flow through the process at Walgreens if the prior authorization was not approved. For that reason, we were not receiving any cash for that prescription; however, we were still paying fees for that prescription. As a result of that, I referred to it as a negative average selling price because we received no cash for the prescription, but we were allowing the prescription to flow through and paying the fees. That is something that I made mention of we would get corrected in 30 to 60 days. Now, as I mentioned, we now believe we have that corrected based on the new programs we put in place that kicked off in early August.

Is that part clear, David, in terms of the negative ASP questions?

Yes. That's clear. Thank you.

On the second part of the question, that is the basis by which I've made the comment that we will have net profitability with our prescriptions because we will ensure that the co-pays that patients pay will cover the fee structure, even during the time period if we do not receive the initial approval for that prior authorization. So the co-pays will cover those fees and that will allow us to avoid the situation with negative ASPs. Is that clear?

Yes.

Then on the final question -- what I said, I want to be clear, it's 2018 and beyond -- I said that we would look at a more balanced growth profile where we assume that we will pay down our debt. We will get to a manageable debt level, and at that point, when we're at a manageable debt level, we would look at trying to grow the business both organically, through our own research and development, but also through inorganic means. Because we believe we have very important franchise positions with the products in dermatology, with the products in gastro, in eye care. We believe we have very important relationships, very important positions where we have got a great pipeline. Plus, there are some places where some of our competitors and other players in the marketplace may have a product that we think makes a lot of sense.

And if we have a leadership position, for example, in GI --we just announced the Norgine relationship that w have, as a perfect example. We have a position in the GI category. Norgine has a product. We felt that would be a perfect example of us going out, and through inorganic means, building a stronger pipeline for the future. That is what I was really referring to in 2018 and beyond. I'm not making any comments yet about what percentage will be organic, what percent inorganic, but that concept, once we get to a state where we get our debt position to a more manageable place, we do believe there's going to be opportunities for inorganic opportunities. But clearly we have got a lot of debt payment downs to happen first. I don't want to get too far ahead of that transformation stage.

Thank you very much.

Prakash Gowd, CIBC.

Joe, just a couple of questions.

First, on payers. I wonder if you could just maybe outline some of your discussions with payers and the outcomes there? Are you still seeing challenges from legacy pricing issues? Specifically, what steps are you taking to reverse any proposed formulary exclusions?

Secondly, on Xifaxan, you're probably in the midst of this strategy shift, moving from IBSD more to focusing on HE; and in Q1, you talked about implementation of educational programs and increasing the number of reps focusing on that. If you can update us on how that is progressing and when you think we can expect to see the full effect of these initiatives? Thanks very much.

Sure. Let me start with the payers discussion -- yes, we have discussion with a number of payers. I will compliment the team that is here before I got here: Anne Whitaker and her team, Sandy, have done an outstanding job of improving our relationships with the payers. We feel good about where we are. There are still challenges, to be clear. I don't want to suggest for an instant that there's not challenges. There's still things we need to work on, but we like our position for 2016, as I mentioned. We have got a number of wins. I mentioned the Xifaxan win as certainly one example of a recent win that affects -- actually, it's two wins -- that affects combined 20 million lives, where we think that's a great opportunity to remove some of the step therapy hurdles that we have had.

That is what we are going to continue to work towards doing, just to make sure that our drugs are available for patients when they need them. It all goes back to what we are saying about our mission and trying to improve patients' lives with our healthcare products. That is really the focus we have taken and how we're going to continue to look to the future on trying to improve lives. There is no doubt, though, there is still going to still be challenges and we're going to work our way through them.

On the questions of -- the next question you really was asked was about Xifaxan. We do believe hepatic encephalopathy is a very important opportunity for us. We wanted to make sure there were incremental resources put behind that opportunity, and Mark McKenna and his team have done that. We got, as I said, we have put an incremental 60-plus percentage more sales representatives behind hepatic encephalopathy. We think that's a place where we can make a very important contribution to a patient's life and reduce overall health care expenditures, because the facts are that those are very expensive patients. If we can reduce the need for rehospitalization or additional diagnostic work, that is important. That is what the team is working on.

Relative to when we're going to get there, in terms of hitting a peak performance, we think the peak performance of Xifaxan is certainly out many years. One of the things I talked about in the last call is that we think the potential opportunity for Xifaxan, if all patients for hepatic encephalopathy, for example, were treated, it would be a over a $5 billion opportunity. We are nowhere close to that. Let's be clear. But we do think there's certainly a significant upside from where we are today for Xifaxan. We have got a lot of years to still work on that and we are going to work very diligently on progressing our success with Xifaxan hepatic encephalopathy and IBSD, for that matter.

Can I ask a follow-up on the payer question? Just around your discussions with those payers, are the negotiations around you having to lower prices to maintain formulary status?

I would phrase it differently. I would phrase it, and what we have acknowledged earlier in this year, is that what we did is, we have looked at the amount of rebates and discounts that we provided to these payers to ensure that we got the appropriate access for our drugs. It is not so much reducing prices as much as it is looking at the rebate structure of what we're doing as a Company, is really been what has been gained the additional access for our products.

Thank you, Joe.

Murali Ganti, Citigroup.

My main debt-related questions have been answered, so maybe I'll ask a bigger-picture question here.

Operationally, are you now fully staffed at the senior management level? Do you have any more key hires you need to make to execute on your longer-term strategy, particularly with regard to the new segment structure you laid out?

On the question of -- I feel very good about our team, but there are some additional hires that I do believe we need to make in the Company, yes. Look to us have more comment on that in the future. But I do feel we have got a good team, but there are still some additional areas that we want to strengthen at the Valeant organization. We will have more to say about that in the near future.

Thank you.

Gregg Gilbert, Deutsche Bank.

One follow-up, Joe.

You mentioned one [thing] cushion on debt covenant. I'm sorry if I missed this, but can you describe the financial implications and the timeline to achieve that, at least generally, for us? Thanks.

You're asking relative to the amendment, Gregg, that I mentioned?

Yes.

I'll start, but Linda is going to give you the details on that, or give you some additional information on it. Obviously, we can't say anything because it's not final yet. But that is --

Gregg, I want to go back to my comments and what I was trying to say here. The issue that we face as a Company was that, since I've become the CEO of the Company, every single meeting, this question comes up. While it is a very important question, there's no doubt about it, I do also believe that it is something we can resolve. With the great work from Linda and her team, it is something we can get resolved relatively quickly, so Linda is going to take on this task of working through this amendment.

Importantly, once -- Linda will go through the details of the financial side -- at least some of them; we can't give out too much yet -- but the important part for me, from a big picture point of view, is that once we get this behind us, we can go back to talking more about our products, how we plan to improve patients' lives, what our growth trajectory looks like, what the pipeline looks like, what we think is exciting about these new segment, in terms of what we think is durable growth for the future. That, we think is a lot more exciting than always talking about bank covenants. No disrespect to Linda and her role as the Treasurer.

But Linda, do you want to give any comments on the bank covenants and what you are doing?

We haven't launched the amendment yet. We expect to launch later today. But as Joe mentioned, we will [define] the interest coverage, financial maintenance covenants, as well as a couple other small changes. This is all opportunistic and focused on giving us the flexibility to optimize our capital structure. While the interest coverage financial maintenance covenant is a big tight right now, with this additional cushion, we think we'll be very comfortable going forward. And to Joe's point, be able to focus on the strategy, the business, and talking about the business.

Thanks.

Thank you, Linda. Thank you, Gregg. We only have time for a couple more. We've gone a little bit even further -- we wanted to go further, but we've gone quite far, so let's maybe take another one or two questions, please.

Doug Miehm, RBC Capital Markets.

It's Joel on again. One quick follow-up on the access program amendment: we checked the pharmacy locator, and I'm wondering if you can outline the number of independent pharmacies you are working with? And again, how you expect that to drive volume growth going forward?

This is not going to be a scientific number, but the answer is all of them -- all of the independent pharmacies are eligible for our couponing program. Probably the best thing I can do -- that really is the magnitude of what it is. We have not specified any restrictions on independent pharmacies.

How does that compare to Walgreens locations? Is it double the number of Walgreens locations?

I probably don't want to comment about the specifics on it, in terms of the actual numbers, but we just simply stated, as we have made it eligible for any independent pharmacy that they will have a couponing system for patients, that if a patient wants to go there, he or she can go there. I will say that we still believe the Walgreens program has preferable advantages for patients, but obviously individual patients should have the flexibility to make their decisions. But the Walgreens outlet is going to be a preferred outlet for all patients.

Okay. Just to follow up, how do you expect that to increase volume going forward for the derm portfolio recovery? Is there any quantification you can put to that?

Probably, we saw, just really when the program was launched at the end of June, we did see some pickup in the prescriptions of our dermatology, but once again, it is probably too early to make any projections on exact numbers. But we are looking at trying to continue to increase this. We think it's especially important to get these programs in place. Because, as you know, people -- as many of the teenagers go back to school, that's an important time period for acne and other parts of dermatology franchise. So we think having these programs in place at the end of June and early August were very important to us, as we think about the future return to school type of prescriptions that we often see happen in dermatology.

I don't want to give anything further beyond that other than it is very early in timing, but it's something that we're looking forward to and will continue to track very closely.

Okay, perfect. Thank you.

David Maris, Wells Fargo.

On the first-quarter slide, you had a slide on liquidity that, on the bottom said, based on guidance, we expect to remain in compliance with the credit agreement. That boxed shaded statement is not in the second-quarter slide deck. I just wanted to see if that was true or not, if based on your current guidance, you would expect to remain in compliance with the credit agreement as they stand now throughout 2016? Secondly--?

The answer is yes, David. The answer is yes. That was one of the comments that was made. I made certainly, but Rob may have made mention, as well.

The other is, do you think -- to Gregg's question, the debt covenant amendments -- will they carry with them any cost? And does the guidance include that cost? And separately, does Nitropress and Isuprel generics, when you say they are in -- they are 6 to 12 months out, are they included in part in the current 2016 guidance?

First, Linda, on the question -- take the question on the debt covenants. We obviously cannot give that pricing information on things like that, David, because it obviously has not happened. We wanted to be transparent to let you know that we're going into the market with that. But until that happens, we cannot give exact numbers, but Linda has directionally thought about what that means to us. And Linda, anything else you can add to what I just stated?

You've covered it, Joe.

I just wondered, Joe, is that in the current guidance or not in the current guidance?

It is in the current guidance. That is correct. Yes, but we recognize that we do not have an exact number; we have a ballpark number or range of number. But just want to be clear that I don't have -- I can't know that until we actually get it completed.

On the question on Nitropress and Isuprel -- as I said, I expect Nitropress to be first, Isuprel to be second. We think it's going to be, call it, in the next 6 to 12 months. Nitropress is included in 2016, at the latter part of 2016. Isuprel is in the 2017 time frame. That was the question you had, right David?

Yes. Lastly, you have on the slide deck a bridge slide that talks about the first half versus the second half. And something new in the slide deck is that it says that R&D timing will be a benefit. It's included in a few things, but a $0.38 benefit. Does that mean that R&D will be lower? It has to be, based on that slide -- lower in the second half?

That's correct, David. We overspent R&D in the first half of the year, predominantly around the comments that Rob made specifically, to Brodalumab, and some of the new products that were coming through. It required us to overspend in the first half of the year versus our projections for the second half.

Okay, great. Thank you.

Thank you. Operator, that concludes our call. Thank you very much, everyone, for your interest in Valeant. We will be out trying to answer any additional questions. If you have any additional questions, please get in touch with Valeant and we will be happy to try to provide additional information. Thank you very much for your participation today. Have a great day, everyone.

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