Bausch Health Companies Inc (BHC) 2017 Q2 法說會逐字稿

Good morning. My name is Kim, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Valeant Second Quarter 2017 Earnings Conference Call. (Operator Instructions) Art Shannon, Senior Vice President, you may begin your conference, sir.

Thank you, Kim. Good morning, everyone, and welcome to Valeant Pharmaceuticals Second Quarter 2017 Financial Results Conference Call. Participating on today's call are Chairman and Chief Executive Officer, Joe Papa; and Chief Financial Officer, Paul Herendeen. In addition to this live webcast, a copy of today's slide presentation and a replay of this conference call will be available on our website under the Investor Relations section.

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

This presentation contains non-GAAP financial measures. For more information about these measures, please refer to Slide 2 of the presentation. Non-GAAP reconciliations can be found in the appendix to the presentation posted on our website.

Finally, the financial guidance in this presentation is effective as of today only. It is our policy to generally not update guidance until the following quarter and not to update or affirm guidance other than through broadly disseminated public disclosure.

With that, it is my pleasure to turn the call over to Joe.

Thank you, Art. Many of you on the call know Art Shannon. Art joined us as Senior Vice President, Head of Investor Relations and Communications on June 19. Art and I worked together in the past, and we are very happy to have him as part of the Valeant team. So welcome, Art.

With that, let me start with the topics we'll cover on today's call. First, I'll give you a high-level overview of what we've accomplished since our last earnings call. I'll then turn the call over to our CFO, Paul Herendeen, to review our Q2 financial results in detail. He will also cover our updated 2017 financial guidance. Then I'll run through some of the highlights in our business units and talk about the new product pipelines before opening the call for some questions.

Starting with Slide 5. This is how we are thinking about the progress we are making towards a turnaround and transformation of our business. We have a journey ahead of us, to be clear. As I've said before, it's going to be a multiyear process to transform this company, but I am very pleased with the progress our team has made so far.

We completed the stabilization phase in year 1, and we are now on the early part of a 2-year turnaround phase, where our focus is on strengthening our balance sheet, maintaining leadership positions in specialty-driven markets and those markets with above-average growth rates and allocating resources efficiently.

Now over to Slide 6. Let's run through some of the positive developments since our last earnings call. First, in terms of execution, we continue to deliver on our commitments. Our 2 largest businesses are doing great and are now showing solid organic growth of 8% on a combined basis due to investments we've made.

Our largest segment, Bausch + Lomb/International, which represents 56% of our revenues in the quarter, delivered another quarter of solid growth, driven by increased volumes. The business grew about 6% organically in the second quarter, led by strong organic revenue growth of 9% in China.

Salix, the largest part of the Branded Rx segment, generated organic revenue growth of 16%, largely due to better execution and the investment we made in a new Primary Care sales team. This resulted in XIFAXAN revenues up 16% versus last year.

Our adjusted EBITDA of $951 million was up by approximately 10% versus Q1 2017. New product launches are moving ahead as planned, and we are projecting that the products launched in 2017 will generate over $100 million of annualized revenue.

SILIQ, the lowest priced injectable biologic for moderate-to-severe plaque psoriasis, was launched at the end of July. In our B + L business, we introduced AQUALOX biweekly contact lenses to the Japanese market, launching the Vitesse and Stellaris Elite surgical eye care systems.

Our new product pipeline has been very active. We received filing acceptance from the FDA for PLENVU, a novel next-generation bowel preparation for colonoscopies; and Luminesse, a treatment for ocular redness. And our team is very busy preparing for additional Dermatology submissions to the FDA in the second half.

Moving now to Slide 7, divestitures and debt reduction, 2 areas which continue to be priorities for our team. A year ago on the quarter 2 2016 earnings call, we announced an ambitious goal to repay $5 billion of debt by February 2018. Delivering on this commitment is very important to us, and we are very pleased to announce that we now expect to exceed our commitment to pay down $5 billion of debt from divestiture proceeds and free cash flow before February 2018.

Since the beginning of 2016, we have announced approximately $3.8 billion in total asset sales, including future expected milestone payments, and we have achieved a greater than 10x EBITDA multiple for these asset sales. This includes the sale of Dendreon to Sanpower Group, which closed at the end of June. We used the net proceeds of $811 million to pay down senior secured term loans. And last month, we announced agreements to sell iNova Pharmaceuticals and the Obagi Medical Products business for $930 million and $190 million, respectively.

On July 13, we announced that we would use cash on hand to redeem the remaining $500 million of outstanding senior notes due in 2018. Upon redemption, which will be August 15, we will have reduced total debt by $4.8 billion since the first quarter of 2016, and we will have no significant debt maturities and no mandatory amortization requirements until 2020.

I'm encouraged by the financial flexibility this affords us going forward.

Turning now to some -- the challenges on Slide 8. Our Dermatology business continue to face strong headwinds, and we have taken several actions this year to address some of these challenges. First, we have stabilized the Derm average selling prices versus last year. Second, we have hired a new Derm leadership team. Third, we have rebranded the business unit as Ortho Dermatologics. Most importantly, we will launch new products in this business unit starting with SILIQ for psoriasis. We believe the changes and investments we are making will help stabilize this business in the second half of the year.

We've also improved inventory management to better meet our customer needs, and we are working to resolve manufacturing quality issues at our Tampa facility.

Yesterday, we announced that we received a Complete Response Letter from the FDA in connection with Vyzulta. This is obviously disappointing news, and we're going to work with the FDA to resolve this matter as soon as possible. Importantly, the FDA did not identify any efficacy or safety concerns with respect to Vyzulta.

Finally, we've made good progress dealing with some of the legacy legal issues the company is facing. We are achieving great outcomes in resolving and managing litigation and investigations, including some of the following: We settled the Salix securities class action litigation for $210 million. I know several individuals speculated that settling this case would cost significantly more than that. We closed the investigation by the New Jersey Department of Law and Public Safety relating to legacy Philidor matters. We achieved dismissal of the Salix shareholder class actions relating to the merger with Salix. We closed the voluntary request letter from the Federal Trade Commission relating to Paragon. We completed and satisfied all inquiries from the Senate Special Committee on Aging and the House Committee on Oversight and Government Reform relative to pricing. And finally, we obtained dismissals on some of the SHOWER to SHOWER cases. Specifically, with respect to SHOWER to SHOWER lawsuits, we believe that Valeant's potential liability is subject to certain indemnification obligation of J&J owed to Valeant. We have provided J&J with notice that the various lawsuits filed against Valeant relating to SHOWER to SHOWER are subject to indemnification by J&J.

On Slide 9, we presented Q2 revenue and adjusted EBITA for each of our business segments. The key point to take away from this slide is that Bausch + Lomb/International and Salix, which together represent 73% of our revenues this quarter, delivered strong top line and adjusted EBITA performance. That said, our Dermatology business is stabilizing, and we're working hard to get it back on track.

I'll provide more comments on each of the business after Paul reviews our financial results in more detail. Paul, I'll turn it over to you now.

Thanks, Joe. Before I get started, I want to make clear that when we use the phrase organic growth related to revenue, we are adjusting reported revenue growth or decline to reflect the changes in FX rates compared with the relevant period in the prior year, what we call constant currency, and for the impact of divested assets.

Next, the basket of LOE products included on the chart in the appendix to our slides continue to have a meaningful impact on our revenue and pretax profits compared with 2016.

As a reminder, in a normal situation, we would simply call your attention to the impact of LOEs in our discussion of performance. However, the bolus of LOEs hitting the company in the 2016 and 2017 time frame is quite large and creates a growth drag that we cannot overcome. As such, we've tried to be transparent with our expectations for these products so that you can strip away the impact of the LOE products and see through to the performance of the balance of our business. The decline in the LOE products reduced revenue by some $110 million and pretax profits by roughly $100 million in the quarter compared with Q2 of '16. I'll call out the impact of the LOE products a few times in my remarks. So I want to be clear as to why I'm doing that.

Slide 10, financial results. Top-level summary, compared with the prior year quarter, revenue declined 8%. However, 220 basis points of that decline was due to changes in FX rates, and another 280 basis points was due to the divestiture of assets, mainly the skin care assets in the B + L/International segment and Ruconest in Branded Rx.

On an organic basis, our business was down approximately 3%. If you further strip out the $110 million decline of the basket of LOE products, revenue from the balance of our business grew roughly 2%. The decline in the basket of the LOE products also impacted our adjusted gross margin in the quarter as the LOE products are among our higher gross margin assets.

Adjusted gross margin declined by some 240 basis points, mainly due to mix, and to a lesser extent, the unfavorable impact of movement in foreign exchange rates. Below the gross profit line, I want to point out that the year-over-year decrease in our investment in R&D does not reflect an intention to reduce our investment. It's more the phasing of that investment, removing some projects related to divested businesses and the rebalancing of our R&D projects to better align with our long-term plans.

Adjusted EBITDA declined 13% on a reported basis. The impact of FX on adjusted EBITDA compared with the prior year quarter was a slight tailwind with the transactional FX gains on intercompany debt more than offsetting the translational FX headwinds. The biggest factors driving the $136 million reduction in adjusted EBITDA were the $100 million impact coming from LOEs and the impact of the divested assets, which reduced profit by some $35 million compared with Q2 of '16. Adjusted EBITDA from the balance of our business was roughly flat versus the prior year quarter.

Turning to our 3 segments on Slide 11. B + L/International posted a strong quarter with organic revenue growth of roughly 6% compared with Q2 of 2016; 2% of that came from price and 4% from volume. Reported revenues declined roughly 3%, driven by unfavorable movements in FX rates and the impact of -- excuse me, divested assets. Of the roughly 6% organic growth in revenue, about 3/4 came from increased volumes and the balance from realized price increases compared with the prior year quarter.

Our non-B + L/International businesses were the stars of the quarter, up 17% on an organic basis, with notable contributions from our Middle East/Africa cluster, Russia, China and Mexico. The global B + L businesses grew 2% on an organic basis, and within that, Ophtha Rx was up 4%; consumer, up 3%; surgical, up 1%; and Vision Care was down 2%.

Within operating expenses in the segment, we continue our efforts to reorganize and streamline the global B + L and International operations. And under Tom Appio's leadership, we're seeing results.

SG&A expenses were down $29 million compared with Q2 of 2016. Roughly $8 million of the favorable variance reflected successful and continuing efforts to be more efficient in the deployment of our operating expense dollars. $12 million came from expenses we successfully eliminated following divestitures, and the balance came from changes in FX rates.

Adjusted EBITA in the segment was down 2% on a reported basis and up 4% on a constant currency basis, and would have been up even more but for the $17 million reduction of segment profit relative to Q2 of '16 due to the divestiture of the Skin Care and other assets. The impact of the LOES on this segment was negligible. All in all, B + L/International posted solid results in Q2.

Now on to Slide 12 and the Branded Rx segment. The segment was essentially flat on an organic basis compared with Q2 of '16. The divestiture of Ruconest and the late Q2 closing of Dendreon both impacted the reported decline of 3%.

Within the segment, our Salix business had a very strong quarter, posting organic growth of 16%. We enjoyed improved net pricing in the Salix business as a result of modest price increases across the GI portfolio as well as favorable gross-to-net items compared with the prior year quarter.

While the improved net pricing is awesome, I just caution that part of that improvement is less durable than the rest. Also encouraging, Salix volume was up over the prior year quarter by some 350 basis points, mainly driven by increased demand from XIFAXAN. We made considerable investments in the new Primary Care sales team, and we're starting to see measurable progress growing XIFAXAN prescriptions for IBS-D.

In Q2 compared with Q2 last year, total prescriptions for XIFAXAN were up 2% while extended units, which means the total prescriptions multiplied by the pills for Rx, were up 4%. After we lost some momentum with XIFAXAN in late 2016 and into Q1 of '17, it's encouraging to have our most recent results showing a return to growth for this important franchise.

In addition to XIFAXAN, we posted a solid quarter with APRISO, where Rxs were up 7%; and RELISTOR, where Rxs were up 33% versus the year-ago quarter.

As Joe mentioned, our Dermatology business continues to be in transition and performed below our expectations in the quarter. Filled prescriptions for our promoted brands in Derm declined in Q2 compared with what was a soft Q1, and the low volumes accounted for almost the entire 31% decline in revenue compared with Q2 of '16. The dynamics of the Dermatology segment have been changing over the last several years with payers more aggressively restricting access to branded products. Layer on top of that, the challenges we faced in converting from a specialty pharmacy-based model in early 2016, and we simply have not been able to deliver to our own or likely to your expectations. We take full responsibility for that.

What we've done so far was we put in place the right team, we rightsized the operating expense structure for the business, and we've invested in improved sales support systems and market access. What we need to do from here forward is demonstrate that we can get Derm back to a growth trajectory through improved execution against our existing product portfolio and the successful launch of new products.

There are some encouraging signs in Derm. Realized net selling prices seem to have stabilized, and the most recent prescription data trends suggest that we are regaining traction with our promoted brands.

Adjusted EBITA in the Branded Rx segment decreased 7% as total operating expenses, including R&D, rose 1% while unadjusted revenues declined 3% and gross margin declined roughly 100 basis points.

I want to point out that within the Branded Rx segment, we have rebalanced our selling and A&P expenses with reductions in the Dermatology business more than offset by increased investments in the Salix business. The drop in Dermatology sales was the driver of the decline in adjusted EBITA relative to Q2 of 2016.

Turning to Slide 13 and the Diversified segment. Total revenue for the segment was down 27%, both reported and on an organic basis, with more than 2/3 of that decline tied to the LOE products shown on the slide in the appendix to our slide deck.

Within the Diversified segment, there are some products and entities, for example the U.S. portion of Solta, that have the ability to grow with our more durable assets. However, our objective in the Diversified segment is to maximize the cash flows associated with the assets in this group with the understanding that the revenue of the segment as a whole is expected to decline over time.

Turning to Slide 14 and our balance sheet and liquidity. You see that we ended the quarter with more than $2 billion of cash and cash equivalents on hand. After that date, we did use $811 million of that cash to repay senior secured term debt, and we committed another $500 million to call and redeem the remaining $500 million of 6.75% senior notes due in 2018. Which leads to Slide 15, that shows our long-term debt maturity profile pro forma as of August 15.

After taking into consideration the $811 million debt repayment from the Dendreon proceeds and the $500 million redemption of bonds, we will have no debt maturities and no mandatory amortization until 2020. The closing of the sales of iNova and Obagi, expected in the second half of 2017, will enable us to address additional mandatory amortization of our term loans in 2020 and beyond and will reduce our senior secured leverage ratio. Based on our current maturity profile, we have time to develop and execute plans to address our debt stacks in 2020, 2021 and beyond.

On to Slide 16, our cash flow summary. Net cash provided by operating activities in the second quarter was $268 million. In the quarter, we paid out $210 million to resolve the Salix securities litigation and received $20 million in insurance proceeds for a net impact on operating cash flow of $190 million.

Adjusted for this amount, our cash flow from operations in the quarter was $458 million. Note that we have received or expect to receive an additional $40 million of insurance proceeds against the Salix settlement in Q3.

On to Slide 17 and the revisions to our 2017 guidance. On this slide, you can see the progression of our 2017 guidance from February to today. Today, we lowered our guidance for revenue for 2017 by $200 million across the range to new guidance in the range of $8.70 billion to $8.90 billion.

This change is a result of 3 factors: first, it reflects the loss of approximately $170 million of Dendreon revenues following the June 28 closing; second, it reflects a $120 million increase in our 2017 revenue expectations for the LOE assets shown on the chart in the appendix to our slides; and third, it reflects a reduced outlook for revenue for the full year 2017 of roughly $150 million, which is net of the impact of favorable movements in FX rates since the date of our May guidance.

The reduced outlook is mainly driven by our revised expectations for our Dermatology business. We continue to expect adjusted EBITDA to be in the range of $3.6 billion to $3.75 billion, even while absorbing the impact of the Dendreon divestiture.

This expectation is the result of 4 factors. First, the loss of $65 million of operating profit from the closing of the Dendreon transaction. Second, an increase of approximately $105 million related to our revised profit expectations for the LOE assets. Third, $38 million of additional transactional FX gain on intercompany debt balance that increased our adjusted EBITDA in Q2; and four, a reduction of approximately $78 million to reflect the change in our outlook for our overall business, mainly our Dermatology business, that has reduced our expectations for the full year 2017. There are graphical bridges showing the components of the changes to our revenue and adjusted EBITDA guidance on the next slide.

With that, let me turn it back to Joe.

Thank you, Paul. As I mentioned briefly in my opening remarks, our focus on delivering on our commitments. Over the past 18 months, we have made a number of noncore divestitures that have enabled us to simplify our operating model and reduce our debt.

The chart on Slide 19 has been updated from last quarter to show the progress we've made in closing the previously announced transaction and announcing new divestitures. As you can now see, we have now closed 10 of the 12 asset sales we've announced, and we expect Obagi and iNova to close in the second half of 2017.

We were able to execute transactions that delivered attractive returns for our shareholders. In the aggregate, the average multiple received, including expected milestone payments, was greater than 10x EBITDA.

On Slide 20, second quarter revenues for Bausch + Lomb/International segment were $1.241 billion. The business is growing 6% organically, driven by continued strength in China. China has delivered organic revenue growth of 9% year-over-year, and the Europe and Africa/Middle East were up 11% year-over-year in organic revenue growth. We're also excited about the launch of AQUALOX in Japan. These lenses were developed in-house by our scientists to offer maximum comfort, and they represent the first new innovation in the biweekly contact lens category in 5 years.

And in terms of new product development, Luminesse is filed with a PDUFA date in December of 2017. We're proud to have developed Vitesse, the first-and-only hypersonic device and the first major vitreous removal innovation in 40 years. We've received FDA clearance in April 2017. The first case was on July 18, 2017.

In addition, the rollout of the Stellaris Elite cataract system has been successful, and we're receiving positive comments from surgeons on the system's performance.

Briefly on our surgical business, we are committed to this business, which we view as an important part of an integrated eye care, and we will continue to invest in this business.

Staying with B + L on Slide 21, we provide an update on our Consumer business. To call out a few highlights. Overall, the global Consumer business continues to perform very well, with the U.S. Vision Care consumption up 2% year-over-year. This is the 22nd consecutive quarter of consumption growth for the U.S. Consumer business. We continue to invest in our Consumer business, and are clear the investments we've made in our brands are delivering results. Biotrue and PreserVision are showing strong growth as a result of recent ad campaigns we've undertaken to support these brands.

In terms of revenue, the Biotrue Multipurpose Solution is up 8.4%, and PreserVision is up 12.1% versus last year. This strong performance is a testament to the team's commitment to providing innovative quality Vision Care products that meet the needs of our customers.

Moving now to Slide 22. Salix, which represents 17% of our revenues, has been a standout this quarter, generating $387 million of revenue compared to $302 million last quarter. XIFAXAN in particular made strong progress over the first quarter, driven by strong sales in May and June. New Rx market share was up 400 basis points from March to June, from 73% to 77%, and revenues increased $185 million in quarter 1 to $233 million in quarter 2.

Drilling down on -- for a moment on XIFAXAN, you can see the strong new Rx share growth among Primary Care targets, which is up 1,200 basis points from 21% to 33%. We attribute this strong performance to the investment we made in a Primary Care sales force.

Our other sales -- Salix products are also performing very well. RELISTOR prescriptions grew by 33%. APRISO grew by 7% year-over-year, and we are committed to continuing to grow this business. You can see the progress of our products compared to last quarter in the chart in the lower right-hand corner. TRxs for XIFAXAN franchise are up 6%; RELISTOR franchise is up 21%; and UCERIS franchise is up 7%; and APRISO is up 4%.

On to Slide 23. As we mentioned earlier, we are committed to working through the challenges facing the Dermatology business and investing in research and development to reinvigorate the Dermatology portfolio. I want to assure you that we are taking steps to improve the performance of the Dermatology business. First, we rightsized the sales force from 250 individuals to 151 sales representatives. Second, we are stabilizing Dermatology average selling prices. Third, we continue to work with our partner, Walgreens, to modify and enhance our agreement.

Additionally, the new management team is taking further steps to optimize the business, which we recently rebranded as Ortho Dermatologics with a mission to be the most trusted Dermatology company in the United States. We also expect SILIQ to be a new growth driver for the business. SILIQ was launched on July 27. I spent some time with key opinion leaders at the product launch event last week, and I was strongly encouraged by their enthusiasm for SILIQ's unique method of action and strong efficacy. We are leveraging these key opinion leaders to educate and activate patients who can benefit from the pharmacologic properties of an IL-17 blocker.

At the same time, we are preparing to submit the FDA filing for IDP-118, which we believe has the potential to be a very promising topical product for the treatment of psoriasis.

Moving on to Slide 24. The products launched in the last 12 months, such as SILIQ, AQUALOX, Vitesse, are expected to generate more than $100 million of annualized revenue in 2017, and importantly, drive sustainable long-term growth.

On the left side of Slide 25, you can see that we continue to refresh our late-stage pipeline, with approximately 80% of the programs targeted to launch in the 2017 to 2019 timeframe. On the right, we've listed the innovations we are working on, including late-stage programs, submissions and new product launches.

For example, we recently completed a Phase II trial with [SAN 300]. We learned that SAN 300 , a biologic for autoimmune disease, is very well tolerated with no significant toxicity even at the highest dosing levels. Biomarkers did show evidence of related anti-inflammatory activity, but we will need to do some additional work before we make any decisions on next steps. The initiatives in this list have either been completed or are on track to be completed in the expected time frame.

Let me call out just a few of the programs we're excited about. First, IDP-126, an acne triple combination program. Second, we have IDP-118, a topical psoriasis product that we anticipate to submit later this year. Finally, I'll call out some of the new launches: Stellaris Elite, which is a Vision Enhancement System; Ultra for astigmatism contact lens; Vitesse, of course; and SILIQ for the treatment of moderate-to-severe plaque psoriasis. So we have a number of new opportunities here. We believe these products will be our growth drivers for the future, and importantly, our investments in R&D will enable us to deliver on our mission of improving peoples' lives.

To conclude, on Slide #26, our second quarter results demonstrate that we are delivering on our commitments and are making tangible progress towards a turnaround.

A few examples just to highlight. Adjusted EBITDA was up approximately 10% quarter-over-quarter. Debt reduction remains a focus, and we now expect to exceed our commitment to pay down $5 billion of debt before February 2018. Our B + L business is growing organically, 6%, and we are seeing strong performance in Asia, particularly in China, where the brand is synonymous with eye care; and of course, in Europe and Middle East. In our Salix business, our investment in Primary Care sales force has resulted in organic revenue growth of 16%, and the XIFAXAN trends are very promising. And the investments we are making in our pipeline have resulted in launches of SILIQ, AQUALOX and a strong late-stage pipeline of innovative and promising products that will be the foundation for our future growth. We remain laser-focused on our commitments, and these results confirm that the steps we are taking are moving us in the right direction.

With that, operator, let's open up the line for questions.

(Operator Instructions) And your first question comes from the line of David Risinger with Morgan Stanley.

David?

David, are you there?

Your next question comes from the line of Umer Raffat with Evercore.

Perhaps first, Paul, Joe, how are you thinking about the $5 billion maturities in 2020? There's a lot of investor feedback and questions around a possible use of some sort of combination of a convert, divestitures and/or even perhaps an equity offering. So I just wanted to get color from you on that. Perhaps one for Scott. Scott, the SILIQ is now the lowest priced biologic on a WAC basis. Is it also so on a net basis? And if so, what type of feedback are you hearing from docs on how the REMS component is or isn't offsetting the fact that it actually is a cheaper alternative? And finally, just wanted to get a bit more specific feedback on exactly what remains unremediated on the Florida Bausch facility for latanoprostene.

All right. Let me -- Paul, you take the first one on the debt, and then I'll take the SILIQ and then the Tampa.

Sure. Umer, as I said in my prepared remarks, I think the good news is that we have a bit of runway here to deal with the maturities that are coming up in 2020 and then into 2021. Our intention is to deal with those debt stacks through a combination of cash flow generated from our business. Our goal is to generate the maximum cash flow we can and deploy it to reduce our indebtedness. Second would be to use, as available, senior secured leverage to address those unsecured bonds that are due in 2020 and 2021. And third would be, to the extent that we continue to sell assets, that would obviously reduce our refinancing requirements for those debt stacks. And then last, and as I said in a number of different conferences over the course of last, call it, 3 to 4 months, we always have to have on the table the prospect of raising equity or reissuing equity-linked-type securities to deal with that debt stack. Obviously, it is our preference to use cash flow, senior secured leverage and proceeds from the sale of noncore assets as a means of reducing that debt stack in 2020.

Next part of the question was relative to SILIQ and the WAC and net. Obviously, we don't have all of the net charges. We just do know that, number one, we priced SILIQ to be the most affordable biologic for the treatment of psoriasis. As we look at what we are doing with the different physicians that we're talking to boot -- about, we are very encouraged by the response we're getting. We're still working through some of the managed care contracts and agreements, but the physician response has been very favorable to the product, predominantly because of the efficacy profile and our status as the only IL-17 blocker. I think we've continued to look to generate more data, not only the initial, the fast uptake of the SILIQ product relative to patient response, but also the opportunity to show the durability of the patient response, and we think that's what's going to be the primary reason why people will use it over time. But we're continuing to work to get additional access with managed care on the agreements. Importantly, we think this is going to be an important product for patients who have psoriasis because of the significant efficacy associated with SILIQ, and we're working through the REMS program, which we -- physicians -- have already signed up physicians for the program as we sit here today.

On -- the last part of your question was about Tampa. We are working through that. We obviously got a letter from the FDA yesterday afternoon. It is disappointing, as I mentioned in my comments. We do not believe there's any issues of safety or efficacy with Vyzulta. We believe it is specifically related to our Tampa facility. We had an inspection of our Tampa facility. We have responded to the observations from the FDA on that facility, and we've sent them additional response just recently to the FDA. Yesterday was our first feedback from the FDA, and we're going to obviously meet with the FDA and talk to them about the progress that we've made in resolving their questions. But I probably can't comment any further about the specifics of it until we have a firsthand conversation -- another conversation with the FDA. But importantly, we've brought in some new capabilities in our quality team. We've hired a new individual from -- previously with Lachman. We've got a new head for the quality site in our Tampa facility that we hired from Elcon, and we've got some additional medical device experience that we've rehired into our Bausch + Lomb business. So we're taking the steps we think are required to remediate this program.

Your next question comes from the line of Gregg Gilbert with Deutsche Bank.

I have a few here. First, can you speak to non-Bausch + Lomb/International and whether that's core or noncore longer term to Valeant? Paul, on Salix, can you talk a little more about what is temporary about the price effect that helped Salix and quantify the gross-to-net benefit and comment on whether there were any inventory changes in the quarter?

Sure. Starting, Gregg, with the non-Bausch + Lomb/International portion, that is an important part of our business. We like that business. Obviously, you're seeing some very significant growth. The leader we have of that business, Tom Appio, who has just done an outstanding job in getting that team focused and delivering on the results. We're very pleased with the business. We very much run it as part of our international business, including both the Bausch + Lomb as well as the non-Bausch + Lomb sales, but we run it as one business unit in each of the countries. So it is critical to us as we think about the future of how that business -- the critical mass we have in the business and how we run it. So we like it. We think Tom's done a great job with it, and we're going to continue to have it as part of our business. I think, Paul, you had the next question on the portion of the Salix price increase.

Yes, which I mentioned -- is part of it is less durable, Gregg. And what I'm talking about there is, to the extent that you have net pricing, it's on XIFAXAN, clearly that is sticky and clearly -- or it is sticky and you'd expect that to continue on into Q3 into Q4. To the extent that we get good pricing on products that are -- have a projected decline, that is less sticky, and so it doesn't stick with the company here as we go ahead into Q3 and 4. But there's really good news there. I mean, if you look at Salix, it was very strong growth in Salix, even setting aside some of that price increase that may not continue on as strongly. I mean, we had volume. We had price. Look at XIFAXAN, for example, if you want to look at an impact of pipeline, because overall, the GI space did not have a lot of pipeline change relative to Q2 of 2016. XIFAXAN did a bit. I mentioned in my prepared remarks, people looking at Rx is up 2%. Well, extended units were up 4%. Volume in XIFAXAN -- fundamental volume, up circa 4% plus. We had the benefit of some modest price increases with respect to the brand, and then we did benefit in the XIFAXAN brand within Salix year-over-year from a relative pipeline expansion. Now before anybody gets excited, pipeline is well within a normal range in 2017 in Q2. It's just that in the year-ago quarter, we had a contraction of, I'll get the number close, it was about 0.4 months versus a contraction in the Q2 of '17 of about 0.1 month. That is a net expansion, if you will, in Q2 of about 0.3 months of XIFAXAN. So that helped that 16% increase year-over-year in the quarter.

And the gross-to-net benefit, too, lastly?

Yes, the gross-to-net benefit was quite modest but also should be sticky.

Your next question comes from the line of Louise Chen with Cantor Fitzgerald.

I had 2 here. So first question I had was, we've often gotten the feedback -- or pushback, that even though you've been very aggressive with debt pay-down, that the leverage ratio isn't coming down fast enough. I'm just curious how should we think about that maybe qualitatively in '18 and beyond. And then secondly, just curious, you've done a lot to stabilize this business and turn things around. But what still keeps you up at night? What are some of the key hurdles left that you think are really important to overcome to get the company back to consistent earnings growth?

Louise, it's Paul. I'll start with the leverage ratio. Obviously, our goal is to reduce that leverage ratio over time. As we said many times in public forums, our company carries more debt than it should based on the assets that we presently manage. The 2 ways that we can address that the most easily are through generation of cash flow and growth of adjusted EBITDA. Those are absolutely the best ways to do it. So as we look forward, a combination of reducing debt from cash flow, as I outlined, to the extent that we see opportunities to sell assets and improve our credit profile and the quantum of debt, we'll go ahead and do that. The best way is for us to grow our adjusted EBITDA.

Yes. And clearly, I think, as we go to the key hurdles that you're talking about. Number one, it's all about the execution of the business. It's taking and finding ways to grow our Bausch + Lomb business, which we did in the quarter, plus 6% organic, as well as growing the Salix business. That's clearly one of the comments that I made in the call, plus 16% organic. We know that the Derm business is not performing up to expectations, and that's the next area we have to focus. But the good news for us, we think, is that 73% of the business, the Bausch + Lomb/International plus the Salix, is performing at a combined basis of about 8% organically. We think that's a real important factor towards the question for the future.

On the question that Paul mentioned on the debt, it is an issue. The good news is we brought it down from $32-plus billion to -- it'll be somewhere in the $27 billion after we make these additional payments. So we think that's an important part of what is critical for us for the future, as Paul very appropriately commented on. Final comment is, we need to continue to resolve some of these legacy legal issues. Christina Ackermann and her legal team are just doing an outstanding job, and I think as mentioned today, we cleared up a number of important issues that have been part of our legacy legal issues. We believe we need to continue to work towards resolving those for the future, and that really will be our focus for the next 3 months and next year.

Your next question comes from the line of Chris Schott with JPMorgan.

This is Chris on for Chris. First question, can you elaborate on the progress for rightsizing the Dermatology portfolio between your upcoming launches for SILIQ and IDP-118, the sales force realignment and your work to stabilize ASPs. What's the next steps for the Derm business and how do you think about the balance of restructuring the effort -- your restructuring efforts and upcoming launches?

And for second question, can you talk through the 2018 pushes and pulls on EBITDA? Just looking to next year, is flat EBITDA a possibility in 2018? And should we think about EBITDA being down with the divestitures and ongoing price [rising] in diversified business?

Sure. Let me start with what we're doing on the Derm business. Clearly, the Derm business, as I mentioned in the call, it has a number of market dynamics that are changing. We're seeing some of the products, for example, some -- retinoid has switched to over-the-counter. We've seen some of the changes in managed care access and rebates and the gross-to-net. And appropriately, what we did is we took the decision early in the year to move to the right number of sales reps for our company. That meant we reduced it from 250 approximately to 151 sales reps. That was an important step to rightsize the expenses relative to what we saw in the portfolio.

As we think about the future though, the very clear direction we have is going to be to grow this business as a result of launching new products. These new product launches, starting with SILIQ last month, then moving to IDP-118, which is, we think, a very novel way to treat psoriasis, are going to a very important opportunities for us to grow this business and to grow EBITDA into 2018 and beyond for the Derm business. But I think that's probably the best I can answer relative to where we're going with it. Clearly, the action steps I talked about also talked about stabilizing the average selling price, which we've done, partnering with our Walgreens and trying to continue to amend and enhance that program, looking at a new branding for the Derm business, a new management team in place. I think we've taken the steps that are going to position us for growth for the future, but it's really going to come down to new products, really, is the important comment.

Yes, with respect to EBITDA -- adjusted EBITDA for 2018, we're not going to provide guidance for 2018, but I will provide a couple of things to think about. If you're solely looking at growth -- aggregate growth, stating the obvious, things that need to be taken into consideration are the LOES, the timing of those LOEs and the divestitures and the timing of those divestitures. So if you're simply laying down actual results expected for '17 versus '18, you need to take those into consideration and definitionally, the LOES and the divestitures will be a earnings -- excuse me, a growth drag on '18.

Now interesting, with respect to the LOES, our hope would be that the LOES would continue to get pushed out and we'd gain more revenue and therefore cash flow from those LOES in 2017 and then ultimately, they go -- when they go generic, when they lose their exclusivity, it's a growth drag. But we would prefer, as you've seen, that we continue to see increased revenue expectations for that LOE basket. But those, make no mistake, those are going away in 2018. So that you need to keep that in the back of your head.

The important thing is, I think, talking about LOEs and divestiture, is you strip both of those away and look at our underlying business, Joe referenced, I referenced in my comments about the underlying strength of our core businesses. I mean, I used the B + L business -- B + L/International segment as an example. It's growing strongly. The Salix portion of our Branded Rx business is returned to a growth mode. It's our goal to bring -- excuse me, the Dermatology business back to a growth mode. If we do all those things, then the core part of our business for sure would grow in '18 relative to '17.

Your next question comes from the line of David Amsellem with Piper Jaffray.

I have just a couple of questions on the GI business. First on XIFAXAN. Can you talk about the mix from growth related to -- was it driven by primarily IBS or HE or both? And how much of it was just benefit from the more restrictive labeling for VIBERZI? Maybe you can talk to those near-term dynamics.

And then just secondly, on a broader GI question. Before Salix was acquired, there was a fair amount of R&D spend on the business. That's obviously fell by the wayside. I guess, the question here is, this: you've talked about R&D in ophthalmics and Dermatology, not hearing a ton about R&D in the GI space. So maybe you could talk about what you're doing to try to rebuild the R&D infrastructure for the GI business and how much of a priority that is.

Sure. So let's start the first part of your question. Clearly, the IBS has been an important part of the growth, but I do want to be -- you know we've got specific HE programs that are helping the hepatic encephalopathy as well, especially with patient compliance.

First, to deal with the IBS question. The IBS-D opportunity for us was one that was very -- we recognized it going back about 6, 8 months ago, and we looked at it and said, we really need to build additional Primary Care capabilities. We put together that Primary Care capability of over 200 -- approximately 250 sales representatives, sales professionals out there. That was important to us to reach the majority of the IBS physicians that prescribe for IBS products. That work together, got that in place on or about February, and that has really driven a majority of the incremental volume that we're seeing, but I don't want -- I want to be clear that having the incremental sales force and growing that, as I mentioned in the call, 1,200 basis points was absolutely one of the important Primary Care efforts.

On HE, though, one of the things we've also put together for HE is additional programs to help with compliance when a patient is first diagnosed and discharged from a hospital with HE to make sure that the patients who are discharged get the appropriate product and stay on it from a compliance point of view. So we put together some nurse educator programs, some discharge planning programs to help us with the HE and making sure that the patient gets the maximum benefit for -- of XIFAXAN so that they do not get readmitted to the hospital. So I think it was both of them. But clearly, it was the IBS is driving most of it.

On the question, we don't view it specifically by (inaudible) or changes in labeling. We view it as really getting our message out on what we could do with XIFAXAN and importantly, educating the physicians, especially Primary Care.

On the question of R&D in next-generation and what we're doing there, I don't necessarily agree with your comment. I did talk specifically in the Salix -- about Salix, some of the things we're doing in R&D for Salix. We, number one, have already filed a next-generation product for colonoscopies. That clearly is one example. The second example is that we have a next-generation patient-friendly alternative that will go into clinical trials in the second half of 2017. We think that is another important advance. And we're going to continue to look at additional indications for XIFAXAN, going after some areas, [CIBO] as an example, looking at other places where XIFAXAN can help patients with any of the gastrointestinal opportunity. So we're clearly going to invest behind this. Look for us to make more announcements in the second half relative to what we're going to do with a next-generation XIFAXAN that we think is going to be a more patient-friendly product and important advance for patients.

Your next question comes from the line of Gary Nachman with Bank of Montreal.

This is Nicole on for Gary. I just wanted to ask a couple of questions. Have you completely fixed the Walgreens partnership? Or are they still more tweaks that need to happen there?

Well, I would say that Walgreens is an important partner for us. What we worked, especially in the Dermatology area, a number of projects with Walgreens to improve the patient experience for patients that go in looking for filling a Dermatology prescription. So we, -- but we clearly do think there are additional things that we're working with Walgreens to improve in the program. So I think, in general, what I'd say is, number one, we've fixed some of the issues we had a year ago, which was relative -- we were seeing in relative average selling prices. Number one, that's been fixed. We feel we now are stabilizing our average selling prices for Dermatology. Number two, I do think there are some additional opportunities for us, and we're talking to Walgreens all the time about what are some of the next-generation opportunities for us to partner with Walgreens for the future and looking at how we can modify or enhance the existing agreements. So I think there are still opportunities there that we'll spend more time working with Walgreens for -- in the future.

Okay. And how much of the Dermatology volume is going through Walgreens? And why aren't we seeing more of a benefit with those prescription trends there?

Yes, I don't know we're going to give out the exact percentage of our Dermatology business that goes through Walgreens. I would say, clearly, Walgreens is an important part of the business, to be clear, relative to just as a general comment. But I don't want to suggest that we're going to give out the percentages right now. But I think the important part, when I step back from Walgreens, or step back from your question to say, what's going on with our programs with Walgreens? We think Walgreens is a good partner, and we're working to try to enhance the program for the future, and that's really how we're doing it, but I probably don't want to give out exact line that goes through Walgreens.

Your next question comes from the line of Doug Miehm with RBC Capital Markets.

Yes. First question just has to do with the foreign exchange component there. I believe it was $38 million that you're showing in the -- Page 18 on the guidance line in terms of the bridge. I'm just wondering if that was the full amount that was impacting Q2 or if there was an amount from Q1 that I'm just overlooking right now.

And then, the second question just has to do with the changes in contingent consideration/milestones from 2 30 to 2 70, I think it is, and what that relates to, maybe SILIQ. And then finally, why CapEx dropped from $250 million to $175 million?

Yes, I'll start with the FX piece. That $38 million that we call out is the one that you can quite easily find in our financial statements. It's the FX gain on intercompany debt balances that is a component of our adjusted EBITDA, and so it's kind of -- that's what was recognized in the quarter. There was also a gain recognized in Q1 -- help me, someone, with the...

$26 million, I think, or something like that.

$26 million. It was $26 million in Q1, but specifically, the $38 million was what impacted our adjusted EBITDA in Q2. As you're thinking about the impact of FX in its entirety on adjusted EBITDA, I did call out that it has 2 components. One is this -- a transactional gain; and the other are headwinds, basically less favorable FX rates relative to the prior year period. And net-net, that translated into a bit of a tailwind, not an enormous amount in adjusted EBITDA.

And the final question was on CapEx. CapEx is something, it just depends on when -- how projects progress through the year. It's really, for us, one of the things that we talked about is changing how we've taken approach to globalize our business and globalize our capital expenditures. Dennis Asharin on our team has done a really nice job in putting together a program and activities for how we look at CapEx, and I think we just believe we can be a little bit more efficient with CapEx this year. As for where it goes for the future, we'll talk more about that next year. But this year, we think we can be a little bit more efficient. Obviously, that helps on our return on capital. That's one of the metrics that we put in place for the company in terms of looking at the future and where -- how we can be more efficient for the future.

And your final question comes from the line of Annabel Samimy with Stifel.

So you've talked about some of the volume and access pressure that you're seeing due to reimbursement and changes in the payer landscape in Dermatology. And it looks like in 2018, there's going to be some more, not just for Derm but also for RELISTOR. So maybe you can talk about what you might do to offset some of this and how are some of your other contracts shaping up for 2018? What might we be expecting there? And then, just to go back to the remediation efforts around the B + L plant, I know that you don't really have much detail at this point, but do you have a sense maybe of the timing? Is this a several-month delay? Is it going to be another refiling of the NDA and 6-month review? Is there going to be a technical delay? Do you have any color there you can provide?

Sure. Maybe just a couple comments. Number one, in terms of this, the volume and access, I mean, just -- I probably want to correct some -- there's some noise out there in the system. There was at least one report about whether or not some of the changes in the managed care plans occurred this year or last year. To be clear, some of the changes that occurred with CVS and Caremark really occurred in 2016. So they haven't really been a 2017 event. They were rather a 2016 event, and there really is no significant impact on our business relative to volume and access for our product. Having said that, though, let me go to really the heart of your question in terms of where are we going, and I'd say the most important thing that we can do with our Dermatology business is bring out these new products. I think it's always going to be about new products, new innovation, and that's why I think a product like SILIQ, where we have the most efficacious product or at least as it relates to PASI 100 scores, certainly a very efficacious product, that we think that is going to be the reason why people are going to use our products in terms of the efficacy. We did price it, though, to be clear, as the most affordable product in the area of psoriasis -- biologic for psoriasis. So for that reason, we think we'll get the innovation that's going to be important for patients and allow us to work through some of the issues on the REMS program for that specific patient, physician and pharmacist. So we're excited about innovation. I think it's the #1 way we're going to work through that.

Beyond that, it's always going to come down to the next product, the IDP-118, the IDP-126, all the other products that we'll launch and the innovation that those will bring to the marketplace.

On the question of Tampa, I really can't say very much more than that. We just got the letter yesterday. We're going to obviously be in touch with the FDA. I know there's an outreach to the FDA even as we speak today. So that's really going to be important thing before I make any specific comments on kind of the next steps or timing. I'm really going to, at this point, want to work through that with FDA. I think we feel we've made significant progress at the Tampa site. We're going to continue to talk to the FDA about some of their observations. We've put together a response to their observations already, and we'll see where it goes for the timing for the future, but thank you very much for your questions, everybody.

Let me close there with saying, I thank you for your participation this morning. We clearly are looking at some of what we think are exciting opportunities for the future of Valeant. First and foremost, really looking at our ability to grow the Bausch + Lomb/International business as well as the Salix business. Having 73% of our business showing the growth that we've showed of approximately, on a combined basis; 8% on an organic basis, we think, is a really exciting preview of our future. And importantly, bringing down the debt, giving us some additional flexibility on how we can manage the debt and having 0 maturities and debt payments between now and 2020, we think, is an important milestone. And importantly, some of the progress we're making on legal liabilities, we think, all those total into a company that we can really begin to have some significant success in our turnaround. But it's not going to happen overnight. It takes some time, but we're excited about what we see for the future. Thank you, everyone, for joining us today on the call. Have a great day.

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