Bausch Health Companies Inc (BHC) 2017 Q4 法說會逐字稿

Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to Valeant Fourth Quarter and Full Year 2017 Earnings Call. (Operator Instructions)

Art Shannon, SVP of Investor Relations and Global Communications, you may begin your conference.

Thank you, Amy. Good morning, everyone, and welcome to Valeant Pharmaceuticals Fourth Quarter Full Year 2017 Financial Results Conference Call. Participating on today's call are Chairman and Chief Executive Officer Mr. Joe Papa; and Chief Financial Officer, Mr. 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'd like to remind that 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. 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 of the presented posted on our website.

Finally, the financial guidance in this presentation is effective as of today only. It is our policy generally to not updated 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.

Thanks, Art. Let's start with the topics for today's call. First, I will run through the fourth quarter and full year highlights and briefly review the key achievements of our businesses. I'll then turn the call over to our CFO, Paul Herendeen, to review about the fourth quarter and full year financial results and provide our guidance for 2018. Finally, I will wrap up with the 2018 catalysts before opening the line for questions.

Beginning on Slide 4, approximately 21 months ago, we established a multiyear plan for Valeant's turnaround. After working to stabilize the company, we are now well into the second phase of the plan, the turnaround, where we're taking steps to drive shareholder value. Our 3 main areas of focus are: resolving legacy issues and derisking the balance sheet; investing in core franchises with attractive growth; and launching new products with meaningful opportunities. We've built a world-class organization, and we are confident that we can continue to successfully execute on these initiatives.

Moving now to Slide 5. We provide an overview of what we have accomplished in 2017. It's been a very busy and productive year. Bausch + Lomb/International, which represents more than half of our 2017 revenues, grew organically in the mid-single digits during each of the 4 quarters of 2017. Our Salix business is also growing nicely. That business generated mid-single-digit or higher organic revenue growth during the last 3 quarters of 2017.

In addition to growing our core businesses, another important area of focus throughout the year has been advancing our new product pipeline. We launched more than 100 products globally last year, including AQUALOX contact lenses in Japan and Biotrue ONEday lenses for astigmatism in Europe. In the U.S., we launched VYZULTA and SILIQ. We received FDA approval for LUMIFY, FDA acceptance to file for DUOBRII and the clearance of next generation of Thermage System. At the same time, we've continued to make progress in our efforts to strengthen the balance sheet. As of today, we have reduced total debt by more than $6.7 billion since the end of the first quarter of 2016.

Our legal team has done an outstanding job reducing the legal liabilities facing the company. From the beginning of 2017 through today, we achieved dismissals, settlements or other with positive outcomes in more than 80 litigations and investigations all of which related to historical matters. Notably, we agreed to resolve the Allergan securities litigation subject to court approval, which was an important milestone to resolve. We believe that our insurance policies are sufficient to cover the settlement cost and legal fees. In a recent development, we've agreed to resolve the SOLODYN antitrust litigation, with the class settlement amounting to $258 million (sic) [$58 million] and which will be remaining those subject to court approval. Also, we simplified the supply chain by reducing number of manufacturing sites we operate by 23%. And we're in the process of discontinuing more than 1,900 SKUs. These changes have resulted in cost improvements of approximately $90 million in 2017 alone. Delivering on our commitments have been and continues to be a major focus of the team.

Moving now to Slide 6. First, I want to call out the 4 sequential quarters of mid-single-digit organic revenue growth in the segment. As you could see from the chart on the right, this sustained growth follows a declining to relatively flat period in the prior year. These results were led by strong sales in Global Consumer, Global Vision Care and our International business. I also want to highlight the growing e-commerce presence of the Global Consumer and Vision Care business. On Amazon, B + L grew by 58% in 2017 compared to 2016. And given the strength of the B + L brand in China, we're excited to see that Alibaba sales spiked about 35% on Single's Day, which is a quarter 4 Chinese shopping holiday. Finally, after launching VYZULTA at the end of 2017, we're excited that this proven treatment is now available to lower intraocular pressure for patients with glaucoma. The global glaucoma market represents a $6 billion opportunity, and it's expected to grow at compound annual growth rate of 15%, eventually accounting for more than $11 billion in revenue opportunity by the end of 2020.

As an update, we also recently learned that Express Scripts has agreed to begin coverage of VYZULTA under an unrestricted access position among the commercial ESI national preferred and basic formularies. This will give us access to an additional 23 million people in the U.S.

On to Slide 7 for the update on Salix business, which grew organically 5% in 2017 and 5% in the quarter year-over-year. XIFAXAN is performing well delivering organic revenue growth of 5% in 2017. We have very good momentum behind XIFAXAN, both in IBS-D and hepatic encephalopathy, and we believe we have a durable product in XIFAXAN, which we're continuing to invest in through the study of new indications and new formulations. XIFAXAN TRx unit volume growth was up 4% in Q4 2017 compared to 2016, driven by the Primary Care expansion and sales force messaging on the proper dosing for IBS-D. As you can see from the chart in the upper-right corner, since we added a Primary Care (inaudible) February 2017, TRx' are up approximately 10%. This trend has continued in the first quarter as we're up another 7.3% for January 2018. And finally, over the trailing 12 months, XIFAXAN achieved blockbuster status of $1 billion of sales as of January 2018. And I want to congratulate the entire Salix's team on that achievement.

RELISTOR is also performing well. Weekly TRx growth for RELISTOR increased approximately 40% in 2017 as we show in the chart on the lower-right corner.

Overall, we are making good progress in our GI business, and we look forward to continuing to build this franchise for the future.

Turning to Slide 8, Ortho Dermalogics. We remain focused on returning our dermatology business to growth, and we have a clear path for achieving that goal by investing in new product approvals and launches, global expansion and business synergies. Looking at the milestones we called out in the top right corner, you can see we have core group of 5 recently launched or soon-to-be approved products that represent a meaningful growth opportunity for our dermatology business. With SILIQ and the potential approvals for DUOBRII, JEMDEL, we expect they're a very important group of product that could help improve the lives of patients with psoriasis. And when you add Retin-A Micro in the late-stage acne treatment, ALTRENO, to the group, you can see how these products collectively represent an opportunity to restore this business to grow in the coming years.

If you take a look at the chart at the bottom right, you'll see how these new products in high-growth markets add to our base business and the growth trajectory we are anticipating. A return to modest growth in 2019 and ramp up from there. We also increased the derm sales force by more than 25% last month to support this growth.

I'll talk more about our plans to double Ortho Dermatologics business after Paul takes us through the financial results and 2018 guidance. But let me spend a minute here on SILIQ, which we launched in July of 2017. We expected SILIQ would have a slow initial uptake based on the labeling, but believe it will represent an important long-term opportunity. Early market access for SILIQ was better than expected. At less than 6 months, we have covered for more than 50% of commercial life and expect to soon reach above 70%. And we are continuing to expand by targeting broader audience of high-volume prescribers of injectable biologics. To date, we have REMS certified approximately 100,000 -- 1,542 physicians or about 70% of the key prescribers in this broad injectable biologicals. Importantly, 90% of patients who have started using SILIQ have stayed on therapy, which is an important outcome. In addition, new data suggest that SILIQ reduces the burden from anxiety and depression in people with psoriasis.

On Slide 9. Before I turn it over to Paul, I want to call one important takeaway. The Bausch + Lomb/International segment and the Salix business, which represent approximately 3/4 of our revenue, grew organically in the mid-single digits in 2017. We see this clear evidence that the investments we are making in our core business are delivering results.

Paul, I'll turn it over to you

Thanks, Joe. Before I start, when we talk about organic growth, I just want to make sure everyone understands that means on a constant-currency basis and adjusted to remove the impact of the businesses that we divested.

So here we go. Starting with the quarter on Slide 10 with segment details on Slide 11, 12 and 13. We posted a solid quarter with reported revenue and adjusted EBITDA squarely in line with our expectations. Reported revenues were down 10%. Divested assets accounted for roughly 9 percentage points or $221 million of that reported decline. Further adjusting for FX, so on organic basis, revenue was down 2%. If you peel back the impact of the LOE bucket, our core or go-forward assets actually grew about 1%. The major items driving that growth were the B + L/International segment, which grew 4% organically, and our Salix business, which grew 5% organically. Within the B + L/International segment, all 5 subunits posted organic growth over the prior-year quarter. In order: Global Consumer was the star, up 9%: Global Vision Care up 5%; Global Surgical and International Rx were both up 2%; and Global Ophtho was up 1%. In Salix, XIFAXAN led the way, was up 10%. Ortho Dermalogics was a growth headwind in the quarter down 36%, as the rebasing of that business continues. I'll spend a second.

Our ASPs in derm have stabilized and now units are stabilizing as well. Not compared with the prior year, but looking at time series Rx data as a proxy for the units, you can see the flattening out. The dermatology market has undergone significant changes during the last 2 years. Third-party payers have dramatically reduced patient access to products like those that comprise our legacy derm portfolio. That has had an impact on both net realized prices and on unit volumes. Our legacy products continue to bring value to patients, just at lower volumes and lower net realized prices than in the past. As we move forward from here, we intend to grow our presence in dermatology through innovation. And that means, the development and launch of new products like SILIQ and RAM 0.06% and late-stage development drugs like DUOBRII, like JEMDEL and like ALTRENO that represent beneficial options for physicians and their patients, and therefore, we expect will be more broadly available to patients.

The other revenue decline during the quarter was predictably the U.S. Diversified Products segment, where the majority of the impact of the LOE bucket is felt. Organically, the segment was down 12%, but the LOE bucket drove 14 percentage points of decline, while the balance of the Diversified segment actually grew 2%. Gross margin in the quarter was down over 200 basis points versus the prior-year quarter. The main driver was reduced gross margins in the B + L/International segment, where margin just climbed by some 260 basis points due in part to the transactional impact of unfavorable movements in FX. Gross margin in that Diversified segment also declined roughly 195 basis points driven by mix as revenues from the high-margin LOE products declined. Gross margin in the Branded Rx segment was up roughly 195 basis points due to the impact of that Dendreon divestiture.

Below the gross profit line, adjusted SG&A expenses were down about $26 million compared with the prior-year quarter, the reductions in all expense categories due to the divestitures that took place during the year. Offsetting some, but not all of those reductions was increased promotional spending, particularly within the U.S. Consumer and the U.S. contact lens businesses. You may have seen our TV ads for PreserVision, Ocuvite and Soothe XP. Validating the perspicacity of those investments, the U.S. Consumer and U.S. Vision Care businesses were both up 16% organically compared with Q4 of '16 on very strong volume increases.

Our investment in R&D in the quarter compared with the prior year was down 3%. As I said in the last call, we intend to increase our investment in R&D in the coming years, and when we get to guidance, you'll see that we expect to invest roughly $425 million in R&D in 2018. The net of all that I outlined for the quarter was that adjusted EBITDA on a reported basis was down 19% compared with the prior year quarter. Divested assets and the LOE products accounted for almost 18 percentage points of that decline. So adjusted EBITDA for our remaining base business was down slightly, less than 1% as growth in our B + L/International segment and Salix business was offset mainly by the decline in dermatology. Adjusted EBITDA in the quarter was $875 million.

Moving right along to the full year shown on Slide 14, with additional segment details on Slides 15, 16 and 17. Many of the themes I called out for the quarter apply to the full year as well. Reported revenues were down 2% compared with 2016 with divested assets accounting for roughly 4 percentage points or roughly $387 million of that decline. Unfavorable movements in FX accounted for another minus 1% and the LOE bucket roughly 5 percentage points of decline. Our underlying core businesses were essentially flat compared with the prior year as -- and I think you can see, as we put the contraction of our dermatology business behind us, you can start to see the future growth potential of our core assets. Of our core businesses, the B + L/International segment posted 6% organic growth over 2016. Four of the 5 subunits grew led by the International Rx group up 13% organically benefiting from improved net pricing, and increased volume, mainly due to the inventory drawdown in Poland and Russia in 2016. Global Consumer was up 6% organically, consistent of both -- across both the U.S. and international markets. Global Vision Care was up 3%, also consistent across both the U.S. and international markets. Global Surgical was slightly positive. And Global Ophtho Rx declined a small amount, roughly 20 basis points.

2017 was a good solid year for the B + L/International segment. Revenue in the Branded Rx segment was down 6% organically. Salix finished up 5% organically led by XIFAXAN, which was up 5% even after absorbing roughly $25 million of pipeline inventory reductions over the course of 2017. RELISTOR was up 4%, APRISO up 2%, and we had better-than-expected contribution from Glumetza through the third quarter of the year. LOE shaved some 160 basis points of organic growth off of Salix' result and that's mainly Zegerid. It was a good solid year for Salix after a slow start in Q1.

Dermatology is the same story as in the fourth quarter. One factoid for you. Compared with 2016, our net realized pricing declined by only 100 basis points for the full year. We believe the dramatic decline in realized net pricing that we saw in our dermatology business in 2016 are behind us. The Diversified segment declined organically 27%, with 22 points of that decline related to the LOE assets. So the other assets in the segment accounted for roughly 5% of the decline for the full year. As we put the impact of that big bolus of LOE assets behind us in 2018, the balance of the Diversified segment is expected to be a low-single -- excuse me, low- to mid-single-digit decliner off of a much smaller base.

Gross margin for the company decreased by some 280 basis points compared with '16, with the mix of revenues between segments accounting for roughly 120 basis points of that decline. Another driver of the decline in gross margins was the impact of transactional FX losses in part to the B + L/International segment that decreased our margins. The balance was mainly due to the change in product mix within the diversified segment driven by the decline in revenue from the LOE products.

SG&A expenses for the full year were favorable to '16 by $160 million. Roughly half of the reductions in SG&A were costs that were eliminated in conjunction with the divestitures. Excluding the impact of divestitures, we reduced SG&A expenses relative to '16 by some $31 million across the Branded Rx segment and by roughly $70 million within corporate G&A. And within G&A, $55 million of that was a reduction in share-based comp. Adjusted for divestitures, we actually increased SG&A spending in the B + L/International segment, mainly increased selling expenses in Vision Care and Optho Rx. Investment in R&D for the full year was down 11% as we're not able to immediately redeploy funding from programs eliminated in conjunction with the divestitures.

Adjusted EBITDA for the full year was down $737 million. Of the 18% year-over-year decline, roughly 4 percentage points were due to divestitures, roughly 11 percentage points from the impact of the LOE assets, and 1 percentage point from currency. Adjusted EBITDA for the remaining core businesses were essentially flat versus the prior year. Full year adjusted EBITDA was $3.638 billion.

Moving to Slides 18, 19 and 20. During Q4, we continued our efforts to improve our capital structure. We use the net proceeds from divestitures to reduce debt, we used cash generated from the business to reduce debt, and we completed successful note offerings during the quarter to further address our 2020 debt maturities. Our most significant financing was the $1.5 billion of senior unsecured notes offering in early December. Regaining access to the unsecured debt markets was an important step as we work to ensure that we have the runway to continue the turnaround and transformation of Valeant. Sitting here today, our long-term debt is down to $25.5 billion, and our next maturities are out in 2020. Plenty more work to do, but we made very substantial progress over the course of 2017 and including in the fourth quarter.

In order to maintain flexibility, as we continue to manage our cap structure, we do plan to file a universal shelf around the same time as the filing of our 10-K. This is good practice to have a shelf in place, and this should not and does not signal any specific transaction.

Cash flow from operations in the quarter was a strong $578 million and totaled $2.29 billion for the full year.

Turning to our guidance for 2018 on Slide 21. We're guiding the revenue in the range of $8.1 billion to $8.3 billion and adjusted EBITDA in the range of $3.05 billion to $3.20 billion. We expect that revenue and EBITDA will be the lowest in Q1 as historically this quarter is seasonally impacted and will generally move higher over the balance of the year.

We've included a bridge on Slide 22 to show how we think about those ranges relative to our actual results for 2017. Specifically, you need to adjust our 2017 for the assets we divested, next adjust for the changes in FX. Finally, you should consider the impact of the LOE assets, including the class of 2017 LOE bucket that we called out throughout 2017 and a more manageable group of product phasing LOEs in 2018. In addition to the products highlighted on our LOE Slide in 17, our 2018 guidance takes into consideration the prospect for LOEs for APRISO, UCERIS, Acanya, CUPRIMINE and 2 strengths of SOLODYN. A little color on APRISO and UCERIS. We have risk-adjusted our 2018 revenue and profit forecast for these 2 products as there are some probability that one or both could face generic competition in 2018. Accordingly, our guidance anticipates potential LOEs for both. Here a couple of facts to consider. First, there have been no tentative approvals from the FDA for a generic for either drug. Second, we are actively defending the intellectual property protecting these brands. As we learn more about potential competition, we'll keep you posted. Details of both LOE buckets, the class of 2017, the class of 2018 are shown in the appendix in the slide deck.

So looking at the bridge on Slide 22. Our revenue guidance implies that we expect our business adjusted for the divested assets, that 2018 expected LOE impact and for FX to grow some 3% to 5% and our adjusted EBITDA to be up 1% to 6% relative to our base businesses performance in 2017. Excluding divested assets and the impact of LOEs, our B + L/International segment and our Salix unit are expected to generate solid mid-single-digit revenue growth. Our dermatology business is expected to decline in 2018 versus '17. While the business stabilized in the second half of '17, the first half of 2018 will have a tougher comp for us with the prospect of turning the corner to growth later in the year as our new product launches take hold.

Setting aside the expected decline of the LOE assets, we expect that the balance of the Diversified segment will be relatively stable in 2018 versus '17. Note that in our guidance -- note that our guidance for 2018 incorporates increased spending to support the launches of VYZULTA, LUMIFY, SILIQ, DUOBRII, JEMDEL and others and to support the continued growth of our B + L consumer products. As Joe mentioned, after year-end, we increased the size of our derm sales force by more than 25%. And earlier, I mentioned there are TV ads for some of our B + L consumer brands.

Finally, we expect to invest more in R&D in 2018 and than in 2017. The point of this story is that our objective is not to maximize adjusted EBITDA in 2018. It's to ensure that we support each of our go-forward businesses with appropriate resources to drive the best long-term outcomes. Note that we are guiding to a roughly 13% effective tax rate on adjusted earnings for 2018. After giving effect of the impact of U.S. tax reform, we continue to enjoy an attractive and sustainable rate on adjusted earnings. As a result, we converted a large proportion of our earnings to cash, a good thing. Overall, our global operational footprint provides us with the flexibility to adapt to changes in tax laws. And as a result, our 2018 guidance for our effective tax rate on adjusted earnings is roughly the same as our actual adjusted tax rate in 2017. Net-net, the impact of U.S. tax reform on 2018 is that we'll pay a bit more in U.S. cash taxes due to tax reform.

Now turning to our longer-range outlook for our company on Slide 23. Joe started off with a slide that talks about our progress towards the transformation of Valeant and shows 2017 and 2018 as the turnaround years. 2018 will set the stage for our transformation to begin. Slide 23 is a visual presentation of our expected revenue progression from 2016 through 2021. Before you get your micrometers out to try to infer more than we are actually trying to say on this slide, the information is not to scale and is simply meant to illustrate the ramp and certain components of revenue through 2021, with 2018 being our trough year. This represents the entirety of our business on reported results, including LOEs. Here is the important part. Sitting here today, we expect our reported revenue to grow at a CAGR of between 4% and 6% off of the midpoint of our 2018 guidance through 2021. Further, we expect our reported adjusted EBITDA to grow at a slightly faster CAGR, 5% to 8%. Please note that, in the case of both revenue and adjusted EBITDA CAGRs, we do not expect the growth over the period from 2018 to '21 will occur in a linear fashion. For example, the impact of the class of 2018 LOEs will dampen but not overwhelm revenue growth in 2019 versus 2018. For the avoidance of doubt, we expect reported revenue to grow beginning in 2019 versus 2018, and for growth to accelerate as our new product launches take hold. The crux of the biscuit is that we now have line-of-sight to the return to growth.

With that let me turn it back to Joe.

Thank you, Paul. Let me now turn to Slide #24. Today, I'm excited to announce the global expansion of our dermatology business, Ortho Dermatologics and our aesthetics business, Solta, as a long-proven model demonstrating the synergies between aesthetics and medical dermatology. We've now reached a point with our 5 new launches in late-stage products in dermatology, including SILIQ, DUOBRII, JEMDEL, RAM 0.06%, ALTRENO, along with our investment cycle in Solta with Thermage, Fraxel and Clear + Brilliant that are all bearing out that we decided to combine our dermatology portfolio. Solta is available in countries all around the world and with a geographic expansion of our U.S. dermatology business combined with our new product growth, this will help us to double this business over the next several years. With differentiated products, we believe dermatology and aesthetics are high-growth therapeutic areas with strong consumer qualities that will prove durable and successful over time, especially as our market share increases in the global field.

Let's discuss the opportunities for our products. Starting with psoriasis. We estimated the combined market for biologic and non-biologic products to be more than $7 billion per year. We believe acne adds another $2 billion. So this is a large and growing area with an addressable market of over $9 billion per year. In addition, there are 7.5 million patients in the U.S. with psoriasis, the majority of which are treated with a topical either alone or as an adjunct to biologics. Ortho Dermatologics has distinct competitive advantages in this area. For example, based on publicly reported data, we believe approximately 35% of the major products in Phase III are awaiting approval in the U.S. for acne, atopic dermatitis and psoriasis are Ortho Dermatologics assets. We also have an opportunity to leverage the synergies from the aesthetic Solta which we are combining with Ortho Dermatologics. This combination will augment our innovative prescription portfolio with a complement of minimally and non-invasive devices that address a broad range of skin care and treatment needs. Combining a strong aesthetics business with derm Rx is a proven model, and we believe our portfolio offers the best range of products in any derm sales force today. On last quarter's call, we announced a target to double the Ortho Dermatologics business, and based on the strength of our pipeline in dermatology, we believe we can achieve that goal by 2022.

The graph on the right shows how we plan to get there, primarily through investments we are making in our sales force, global expansion and new product launches. With respect to the sales force, the first pillar, in January, we increased the number of sales reps in derm by more than 25%, and we created a psoriasis team. We believe we'll soon have a very important group of products that could help improve the lives of the patients with psoriasis and want to be well positioned with a sales force that can promote these products to support our growth. The second pillar, global expansion, is expected to provide strong growth from the existing portfolio, especially in Asia Pacific, Europe and the Middle East. In U.S., we received clearance to start to launch the next-generation Thermage, a skin smoothing system that uses patented radio frequency technology to reduce the appearance of fine lines and wrinkles. Strategic partnerships are also being considered to complement R&D investment. Yesterday, we announced an exclusive license agreement with Kaken Pharmaceuticals to develop and commercialize products containing a new chemical entity KP-470, which is an investigational compound for the treatment of psoriasis. If approved, KP-470 will represent a novel drug with an alternative mechanism of action in the topical treatment of psoriasis.

Finally, bring innovative new products to market will be the key to successfully executing our plan to double the business in 5 years. We have an opportunity before us that not many companies have, the opportunity to launch 5 new dermatological products in a single year. I'll highlight, one of those products in our late-stage pipeline that we think has potential to be a game-changer, DUOBRII, on the next slide. But before I do that, quickly run through the late-stage pipeline. In addition to SILIQ, which I addressed earlier, we have a new formulation of Retin-A Micro or RAM 0.06% that launched in January. Then we have 3 PDUFA dates coming up: DUOBRII on June 18; ALTRENO on August 27; and JEMDEL on October 5. And more products in development. There are other key pipeline candidates for acne and atopic dermatitis in Phase II and III that we're excited about advancing through the pipeline.

Moving now to Slide 25. I want to highlight DUOBRII, formerly known as IDP-118. DUOBRII delivers a high-potency corticosteroid with a retinoid in a that psoriasis patients can use topically. If approved, DUOBRII will be the first and only topical high-potency steroid with a retinoid combination lotion with synergistic effects for adults psoriasis patients. First point I want to highlight here is efficacy. Our unique new formulation uses different strengths of halobatesol and tazarotene than previously available with a single-delivery vehicle. We have developed a proprietary vehicle that provides uniform distribution of the drug substance and enhances the barrier to loss of moisture from the skin. The formulation advantageously allows the simultaneous availability of all drug substances at the skin. This ensures uniform distribution allowing the retinoid and corticosteroid to contact the skin simultaneously, which cannot be achieved by simply layering on 2 products on top of one another. Phase III results demonstrated statistically significant improvement in achieving clear to almost clear scores. The photos on the top right show improvement in scaling over an 8-week period. And the images, as you can see, are really striking.

This takes us to the second point, the safety profile. Let's move to Slide #26. While psoriasis patients tend to prefer a topical treatment, the issue has always been the use of high-potency corticosteroid is limited to a couple weeks duration because of skin atrophy that usually results. Based on the clinical data, we believe DUOBRII safety profile may allow for a longer than 2 weeks. Here are the results of the long-term safety study, which tracked adverse events in patients using IDP-118 once daily for 8 weeks and then intermittently as needed for up to one year. What we saw is that the percentage of patients who reported adverse events did not change from approximately 8 weeks through 52 weeks. Based on this data, we think DUOBRII could be a novel treatment option for people with moderate to severe plaque psoriasis, and we'll learn a lot more as we approach the June 18 PDUFA date. Beyond safety and efficacy, if approved, DUOBRII may help reduce the cost of treating selected psoriasis patients by more than 75% versus an injectable biologic.

Let's move on to Slide #27. Here are the 7 projects that we expect to generate $1 billion of sales collectively over the next 5 years. They are VYZULTA to reduce intraocular pressure in glaucoma patients; LUMIFY for ocular redness; Si-Hy daily contact lenses; SILIQ, JEMDEL and DUOBRII for -- all for the treatment of psoriasis; and of course RELISTOR. Together these products -- 7 products represent less than $100 million of revenue. We're planning to make a significant investment to market these products over the next 5 years, and as we look to peak sales for these products, we expect they will represent over $1 billion of annual sales on a cumulative basis. This is the focus of our turnaround, investing in innovation, getting products approved and successfully commercializing them.

And on Slide 28, you can see an overview of our pipeline and the progress we are making in innovation from late phase to submissions to product launches. The increased investment we are making in R&D will help us to move these projects through the pipeline into the market. The fact that we have 4 PDUFA dates and subsequent product launches coming up in the next 8 months, after completing 6 U.S. launches in 2017, you'd use sense of the pace and volume of activity in our late-stage pipeline, which brings us to our 2018 commitments and expected targets on Slide #29.

We've identified 5 commitments and targets that are going to be the key in helping us drive long-term shareholder returns. Each of these commitments is a continuation of the actions that we have taken successfully in 2017. First, we commit to turnaround the Ortho Dermatologics business with a goal of doubling revenue over the next 5 years. Second, we are targeting over $1 billion of annualized revenue from sales with the significant 7 products for the next 5 years. Next, we'll continue to address the company's debt using cash flows and through opportunistic capital markets transactions. We'll look -- keep looking at how we drive operational efficiency with a goal of reducing our cost of goods by approximately $200 million and taking approximately $100 million out of the working capital over the next 5 years. And finally, we commit to increase R&D spend by more than 15% in 2018.

As I said before, I joined Valeant because I believe I saw an opportunity -- a turnaround opportunity of a lifetime. I'm pleased with the progress we made last year in turning this company around. Our team is focused on delivering on the goals we've outlined for 2018 to lead us into the next phase of our multiyear plan.

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

(Operator Instructions) Your first question comes from the line of Gregg Gilbert with Deutsche Bank.

I have a few starting with you Paul. On the tax rate, does the 13% represent a cash rate? And how should we think about the cash rate beyond this year? Secondly, for both your -- perhaps on the heels of your comments about the shelf, your decision to share longer-term growth goals, what's your sense of urgency and your appetite to reduce debt in addition to doing it the old-fashioned way with cash flow? And lastly, for Joe, can you update us on any recent developments on the XIFAXAN case with Teva? If the litigation stay were to be extended beyond April 30, is that something you would discuss soon? Any update on that front would be helpful.

Okay. Well, why don't you start with the tax rate, and then we'll go to that long-term growth.

Yes. Sure. Starting with the tax rate, the 13% -- to be taxed actually is a component of the 13%. And I think that when we're passed on our public -- something's going wrong with the phone here.

(technical difficulty)

Yes, We're back. Thank you. So when we were last speaking publicly about the impact of tax reform, our belief was that there would be a marginal increase in our tax rate and specifically called out that we expected that our U.S. cash component of our global tax rate would go up, and that's the way it is playing out. I think you saw -- heard my prepared remarks around the tax rate, we're guiding in 2018 to a 13% rate on our adjusted earnings. So that's a global effective tax rate. So it's a -- the cash component is a part of that. Very importantly, and I did have this in my prepared remarks, we continue to have a very good tax structure, which enables us to convert a large proportion of our earnings to cash, which is a good thing when you're a leveraged company like ours, where we need to generate cash in order to continue to address our debt maturities. The second thing on the shelf, you heard me cover that, I said, you linked it into providing longer-term guidance. Let me first say that, well, providing the longer-term guidance because it is difficult for the market to look at the progression of our company. As Joe says, moving from -- stabilizing the company and getting us back to a growth mode, it's hard for the market at large to be able to see that. So we wanted to provide some information about our expectations about revenue and profit over the 3 years following 2018, because they're important years for us where we get past the stabilization, and we get back to a growth mode with our company. Clearly, looking at the way people model us, we wanted to just help put some balance around what we expect. You can believe it or you can choose not to. But we certainly believe in the CAGRs that we put out for both revenue and profit. With respect to the shelf, if we hadn't had our challenges 1 year or more ago, we'd always had it -- had a shelf in place. And this is -- as I said, this is just a good corporate finance practice. You have it so if we need it, it's readily available. To your question about, do we use or how do you feel about reducing debt other than through cash flow, we've consistently said that all levers need to be considered. But as I said, we're not sitting here today saying it is an urgency to go do something tomorrow.

Yes. Maybe I'll just add a little bit to what Paul said. Again, I think Paul is absolutely right. What Paul and the team have done, I think, is an outstanding job in dealing with the debt of our company. What we've done, as you know, as we've turned all the cash that we generate into paying down debt, first and foremost. Number 2, we looked historically at noncore asset divestitures. And we've been able to do -- sell and receive proceeds of $3.8 billion on those noncore asset divestitures. I think as we said publicly from this point forward, we may look at some noncore asset divestitures, but they would simply be opportunistic. We're not out here trying to increase those. So that gives us the -- also the opportunity to take some of the working capital improvements and apply those to debt. And I think those will be the primary areas that I just supplement to what Paul said, because I think he answered it quite well. On the question of XIFAXAN and the situation. Just as a reminder to those that -- to our knowledge, there's only have been 1 filing to date. That was the Actavis Teva filing. Sandoz had a program in place, but by everything we've seen, they discontinued that program. The -- you're correct. There's a 1-year stay through April 30, that's associated with a regulatory stay as well through July 28 of 2019. At this point, we have not heard anything from Teva. At this point, we have not notified. I think Teva is clearly trying to work to understand that they have or they have the ability to meet the new FDA requirement for a XIFAXAN generic, given the fact that we now know there is some significant difference with the different polymers associated with XIFAXAN product. In the meantime, the only thing I would add to your question is say, we continue to develop what we think is a more patient-friendly formulation for the existing and for new indications of XIFAXAN. So we're not sitting still. We are continuing to go forward. And I think as I've said publicly, we are very confident in our intellectual property that supports XIFAXAN to make this a durable franchise.

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

Paul, maybe let me ask it more directly. Is there realistic possibility you may tap capital markets? Or maybe said another way, is there certain share price you need to see for you to pull the trigger? And I have a follow-up.

Yes. Obviously, we never comment on what are plans might be with respect to raising equity capital. We started the question by saying, will you tap the capital markets? And I think, we tapped the capital markets multiple times, i.e. in 2017, but that being the term loan market, the secured note market and the unsecured note market. We will continue to evaluate opportunities to address our cap structure. I think the important thing here is, we stress it over and over again, the work that we completed in 2017, which is by no means over, not done. Enabled us to -- gave us the runway where I think everybody should be able to have a visual about how we work our way through what is and was a challenging debt stack. And then the last thing, I say it every time, equity has to be on the table, but I don't sit here today thinking that's something that's urgent. Again, please, the reason we put it into our script is, last thing we want is we file a shelf and somebody says, "Oh, look at this." It's like, this is just good corporate practice. If you sat in my seat, you would file a shelf.

Got it, got it. And my follow-up, Paul, if I may, is, I think one of the themes throughout 2017 has been -- and maybe this is also for Joe. The theme in 2017 has been that you have a certain guidance in place, which assumes most of the LOE impact and the LOE impact is not as pronounced as what's guided and that results in beats. So my question is this. You have a similar phenomenon going on in '18, but there's something else going on as well. You're guiding to your base business, growing revenues at a certain 3% to 5%, but then the incremental EBITDA margin on that base revenue growth is only 15% to 40%. It's not the 90% EBIDTA hit you get on LOEs. So my point is, are you being conservative when you say LOEs get a 90% hit, whereas incremental revenues on base business are only at an incremental margin of 15% to 40% while SG&A will be flat year-over-year?

Yes, Umer, thank you for the question. Because it focuses right in on something that I tried to hit multiple times in my prepared remarks. You're absolutely correct is that the change in the adjusted EBITDA is not as pronounced as the change in what we expect in our base business. And the primary reason for that as we continue to invest behind our businesses in order to get the best long-term result and the things that I called out is, as Joe said, we're increasing the size of our derm sales force. We are continuing to use media, TV ads to support our consumer -- our U.S. B + L consumer business. We are continuing to engage in incremental promotional activities to drive our global lens business. We are intending to invest greater than 15% more in 2018 versus '17 in our R&D efforts. So you're not seeing any leverage on adjusted EBITDA relative to what you're seeing as growth in that base business, and that's kind of why I pointed to those things. I'll say it, our goal is not to maximize adjusted EBITDA in 2018, it's to ensure that we get each and every one of our core businesses stabilized and invested behind, so that we get the best long-term result. Quickly with respect to the LOE assets. The challenge here has always been that these are date uncertain. And when you have things that are date uncertain, one is, I feel, we feel as a company compelled to provide as much transparency as we can to the market. I daresay we're as good at it as anybody. Just now we've got the class of 2017 LOEs and class of 2018 LOEs. Each and everyone of you can make your own determination about what you think that trajectory will look like. But the point for me is, that's a bucket of revenue that you'd need to think about in the near-term, whether it's hitting in '18, whether it's hitting in '19, whether it's Q2 of '18, or Q4 or '18, you need to be thinking about it and you need to come to a point of view. We have taken what we believe is a good point of view by taking into consideration the things that can happen to us at the revenue line based on LOEs in 2018, the '17, and we've shared that with people. If people have a different view, that's what makes markets.

And I think pointing out to the specific products that Paul talked about, Lotemax, CUPRIMINE, APRISO and UCERIS, all not date certain. And that's the -- we tried to put our numbers forward and realizing that there is no specific date and when they will lose exclusivity, we simply are being prepared for that. If they do not lose exclusivity, obviously there is an upside. But we wanted to put forward the dates so that people have them as we -- how we are thinking about them.

Your next question comes from the line of David Risinger of Morgan Stanley.

So I just wanted to ask about cash flow and expectations for year-end debt. And so Paul, could you please discuss your expectations for cash flow in 2018 in some more detail, including operating cash flow and free cash flow? And what that would imply for year-end debt in 2018 relative to 2017?

Sure. Thanks for the question, David, and we look forward to seeing you later today. We don't guide to cash flow. But I will say a couple things -- repeat a couple things we said during the course of 2017 and then put 2018 in context. We generally said that a kind of middle of the road cash flow number per quarter, operating cash flow was about $500 million. And then it ended up that -- for the year, we ended up generating better than that, about $2.2 billion to $2.3 billion of cash flow from operations in 2017. That is in part due to some movements in accruals and settle ups and such things. But that $500 million per quarter number was a half decent estimate. Now not linear, just like everything, not linear. Thinking ahead to 2018, you have a reduced revenue and profit base and therefore, the $500 million needs to be adjusted based on your view of profitability in 2018. And I daresay, obviously, it's not $500 million, it is a lesser number than that due to divested assets, due to the continued runoff of the LOE bucket and the contraction of the dermatology business. Now that said, I expect that we will continue to produce cash flow in the neighborhood of the low $400 millions per quarter, and then we use that to invest back in the business. And by the way, that's cash flow from operations, so of course, you go to cover CapEx and all of our other cash costs and investments that we might make over the course of the year. We can continue to reduce debt through cash flow. I think you've seen some recent things. Earlier this year, we paid off another couple hundred million dollars. We had a press release actually this morning. We paid off another $71 million just using cash that was available. We will continue to have that ability as we go forward in 2018, and frankly, beyond. Again, this comes back to -- it always comes back to tax. We generate a significant or convert a significant proportion of our earnings into cash. And we will use that cash to reduce debt. We are focused, very focused on improving our working capital efficiency and to an extent that we improve our working capital efficiency, we'll use that cash as a priority to reduce our debt. I'm not sure that answered your question, but I think it gave you a direction.

Your next question comes from the line of Annabel Samimy with Stifel.

This is Andrew in for Annabel. So any thoughts of go-forward margin impact of new launches both for gross and operating margin expectations as the product base turns over and new launch? Do you have any medium or long-term profitability targets? And also are the new dermatology launches you announced in your numbers?

Yes. So I'll start with this one. On the point of view of what you're saying is that we are going to invest in launching these new products, especially as we referred to the significant 7 as they get approved. There will be some investment there. But probably the best way to say is, just if you think about what we're saying about how we're thinking about EBIDTA and the leverage we see in the P&L. So yes, we do think there will be leverage in the P&L as you move from the revenue growth numbers to the operating line. I think it's important to say that the individual products that we're talking about will get incremental sales, marketing and promotional activities behind them. But we also think that the gross-to-nets for these products will be better than the overall Valeant as they represent new innovation in the marketplace. So probably that's all I can really say in terms of how we're thinking about in terms of -- yes, we will launch these new products. Yes, we think there is new innovation here. Yes, we believe the gross-to-nets will be better than historical Valeant products. And I think the only final comment is that as you think about the growth, especially in the dermatology, that growth is going to come with what we think is some improved leverage in the P&L.

Yes, Andrew, it's Paul. I want to -- I just want to follow on, because consistent with what we talked about in our prepared remarks and we have continued to talk about here, I think we -- thinking about margin, if you think about operating margin in '18, the '17, you look at you're going to expect the contraction. I mean, Umer brought up this point about the base business growing at one rate and the adjusted EBIDTA growing at a slower rate. It's -- we are going to see a decline in that margin as that tees us up for, as I said, better long-term performance. Our longer-term guidance implies that we will get leverage on our OpEx over the course of the period from '19 through '21. And I can tell you, I firmly believe that it's timing of supporting launches. I went through the list in my prepared remarks. If I missed one, I'll try and come back to it. But SILIQ, LUMIFY, VYZULTA coming up, DUOBRII, JEMDEL, contact lens, et cetera, et cetera, you invest behind those launches including not just in promotional campaigns but, as Joe said, the increase in the size of sales force in dermatology. That has a short-term impact on your margin and a beneficial impact on your long-term revenue and profit growth trajectories.

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

I had a few here. So first question I had was that you talk about this turnround of a lifetime. But I think it's not really being reflected in your valuation. So just curious what you think the Street might be missing here? Second question I have is, following up on another question earlier, if you could provide more color on your ending debt balance and the leverage ratio for the year. And then last question was seems like derm is still a very important part of your business. Just curious if you have any interest in aesthetics for dermatology or really your focus remains on medical dermatology?

Right, I will start with the commentary. Yes, I do absolutely believe that the turnaround of a lifetime is true. I do think it takes some time, and we have to demonstrate the performance. And what we're trying to do right now is show that in more than 75% of the business, Bausch + Lomb/International plus the Salix business, if you combine those that, we're seeing mid-single-digit growth rate. We think that's obviously important. At the same time, we try to be as transparent as possible that we do have some loss of exclusivity, some divestitures that we made, that because of those we have a 2018 as what we're -- Paul referred to, I believe, is a trough year. I'll probably go one step further and say that the -- based on the seasonality of any year, we probably are in the trough quarter if you think about Q1 being the lower -- the lowest percentage of the performance. Having said that, where we're going from there is always going to be about launching these new products. We're launching the new products as we think they represent the significant turnaround for dermatology, first and foremost, but also as we referred to the significant 7 help us in the Bausch & Lomb business, the Salix business and of course, the dermatology. So that to me is the reason why we're excited about the future and where it goes. Paul, why don't you talk about the ending debt balance?

Yes. We're not going to guide to. I mean, it's kind of a different way of coming at the cash flow and how you are going to use it to reduce debt. We're not going to guide to an ending debt balance. Sorry, Louise.

And then the last part was the derm interest in aesthetics. We have a great business in Solta. As we look at Solta, there is an opportunity we believe to leverage our Solta business, combine it with what we're doing with our medical dermatology and get the value for the total dermatology patients and physicians. So yes, we do think there's value in the medical dermatology. We're excited about some of the new innovation that we have in Thermage and Fraxel. All those products we think will help us for the future.

Your next question comes from Chris Schott of with JPMorgan.

This is Chris Neyor on for Chris Schott. My first question's on the Branded Rx pricing environment, just generally. Last year, you had a reset in the dermatology business. When we think about your pricing and access through GI in dermatology business in the U.S. this year, should we think about a more normalized price environment? Or are there any headwinds that you would -- we should be keeping in mind? Second question is on just the dermatology launches you guys have coming up in the second half of 2018. Should we think about these as more gradual? Or should we think that you could potentially have a more rapid launch process?

Sure. Let me start on the brand Rx pricing environment. We think it is a market where with any -- whatever price increase we take, we will realize approximately half of that in terms of net realized price. So we, as you may know, have tried very hard to stay within our branded prescription product pricing market within the single-digit range. And since we've put together our patient access and pricing committee, we've been able to do that and keep pricing at a single-digit range. I would say that, if I just use a number just for the sake for argument on any product that if we take an 8% price increase or a 6% price increase, we expect we would realize approximately half of that in terms of the value, in terms of the net realized price, the rest would be absorbed by the channel. On the question of where we see that gross-to-net, I think our gross-to-net we think is going to be relatively stable. The big change in gross-to net usually always occur if there is significant new competitor showing up in the category. Otherwise, it's a relatively stable pricing. There is a push-pull on that, of course, from our channel dynamics. On the question on the derm launches. We think that each one of them is a different category by itself. The SILIQ product we expect it to be slower launch. And I made that comment in my remarks based on the labeling. But based on the fact that it is a IL-17 receptor blocker, we believe that, that receptor blockade is going to give good patient response over the long term. So that's clearly one that we do think over the long-term, we're delighted to see that 90% of the patients are staying on therapy. The other products in the derm category, we do believe are going to be a faster onset or faster ramp than the SILIQ product as we look -- go forward with the future. We're already very excited about some of the initial prescription data we're seeing on the Retin-A Micro 0.06%. That's ramping up very nicely in a very quick timetable already. Operator, I think, I have time for one more question.

Your next question comes from Gary Nachman with BMO Capital Markets.

Back on the 2018 EBIDTA guidance, I know you want to spend more this year. But how much flexibility do you have with expenses? So if there are some headwinds on the top line during the year that you'd be able to hold back spending. And where would that potentially come from? And then how aggressive are you looking at additional divestitures? And are you actually at a point where you could consider bringing in some new assets? And what areas might you do that?

Sure. I'll start in EBITDA guidance comment and say, when we crafted this guidance, we tried to be aware of all the issues that could potentially affect it, like the loss of exclusivity, like the new products, like our investment that Paul mentioned. Our view is it's the correct number for what we're trying to do with our plans right now. But with any plan, you always have the ability to manage it during the course of the year. On the second part of that question was about divestitures. We've been very successful. We sold -- realized proceeds of $3.8 billion over the last 18 months. We believe that those proceeds are coming in at an approximate EBITDA multiple on average of approximately 10x, so we -- with the milestone payments. So we feel we've realized what we needed to do. And we, fortunately, have done it with all non --what I would refer to as noncore asset sales. So for that reason we've been able to continue to keep our core, our core being where we want to be in the Bausch + Lomb eye care business, the dermatology business and the Salix GI business are the primary core by which we want to build around. I think on where we'd go with potential new assets here, you heard some of that today when we talked about the Kaken asset that we acquired for new example -- new opportunity to treat topically the product category for psoriasis. That's -- we think is an exciting product for us for the future. You've heard us talk about in the past when we licensed in the PLENVU product. The PLENVU product is a product that we're awaiting FDA approval. We have a May 18 PDUFA date. That's another example of what's building out in our GI category. So what you expect to hear from us as we look to the future is that we'll continue to make investments in areas where we want to remain in our core, our dermatology, eye care and our GI business.

That concludes what we wanted to say today. Everyone, thank you very much for joining us. We look forward to meeting many of you over the next few weeks and months ahead. Please let us know if there are any questions, we'll be happy to try to provide some additional information. Thank you, everyone, for joining us. Have a great day.

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