Bausch Health Companies Inc (BHC) 2018 Q3 法說會逐字稿

Good morning, and welcome to the Bausch Health Third Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Art Shannon, Senior Vice President, Head of Investor Relations and Global Communications. Please go ahead.

Thank you, Chad. Good morning, everyone, and welcome to our Third Quarter 2018 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 you that our presentation today contains forward-looking information. We would ask that you take a moment to read the forward-looking statement legend at the beginning of 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 of 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's my pleasure to turn the call over to Joe.

Thank you, Art, and thanks, everyone, on the phone for joining us this morning. Let's quickly review the topic for today's call. I'll begin with the third quarter highlights before turning the call over to Paul Herendeen, our CFO, to review the financial results in detail and update our 2018 guidance. I then will review the segment highlights and catalysts before opening the line for questions.

Beginning on Slide 4. I'm pleased to say the third quarter results further demonstrate that our progress towards transformation is on track. In addition to another consecutive of overall organic growth, we successfully delivered organic growth across all reporting segments and generated great cash flow from operations in the third quarter. Based on the efforts of the 21,000-plus Bausch Health team members around the world, we are executing on our plans to resolve legacy issues, investing in core franchises and launching new products that we expect to be the foundation of our future growth.

On Slide 5, we've called out some of the highlights that demonstrate our continued progress towards transformation. First and foremost, our businesses are growing. Revenue grew organically by 3% compared to the prior year quarter, and third quarter 2018 was our third consecutive quarter of overall organic revenue growth. We also generated $522 million of cash from operations in the third quarter.

At the product level, our top 10 products grew organically by 7% in the aggregate compared to the prior year quarter.

Moving on to the top right of Slide 5, we had a lot of new product activity, including the launches of LUCEMYRA in August, the SiHy Daily lenses, which were launched in Japan in September; and PLENVU, which was also launched in September. I'll cover a few other recent and upcoming launches in more detail later in the call.

Moving to the bottom left, I'm delighted to say that as of today, we have reduced debt by approximately $7.4 billion since the first quarter of 2016, bringing total debt below $25 billion. This included more than $360 million of debt repaid from cash generated from operations during the third quarter.

Finally, thanks to the hard work of our legal team, we resolved approximately 60 matters since January 1, 2018. Notably, we resolved the XIFAXAN intellectual property litigation, which we expect will preserve market exclusivity until 2028 without making any financial payments.

We also resolved the legacy Salix SEC investigation without any monetary penalty. We have also resolved the outstanding arbitration with Alfasigma and picked up a late-stage Rifaximin development project.

On Slide 6, we present a snapshot of key third quarter financial highlights for our 4 segments. Approximately 75% of our total third quarter revenue was generated by the Bausch + Lomb/International and the Salix segments. On a combined basis, these segments grew organically by 3% during the third quarter compared to the third quarter 2017. As I mentioned earlier, third quarter '18 was the first quarter that all 4 of our segments grew organically: Bausch + Lomb/International by 3%; Salix by 2%, despite the serious loss of exclusivity during the quarter; Ortho Dermatologics grew by 1%; and Diversified Products by 4%.

In summary, it was a strong quarter across the board.

With that, I'll turn it over to Paul to take you through the financial results in further detail.

Thanks, Joe. I'll start by walking down the P&L slide on Slide 7. As Joe said, strong quarter, revenue was 3% organically from Q3 of '17 and adjusted EBITDA was up 5% organically. All 4 of our segments delivered organic revenue growth.

Walking down the P&L, providing a little color with respect to the key line items. I just, first, want to point out that when we talk about organic growth, that means on a constant-currency basis adjusted by divestitures and discontinuations.

Revenue was down 4% on a GAAP basis. Unfavorable movement in FX rates decreased our reported revenue by some $30 million. Further, Q3 '17 included roughly $112 million of revenue from divested assets, particularly iNova and Obagi. So adjusting for both FX and divested assets, our organic growth in Q3 versus 2017 was plus 3%. To put that 3% organic growth rate in context, we overcame a roughly $87 million growth drag in the quarter associated with the LOE assets that are detailed on Slides 27 and 28 in the appendix to our presentation. So a good result.

Next, we saw a marked improvement in our reported gross margin compared with the prior year quarter, up some 250 basis points. Three of our 4 segments saw improvement in gross margin, led by Salix, which was up 470 basis points due to a combination of favorable mix and improved gross to nets.

Within the B + L/International segment, our consumer and Rx businesses in Europe and LatAm saw improved gross margins due to favorable mix and better management of inventories resulting in lesser writeoffs.

International Vision Care was also a meaningful contributor to the gross margin expansion. The better gross margins enabled us to report organic growth at the gross profit line of 6%, double that of our organic revenue growth rate. Selling, advertising and promotional expenses were down or favorable by $20 million, or 4%, 3% on a constant-currency basis.

We continued to implement access to improve the efficiency and effectiveness of the dollars we deploy to these activities, with the current focus on our launch products. For example, in Q3 2018 relative to '17, we reduced A&P spending for some assets, and we allocated some of those savings to roughly $17 million of promotional support for LUMIFY, with excellent results.

G&A expenses were down -- excuse me, were $10 million unfavorable to Q3 of '17. This had more to do with the timing of certain expenses in 2018 than an overall increase in G&A spending. Year-to-date G&A expenses are down some $37 million or 8% favorable to 2017, which more accurately reflects our progress in controlling costs.

Our investment in R&D in the quarter totaled $107 million, up $26 million, or 32%, compared to Q3 of 2017. Now we've been talking for some time about our intentions of ramping up our investment in R&D, and I'll make an editorial comment here. The process of increasing our investment in R&D has been a bit slower than we would have liked. That said, we're pleased with where we are in the process, and we'll not sacrifice the productivity of our investments in R&D for speed. We revised our guidance for full year R&D down to approximately $415 million, and we revised our commitment from expecting increase over 2017 to be greater than 15% to being approximately 15%.

I have no doubt that the level of our investments in R&D will continue to increase over the next several years and that the level of investments will be sufficient to enable the company to drive organic growth over the long term. The net result for the quarter was that we posted a solid $916 million of adjusted EBITDA, up 5% on an organic basis from Q3 '17.

While we focus on adjusted EBITDA as our key performance metric, I do want to call out that our adjusted net income for the quarter was up 10% on a reported basis and 17% on a constant-currency basis. The higher growth relative to adjusted EBITDA was due to 2 factors: lower interest expense and a lower adjusted effective tax rate.

Our average debt balance in Q3 of '18 was some $2.4 billion less than in Q3 of '17, and that, combined with lower noncash interest expense, reduced our total interest expense versus Q3 of '17 by some $39 million. Our effective tax rate on adjusted pretax earnings in Q3 of '18 was considerably less than in Q3 of '17. Now I wouldn't read too much into the tax rate in any 1 quarter in isolation, as small changes in our estimates of pretax income by jurisdiction for the full year can produce large swings in our quarterly effective tax rate.

In Q3 of '18, our ETR on adjusted pretax was circa 7%. Year-to-date, the rate is roughly 10%, and we're guiding to a rate of roughly 11% for the full year.

I want to turn quickly to each of the 4 segments to provide a little color, starting with the B + L/International segment on Slide 8.

Revenue was up 3% on an organic basis, the 8th consecutive quarter of organic growth. Importantly, the growth for the segment was driven by a 4% increase in volumes and offset by a roughly 100 basis point decline in realized net prices. Four of the 5 subsegments posted organic growth, and all 5 saw increased volume over the prior year quarter. The growth in Global Vision Care was led by the U.S., which grew 8% organically. Growth outside the U.S. was strongest in Japan. Global Surgical was up 3% organically and was consistent as between the U.S. and OUS businesses.

Global Consumer was up 3% organically, also led by the U.S., where we posted strong gains with our eye vitamins, Ocuvite and PreserVision, and from the ramp of LUMIFY.

Global Ophtho Rx was up 9% organically, aided by revenue from Vyzulta in the U.S. and strong regional performances from our Turkey, Greece, Middle East, Africa cluster, the U.K. and Eastern Europe.

The International Pharma business was flat organically over the year-ago quarter, with solid growth in our Egyptian business Amoun and our Latin American business. Growth in those regions was offset by softness in Eastern Europe and Russia.

Moving to the Salix segment on Slide 9. Salix revenue grew $8 million, or 2%, despite the impact of LOEs that totaled some $31 million. That's mainly UCERIS tablets. XIFAXAN grew 11%, mainly from improved realized net pricing. TRxs for XIFAXAN, a proxy for units, were up 9% compared with Q3 of '17. RELISTOR grew 88% on improved realized net pricing and a strong increase in volume.

A quick note on the improvements we are seeing in the net realized pricing of a number of our branded pharma products. In 2017, we kicked off initiatives to improve the gross to nets on our branded pharma products, focusing on things including the cost and effectiveness of copay assistance cards, the level of our discounting to nonretail accounts and the magnitude of product returns. You've started to see some of the benefits of these activities in Q1 of this year, for example, the improvement you saw in XIFAXAN realized net pricing based on changes to our nonretail discounting practices.

I'm going to segue to a quick tutorial -- accounting tutorial about the gross to net items. If actual levels of gross to net deductions for a product decline during a quarter, there's an obvious improvement in realized net pricing. And you can expect that the improvement will continue until there's a change in the programs driving the reduced level of process gross to net deductions. Less obvious is the ephemeral benefit of rebasing the accruals for the gross to net items. With lesser observed deductions, the period-ending accrual needs to be reduced with the result being a further improvement in the realized net pricing in the period, which is on top of the already noted improvement driven by the reduced level of process deductions. This so-called true-up of gross to net accruals can drive significant variances in shorter periods of time, like a quarter, but normalize over longer periods of time.

In our Q3 2018 results versus Q3 of '17, you see this phenomenon with RELISTOR, and you're going to see it again when I talk about dermatology and our neurology businesses.

On to the Ortho Dermatologics segment on Slide 10. I want to call your attention to the medical derm part of this segment that was down 1% organically. Volumes in our medical derm business were off substantially versus Q3 of '17, but were nearly offset by improved realized net pricing driven by our efforts to more effectively manage gross to nets in this segment. That's the initiatives I just spoke of in my review of Salix.

We have not taken price increases in our medical derm portfolio, so almost the entirety of the improvement in net pricing came from reduced rebates on copay assistance cards, lesser actual levels of product returns and the beneficial impact of truing up the associated gross to net accruals that had the effect of magnifying the improvement in gross to nets when looking at the quarter in isolation. Of those 3, the true-up of the accruals was the most significant factor, important. Revenue in the medical derm part of this segment in Q4 will revert to something closer to what we saw in the first 2 quarters of this year, as the magnitude of the favorable true-up of accruals seen in Q3 will not repeat in the future.

Solta continued to perform very well under leadership of Tom Hart. Revenue was up 15% on an organic basis, with a strong growth in equipment sales in the U.S. That's VASER, Fraxel and Clear + Brilliant and growth in the Asia Pacific region driven by the launch of Thermage FLX. The growth in Solta was volume-driven as realized net pricing declined versus Q3 of '17.

On to diversified on Slide 11. Overall, the segment was up 4% on an organic basis. The neuro business was down $16 million or 7% organically. The impact of the LOE assets compared with Q3 of '17 was minus $54 million, but that decline was offset in part by growth in the sales of several promoted products within this portfolio, mainly Wellbutrin and Aplenzin, which together grew 15% compared with Q3 of '17 and also the favorable impact of the gross to net initiatives I talked about in covering both Salix and Ortho Derm. The U.S. generics business was the star of this segment, up $35 million, or plus 43%, compared with Q3 of '17. Roughly half of this growth came from launches of authorized generic versions of our products that lost exclusivity and the other half from our ability to capitalize on market opportunities within our broader generic portfolio. I've said this in the past, but the leader of our diversified segment, Barbara Purcell, and her entire team do a great job of maximizing the value of the assets in this segment. Our dentistry business is facing reimbursement challenges, and we saw a revenue decline in that business compared with the prior year quarter.

Switching gears and moving to the balance sheet on Slide 12. Here, you see the progression of our total debt. We were just above $25 billion at quarter close, and we ended with $973 million of cash.

On to the cash flow summary on Slide 13. It was a strong cash flow quarter for us, as we generated $522 million of cash from operations. We used that cash flow to repay more than $360 million of debt during the quarter, and just 2 weeks ago, we repaid another $125 million of debt to bring our debt under $25 billion today. The $1.182 billion of cash from operations generated year-to-date represents an average of $394 million per quarter, but that average was depressed by a number of nonrecurring cash payments we've made so far in 2018, such as the Solodyn settlement, which was paid out in '18 and the Allergan settlement. We continue to believe that our business has the capacity to generate cash flow operations in the low $400 million range per quarter on average.

Next, our revised guidance on Slide 14. On the face of it, we're holding our revenue guidance in the range of $8.15 billion to $8.35 billion. However, that's far from the entire story. FX rates from August until now decreased our full year outlook by $15 million. Our revised view of the trajectory, the LOE assets improved by some $70 million, and we increased our forecast for the balance of our business by some $45 million. So net-net, that would have been plus $100 million at the revenue line compared with our prior guidance. However, as part of our CORE program, and I would remind you if you don't remember, CORE stands for cost optimization and revenue enhancement, we are implementing a change to our distribution strategy for our U.S.-branded pharmaceutical products. This change is expected to generate some $15 million to $20 million of improvement in our gross to net per year from here forward. In addition, this change will enable us to improve our supply chain logistics, thereby improving efficiency and will help us reduce our investment in working capital. All good things, good things that come at the onetime cost of absorbing a reduction in wholesale pipeline inventories during Q4 of this year. The impact of this initiative relative to us continuing as we have in the past is that Q4 2018 and full year 2018 net sales will be reduced by some $100 million. Since we disclose our wholesale pipelines to you each quarter, you'll be able to see the expected reductions in pipeline inventories when we report our full year 2018 and Q4 results. To be clear, this reduction in our revenue forecast for '18 is the result of a tactical decision on our part. The long-term returns that we will realize by forgoing near-term revenue and the associated profits are unassailable.

We're increasing the range for our full year 2018 adjusted EBITDA guidance by $100 million across the range, as you'll see on the bridge on Slide 15. It's the combination of, one, the changes in FX rates; second, the increased profit from higher forecast revenues for the LOE asset; and third, the improved forecast for our base business. All those 3 things together would have allowed us to raise our adjusted EBITDA range by some $185 million. However, the decision to change our distribution strategy for our branded pharma products reduces our adjusted EBITDA expectations for 2008 and limits the raise to $100 million. Still wicked good.

You will note that we are maintaining relatively broad guidance ranges for both revenue and adjusted EBITDA. While we stand by our estimates of the impact of the change to the U.S. pharma distribution strategy, where we actually land with respect to that initiative could vary from our expectations.

In summary, for me, we had a strong quarter and feel really good about the balance of 2018. Since Joe got here in early 2016, we made real strides in improving our operations, investing behind growth, generating cash and using that cash to address our leverage. The cumulative impact of those efforts plus the steps we're taking in Q4 this year will enable us to enter 2019 in really good shape. Back to you, Joe.

Thank you, Paul. Let's go through some of the highlights in our Bausch + Lomb/International segment on Slide #16. First, this segment delivered its 8th consecutive quarter of organic growth, as you can see in the graph on the left. Importantly, this growth was driven by increased volume across all 5 reporting businesses of the segment. In the aggregate, the top 10 products in this segment grew organically by 7% compared to the prior year quarter.

The Global Consumer business delivered another quarter of great performance. LUMIFY, which was launched in May, is already the #1 physician-recommended product in the Redness Reliever category. LUMIFY is also one of the top 2 brands in the category, achieving a weekly market share of 26% as measured by dollar -- retail dollar sales.

The e-commerce trend remains positive for our consumer product. Amazon continues to be a strong channel, with sales up 41% in the third quarter compared to the prior year quarter. And finally, for the consumer business, the Bausch + Lomb eye vitamins PreserVision and Ocuvite together are the #1 brand and the #1 driver of growth in eye vitamins category. These products grew organically by 11% in the third quarter 2018 versus last year on a combined basis.

Moving on to the Vision Care on Slide 17. When it comes to contact lenses, one of our teams mantras is comfort, vision, health. And this clear focus is resonating with consumers. Vision Care's strong performance in the third quarter was driven by continued market share gains outpacing the competitors. Internationally, growth was driven by Asia, Russia and Latin America.

The chart on the left illustrates the performance of our U.S. Vision Care business since we installed new management at the end of the first quarter of 2017. You can see the impact of this change beginning with the third quarter of 2017, up 9%. We're up 15% in the fourth quarter, 15% in the first quarter and so on. This is an example of an effective Vision Care team that is delivering great results.

Turning now to Vyzulta. On the bottom right, we've included the weekly script data for Vyzulta since the beginning of the year, which shows a growth of 20% from the second to the third quarter of 2018. In terms of market access, our position is substantially improved. Our continued coverages now include Express Scripts commercial; a CVS commercial, which started in mid-October; and the AARP Part D, which started on October 1. We have efforts underway on several other plans and expect improved overall access in the fourth quarter.

On Slide 18, Salix revenue growth of 2% was driven by continued strong fundamental execution across XIFAXAN and RELISTOR despite the loss of exclusivity for UCERIS. XIFAXAN revenue increased by 11% compared to the third quarter of 2017. The RELISTOR franchise revenue increased by 88% compared to the third quarter of 2017.

Also, we have now resolved the significant Salix legal legacy matters, and as a result, we have reduced uncertainty around this business. A few more highlights for XIFAXAN. TRx unit volume grew by 9% versus the prior year quarter, and we are seeing continued accelerated growth quarter-over-quarter.

As you can see from the chart on the right, NRx share continues in primary care, up 21 share points since February 2017 as a result of strong execution in the field.

Let's move over to Slide 19 and talk about Salix product portfolio. We have a number of programs in the works for rifaximin. First, we're continuing to enroll patients in a study that we initiated earlier this year with a new formulation of rifaximin for acute overt hepatic encephalopathy. Activities are underway for a small intestinal bacterial overgrowth, or SIBO, study, which is expected to commence in the first half of 2019. Resolving the arbitration with Alfasigma has resulted in 2 important benefits for Salix: one, we have confirmed the rights we have under our existing license agreement to the extended intestinal release formulation of rifaximin; and two, we expect to initiate a late-stage clinical program to study an investigational formulation of rifaximin in patients with postoperative Crohn's disease, which is an area of unmet need.

According to the Crohn's & Colitis Foundation, more than 750,000 Americans have Crohn's disease, and of those, up to 75% will eventually require surgery.

There are 2 additional partnership opportunities that I want to mention. First, we've expanded our microbiome research and discovery through a strategic collaboration with Cedars-Sinai Medical Center, and as we mentioned in the last quarter's call, we have also agreed to expand the license term for 3 additional budesonide programs from Dr. Falk Pharma.

I also want to review a few new products in the Salix that have recently launched or are now launching. LUCEMYRA launched in August as part of a copromotional arrangement with US WorldMeds is the first and only nonopioid medication for the mitigation of withdrawal symptoms after abrupt discontinuation of opioids in adults.

LUCEMYRA is a perfect bolt-on to our ongoing RELISTOR promotions. PLENVU is a one leader PEG bowel-cleansing preparation for colonoscopies launched in the United States in September. The third product that I want to highlight is DOPTELET, which was approved by the FDA in May of 2018 for the treatment of thrombocytopenia in adult patients with chronic liver disease who are scheduled to undergo a procedure. Under our exclusion copromotion arrangement with Dova Pharmaceuticals, about 100 sales reps will begin promoting DOPTELET to gastroenterology health care professionals in mid-October, another synergistic bolt-on promotion opportunity for our gastroenterology team.

Moving on to Slide 20 for Ortho Dermatologics. Total segment organic revenue growth was modest in the quarter, up 1% as the business continues to stabilize. Global Solta had another strong quarter, particularly in key markets of U.S., China, South Korea and Japan. Revenues grew organically by 15% versus the third quarter of 2017, driven by demand and the expected global launch of Thermage FLX, a noninvasive skin-tightening treatment.

When I think about the future of the dermatology business, I think about 3 things: new products, new products and new products. Our ability to develop and commercialize these new products will determine our success. And the good news is that our recent new products are doing well.

First, SILIQ. As you can see from the chart on the right, TRx weekly scripts saw more than a 65% TRx growth in the third quarter versus the prior quarter due to continued marketing initiatives and increasing REMS certifications. To date, we have REMS certified over 3,900 prescribers for SILIQ.

TRx weekly scripts of Retin-A Micro 0.06% and 0.08% on a combined basis saw a more than 50% TRx growth versus last year.

At the end of October, we launched ALTRENO, an innovative new acne treatment. ALTRENO provides the trusted efficacy of tretinoin but in a lotion formulation that is generally well tolerated and helps hydrate and moisturize the skin. In addition, we're investing in a number of potential treatments for acne and atopic dermatitis that are progressing nicely through our pipeline, which you can see on the bottom right of Slide 20. Phase III studies for IDP-120 are expected to begin later this month, and we are expecting to submit an NDA for IDP-123 in the first half of 2019.

On to Slide 21. Let me now take a moment to address BRYHALI and DUOBRII, 2 novel psoriasis treatments. Psoriasis presents a large and growing market opportunity. Approximately 7.5 million people in the United States are living with psoriasis, and there are 150,000 to 250,000 new cases each year. It's important to remember that the clinical picture of psoriasis is not uniform. The condition exists on a spectrum of severity ranging from mild and occasional to severe and chronic. Treatment options are not uniform either, ranging from topical steroid creams to intervenous biologics.

On the left, we show you where we believe BRYHALI and DUOBRII would fall on the spectrum of severity. Our market research has shown that while there is some overlap, health care providers will use BRYHALI differently than DUOBRII with different patient populations. BRYHALI is expected to be a new potent steroid treatment for plaque psoriasis and novel vehicle lotion. Safety has been established in clinical trials with dosing for up to 8 weeks, with no increase in epidermal atrophy. It's an appropriate treatment for patients with mild-to-moderate symptoms.

DUOBRII is expected to be the first and only topical lotion that contains a unique combination halobetasol and tazarotene in one formulation, which allows for a potentially expanded duration of use. If approved, DUOBRII would be an appropriate treatment for patients who present with more moderate-to-severe symptoms, including chronic or long-lasting episodes and thicker, stubborn plaques. Due to the unique formulations that allows for a longer duration of use, DUOBRII has the potential to reduce the cost of treatment by up to 75% versus injectable biologics. That's important for patients, physicians and payers.

On Slide 22, we show the current state of the Significant Seven products, which represent our core growth drivers over the next 5 years. As an update from the last quarter's call, SiHy Daily lenses were launched in Japan in September. BRYHALI is expected to launch later this month. And as a reminder, DUOBRII has a PDUFA date coming up in February 2019.

On Slide 23, we show our late-phase pipeline and recent launches. As you can see, each of these 3 segments is working to develop a best-in-class and diversified pipeline of new ophthalmology, dermatology and GI products that we believe will expand our portfolio and fuel future growth. Now we have a new ophthalmology gel for ocular inflammation, with a PDUFA date coming up in February. We're excited about the rifaximin programs I highlighted earlier, and our late-stage derm pipeline has a lot of potential. On an annualized basis, the products we've launched since 2016 are growing and generating approximately $300 million of revenue.

Finally, Slide #24 reviews the 2018 commitments and expected targets we outlined at the beginning of the year. Having now delivered 3 consecutive quarters of overall organic revenue growth, we are very pleased with our progress. To summarize, all 4 of our segments grew organically for the first time in the third quarter. Our top 10 products in aggregate grew organically by 7% in the quarter. We generated $522 million of cash from operations. We improved working capital by more than 25% since the second quarter of 2016. We reduced our total debt to under $25 billion. We raised our full year adjusted EBITDA guidance range for the third time this year. We resolved approximately 60 legal matters, including 3 important legacy issues for the Salix business. We resolved the XIFAXAN IP litigation and expect to preserve market exclusivity for our top product until 2028.

And finally, we have made responsible pricing decisions, are committed to continue to do so because approximately 51% of our revenues come from a diversified mix of medical devices, OTC products and prescription branded and generic products that are not exposed to the U.S. branded prescription drug pricing environment.

Overall, great progress towards achieving operational excellence.

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

(Operator Instructions) The first question will be from David Risinger with Morgan Stanley.

It's Zhu Shen here for David Risinger. Couple of quick ones. So could you please comment on LUMIFY's global potential, including the opportunity to be bigger than designed? And secondly, what should we assume Lotemax, Cuprimine and APRISO's generic pressures in 2019?

Let me start with LUMIFY in terms of the concepts. We think LUMIFY is a very important advance in the treatment of redness relief. The primary reason I say that is LUMIFY works on the venous side of the -- versus on the arterial side where many of the other products work. We -- based on comments from the physicians we've spoken with, that's an important advance in treating redness relief in the eye. That's the reason why we believe it is the #1 recommended product by physicians in this category. Relative to the concept -- we're not going to make any specific comments about the size of the opportunity, although, as I said, we can very quickly point towards the fact that within 4 months now, we're already at the 26% market share. So we're very excited about where it goes -- where that product goes relative to the future opportunities there. But we're really not going to comment on anything specifically at this point about the future product. On the second part of the question on Lotemax, for 2019, one of the comments, I guess, I would say, first and foremost, is that it is not a date-certain launch. So as we look at the slide number -- I'm just...

27.

27. Thank you, Paul. The Slide #27 in our deck, we point to the fact that Lotemax right now, based on our best estimates, is a second half 2019 event. But once again, we're going to say, it's not a date-certain event.

Yes. I'm going to just follow that up and, again, point you directly to Slide 27. The 3 products that you called out all were changed. When we change an assumption on -- with respect to these LOE assets, we typically highlight it in red. So all 3 are the ones you referenced changed. They're shown on Slide 27. Each one of those products, if you want to get a guesstimate or, actually, a pretty accurate estimate of that trailing 4 quarters revenue, all 4 are part of our top 10 products either by segment or overall, so you can draw your own conclusions from that.

The next question will be from Gary Nachman with Bank of Montreal.

This is Ann-Hunter Van Kirk on for Gary. A couple of questions. If you could give us a better understanding of the gross to net accruals? And how that impacted 3Q overall? And also, you discussed your significant paydown this year. But with XIFAXAN in place, do you see a high probability that you'll be able to actually restructure the debt again and push out maturities even past 2021?

Yes, I'll be addressing the gross net. The reason why I spent probably more time on it than people would have liked on a call is, yes, it's an important driver for us. As I said, we started these initiatives back in 2017, and the kind of the way it works, it's worth reiterating is, until you start to see the actual results, meaning lesser deductions, gross to net, you kind of keep going along. But as you, in a period, see significant reductions in the actual process gross to net items associated with some of these branded products, that's when it forces you to look at your quarter-close accrual and true that accrual up based on the most recent experience. I called it out because it was a driver. I think the easiest example to follow along with is RELISTOR. RELISTOR's scripts were up strongly. However, we are up 88% year-over-year. That's a result of that kind of magnification of the improved gross to net in Q3 of '18 relative to Q3 of '17. That will normalize over time. I think you saw some of that across I called out within the GI, the Salix portfolio, and you saw some of that with respect to that certainly within the dermatology portfolio. I specifically pointed to the fact that I would not expect the results that we have in our medical derm portion of the Ortho Dermatologics segment to be at the sales level that you saw in Q3, that it would return to something akin to what you saw in the first couple of quarters of this year. Last thing on this because it's just I know we're going to get lots of question on it and I appreciate that, we'll do our best to answer, this goes against you too. We had UCERIS, which lost exclusivity in July. As those units start to fall off and you reevaluate your pipeline inventories, you start to take a look at gross to nets there. The gross to nets in that were dramatically worse than we would expect them to be in Q4 and going forward. That's a long-winded way of saying, if you look at the drop-off in UCERIS from Q2 to Q3, you'd say, wow, it really fell off. It's like, yes, a little bit of that is the other side of a true-up of gross to net accruals associated with that brand. And so a lot going on with respect to those quarter-close accruals. That's why we spend so much time on it.

Your question regarding the continuation of our efforts to deal with our cap structure. I think we found ourselves with the work we've done over the last, let's call it, 18 months in pretty good shape. I mean, we don't have any significant maturities going out through 2020. And so now we're starting to look -- as you saw, we announced and paid off $125 million of the debt due in 2021. So we're starting to turn our attention to the 2021 debt stack. I'd say, that is a process. As much progress as we've made, we just need to continue along with for the foreseeable future.

I'd add to what Paul said in that last point. I think Paul and Will have done an outstanding job in moving the debt stack out and giving us, what I always refer to as, freedom to operate so that we can grow our EBITDA, and that to me is really the most important way for us to think about what we're doing on a delevering point of view. But good work by Paul and the team on this.

Next question will be from Umer Raffat with Evercore.

Joe, first for you. So I noticed consensus models top line growing for Bausch going forward over the next several years, including next year. Is that how you understand the business to be, one. And then secondly, Paul you used the words "wicked good" on EBITDA, so I wanted to comb through that a little more. So Q4 EBITDA guidance is implying down, not just versus Q3, but versus Q2 as well based on the guidance. And you also hinted that the distribution strategy could have some impact. So that's really my question. What exactly is going on, on the inventory? Are there certain -- on the distribution channels, are you entering or exiting certain channels? Just to understand this dynamic because it sounds like it will be negative in Q4, but it will be positive next year and how that actually ends up tying into gross to net. Just wanted to clarify this whole thing.

Sure. I'll take the first part of the question. So on our growth comments, the best thing, I think, I can comment about in terms of how we are viewing our future is what we have said historically and what have come through our strategic plans is that, as we think about the growth in our business, we look -- we talked about a compound annual growth rate. What we have said previously on the top line is that across our Bausch health care business, we expect an annual CAGR growth approximately over any 3-year period of a 4% to 6% CAGR on the revenue side and on the EBITDA side is that 5% to 8%. I think that's probably what I'll stick with relative to what we've said historically and how we are modeling our business going forward. Obviously, there could always be variations quarter-to-quarter, year-to-year, but the annual approach that we're looking at is trying to grow that EBITDA by the 5% to 8% and grow the revenue somewhere in that 4% to 6%, depending on what happens in any given year. Paul, do you want to take that second part of the question?

Yes, sure. And, Umer, I used the phrase wicked good because I'm a Sox fan, and I'm still really happy about how that series went. But much more seriously, $100 million, when you're contemplating at the adjusted EBITDA line, when you're executing a strategy that is definitionally going to reduce your expectation for the quarter by some $85 million at the adjusted EBITDA line, that's still pretty strong. We are fortunate that we have the opportunity to continue to execute on these core initiatives. When I said core cost optimization, revenue enhancement. What this is, is revenue enhancement. By executing on this, we expect to improve in a lasting way our gross to nets with respect to these products. Now what does this mean? Say, if you looked at Slides 50 and 51, we have, since I got here, reported our wholesale pipeline inventories so that everyone out there can follow along with what's going on. So there's no question about kind of where are we -- is -- results in a quarter or in any period, the results of any relative expansion or contraction of pipeline inventories. If you looked at that slide, what you'll see is over the course of 2018 year-to-date in our 4 segments that we point out on the branded pharma space, the only one -- I'm sorry, year-to-date, the derm is up a couple of months, 0.23 relative to the prior year-to-date period; the neuro business is down 0.22 months; the ophtha Rx is up 0.15; and the GI is down 0.08. But if you look at the balances at the end of the quarter, you see that they are generally down, and they have been trending down over the course of the last, call it, I don't know, 8 quarters. And so we are working to better align our supply chain with demand. And part of that is going to be reducing from, call it, circa 1.4 or 1.5 months supply out in the channel down to a number closer to a month. The cost of that, as again we estimate in 2018 and Q4 of '18, is circa $100 million of reduced revenue expectations. I think the returns are going to be, as I said on the call, I use the word unassailable. Anybody on this call, I think, would make this economic decision at this moment in time. The hard part about it is the optics are, yes, our revenue is going to be less in '18 and in Q4, and our adjusted EBITDA is going to be less in '18 and in Q4 than it could have been if we just kept doing what we had been doing before. This is one of those things where when Joe joined and sort of when I joined after him, there were a number of initiatives that we started way back when. And these things are -- they're not easy. They're -- I won't call them hard, but it's like, yes, they're -- we've been working on this for quite some time to get to the place where we can execute on this change and now is the time.

That question will be from David Amsellem with Piper Jaffray.

So I wanted to ask a sort of broader question about business developments and in-licensing. I mean, you've started to do deals that are leveraged commercial infrastructure, particularly in gastroenterology and maybe even over time primary care like the DOPTELET deal with Dova. So -- but I wanted to ask you this, I mean, given the state of the capital structure, how should we think about how aggressive you can be regarding the acquisition of products? And what kind of approaches you think you can take regarding accessing capital to bring in products? Are you looking at pipeline-related assets, particularly in GI to acquire or you're looking at ways to add more commercial-stage assets that leverage the infrastructure? Help us understand your thinking and particularly how you expect or how you can deploy capital to that end?

It's a great question, David. Thank you for the question. Relative to what we've talked about for the past couple of years now, we've been in the multi-year plan on transformation of this business. What we said, first and foremost, we had to do is focus on which therapeutic areas that we want to focus on and that, for us, was the ophthalmology or eye care business, the GI and the dermatology. Once we've accomplished that, it was then a question of figuring out where can we best invest behind those businesses. So for example, we've put in that primary care team that you mentioned and saw a great return on investment. But our long-term goal is very much to continue to develop products both internally or organically, but also through inorganic. What we've had a chance to talk about today is really just the transformation that we've been talking about where we can make some investments both on some products that are in addition to what we can do organically. I talked about a couple of them today. PLENVU is a product that we have license in and finally got a chance to launch this year. The LUCEMYRA that -- for us, fits perfectly with what we're doing on RELISTOR and talking about how oral RELISTOR helps the patients with opioid-induced constipation. The LUCEMYRA is just another perfect bolt-on for that product. The other one that we've talked about in the past was in our dermatology space, we developed an early-stage product from Kaken that's going to help us in the area of psoriasis. So look to see us continue to look at opportunities to grow both organically and through inorganic means. I will say for the near term, Paul and the team and the finance and treasury team has done a great job in resolving some of our debt issues, but we're probably not yet at a stage where you're going to see us go after a multibillion-dollar opportunities. But certainly, we can do the bolt-ons that are in the $100 million type range or a couple hundred million dollar range. Those will be the ones that we continue to look at. We think they make a lot of sense because they're strategically perfect fits for ophthalmology, GI and derm, where we think we have some great relationships and, importantly, some good intellectual know-how about what is important to those physicians and those patients. So certainly, we'll continue to look to do more bolt-ons, but order of magnitude under the $1 billion range is more likely than over the $1 billion range in the nearer term.

Operator, next question?

Sure, and that will be from Dana Flanders from Goldman Sachs.

My first one here is, can you just speak to XIFAXAN in postoperative Crohn's and just, one, kind of the confidence jumping into the Phase III? I think the European data was not in the postoperative setting that you cited, and then two, maybe speak a little bit around how you're thinking about that market opportunity.

So maybe just a little bit on the facts side, some of the things that we've been looking at here. First and foremost, we're delighted that we resolved the arbitration with Alfasigma. That gave us access to this investigational formulation of rifaximin. Specifically, it is an extended intestinal release formulation, so it has different release characteristics from the existing molecules. So we felt that was an important question on where it's going to deliver within the GI tract. So that would be the first point that this formulation is different from the existing formation. Relative to the opportunity, unfortunately, based on what we've researched, there are more than 750,000 Americans that have Crohn's disease and the majority of them, 75% of them, will eventually require surgery. Our belief is that in that postsurgical situation, postoperatively, that we believe rifaximin could be a very important adjunct to other therapies and other issues that these patients face. And we believe that based on the available data that exists that we could go forward, as I said, with a late-stage clinical program in this area. So we're excited about what the opportunity could mean to help these patients with the postoperative opportunity in Crohn's disease.

Okay. And then maybe just my quick follow-up. Just on the international segment, I know you mentioned last quarter you were taking steps to just improve the consistency of that business. Maybe just an update on where you are on that progress and if you're seeing early returns on some of the steps you're taking.

Sure, Dana. It's Paul to answer this one. I think that we called -- we did call it. I believe it was last quarter. It might have been first quarter. I think it was second quarter. Tom Appio, who runs our international group, has done a phenomenal job of reconfiguring his organization to be much more effective in our various geographies. And I would say, I think what I said or similar to what I said at Q2, some of the units -- some of the geographies are ahead of other geographies. And I think you could see it in my remarks. I think right now our business in Egypt, Amoun, is firing on all cylinders, doing really well. Our Latin American business is -- which is run out of our -- out of Mexico, is doing very well. And what we're seeing is the laggards are -- continue to be Eastern Europe and Russia. That's not to say that the team there is not doing the job, it's that the steps that Tom and his team have put in place, we just haven't seen the turn there yet. When we turn there, it will be a helper to [say] here as we go forward from a growth perspective. Clearly, the Russian and Eastern European units were the drag that kept that international pharma segment from being a grower. It was the only one that was flat.

Next question will be from Annabel Samimy with Stifel.

So you seem to have stabilized dermatology this quarter. I'm trying to understand how much benefit was from the true-up in the accounting changes that were going on and how much is it from actual volume growth. And now that you have several new products starting to launch in this segment, what's the early reception been by payers given that this area of dermatology has been one of the favorites for reimbursement hurdles in the last few years?

Yes, I'll start, Joe, and you might want to jump in. On the medical derm side, as I said, volumes were -- continued to be down. We have the genericization of a couple of the strengths of Solodyn. You've got a number of things going on there, but here is the good news. The good news is that the steps as I pointed out earlier, it's a kind of a theme of the call. The improvements that we're seeing in the gross to nets are actual observed deductions that degrade gross to net sales. We're making progress. We're making particular progress in dermatology. So we are getting to -- certainly to the point where that legacy portfolio kind of the existing assets ought to perform better. Now how much of that was attributable to the true-up? I sort of called out and said if the sales in the medical derm part were $148 million in the quarter, and I said, it's going to back to something akin to what we saw in Q1 and Q2. That gives you an idea of the magnitude of the helper that the true-up -- or the accruals were in Q3. The good news is, as I said, part of the step-up what you see there is durable. It will continue on because you have lesser-observed deductions in gross to net. And so that's a helper to us as we go forward. So I'd say that we're getting to the point where we stabilize that portfolio and now we start to see ramps of the various products that we launched, that we launched SILIQ. SILIQ continues to ramp week to week to week. We launched ALTRENO just very recently. That's early days. We're hopeful that we'll be shortly launching BRYHALI. And then in the first part of next year, you add DUOBRII into that, and I think you can see that the future for dermatology looks like it will change.

I think I'd add -- and Paul answered it very well. The only thing I'd add, to just give a little more specificity. The Retin-A Micro 0.06% and 0.08% combined, up 50% versus a year ago. We think that's, obviously, important. And we are getting good coverage, although I would say the gross to nets there are very high for us. On SILIQ, as I mentioned during the call, were up 65% just versus the sequential quarter. Also, our coverage in SILIQ is somewhere around that 77% commercial coverage, so we feel very good about that. The other part of what was happening in this business is looking at what happened with Solta. Solta was up approximately 15% in the quarter. So -- and that is not subject to a reimbursement environment. So on balance, I think we feel good that we're making a turn and -- but clearly, as I mentioned in the call, the future of our dermatology business will be new products, new products, new products. And that's really what's going to drive the long-term turnaround in our dermatology business.

Okay. So if I could just ask a quick follow-up. So you have a pretty decent improving position from a business and a core perspective. Can you maybe now consider a more aggressive capital restructuring? We get a lot of questions about equity for capital restructuring. And so how do you feel about that given your current position?

Maybe I'll start, but, Paul, feel free to add anything. I think what I tried to say before during a previous question is that, I think, Paul and the team just have done an outstanding job of stabilizing our debt situation. They've given us freedom to operate relative to -- till 2021 and beyond. What we've got to do, really, for us is to grow our EBITDA. We think that's the best way for us to delever as we grow revenue, grow EBITDA. So clearly, as we're looking at it right now that our best long-term suggestion here or solution for us, grow EBITDA and that by growing the EBITDA, we'll naturally delever, especially right now, as we believe the stock is undervalued relative to where we believe it should be. So I think our long-term solution is still to keep all options on the table, but over the long term we want to make sure that we focus on the freedom to operate and growing our EBITDA in the long term.

Our final question today will come from Louise Chen with Cantor.

So my first question is with respect to the gross to net improvements. Are there any other products or areas where you see that coming up in the future? And then can you remind us where you are with your Significant Seven? How they're tracking relative to your expectations? And then lastly, anything that you could give us on either debt paydown or obligations for 2019? Even if it's just qualitative would be helpful.

I'll start with the gross to nets. I think you're seeing a fairly significant change in Q3 '18 relative to '17, and even on a sequential basis, if you look at it that way. I mean, are there other opportunities? Sure. I mean, we continue to look at each one of our products. I'll keep calling out the revenue enhancement -- part of our core program is designed for us to look and be smarter about the programs that we use to enable patients to access -- have access to our products. So the work is never done. But I think you're seeing a fairly significant improvement here year-to-date 2018. More to come for sure, but I'm not sure you're going to see it of the magnitude that you saw here in year-to-date '18.

Yes. Maybe the only thing I would add to the second part of your question on the Significant Seven is we're very pleased with the progress we're making. If you just think about RELISTOR, for example RELISTOR oral, which is one of the Significant Seven, that product this year is up 88% year-to-date. That's not just the quarter, that's the full year. 88% growth in oral RELISTOR, we think, obviously, is a very important achievement. If you look at -- listen to some of comments I made on Vyzulta. Vyzulta this quarter, up 20% versus the previous quarter, so I -- sequential quarter. So that, we feel, is very good. AQUALOX just launched in Japan. DUOBRII we've got it resubmitted for February PDUFA date -- February 15. SILIQ, I made a mention, it was up 65% TRx versus the second quarter. LUMIFY, already is the #2 product in the category, the #1 recommended physician product. And BRYHALI, which we expect to get approval very, very soon. So we're excited. We think we've made good progress. First and foremost, the products are approved. And then secondarily, as we think about where they're going, we're seeing some good statistics relative to the overall numbers that give us optimism for the future.

Sorry, Louise, I'm going to come back in and just -- I stopped talking and then I realized there's one more point I wanted to make on that gross to net because you had asked about the prospects for the future. I think first, it's helpful to frame it. If you think about the magnitude of the impact of the changes that we've been making to these programs, where you see it most in terms of improvement in gross to net is in derm. That's why you see the impact that you see on our Q3 quarter results, second in GI and then third in neuro. So that just help you calibrate. There are opportunities across any brand where we have programs to assist in patients being able to access our products or get access to our products and so it's -- the biggest impact was certainly in derm, second GI, third neuro.

Louise, I don't think we can give you exact answer on the 2019. But, Paul, is there anything further you want to add about -- in terms of our approximation of what we said this year about paying down our debt being our most important priority?

Sure. I mean, I called it out in my prepared remarks in that we continue to prioritize the use of cash flow to reduce debt. And as you've seen most recently, now we're prioritizing and looking at the closest-in debt stack, which is in 2021. We have, on average, expect to produce cash flow from operations in the low $400 million range, and I think that we are generally on track with that in 2018 year-to-date, and I would expect that, that will continue on. Just to be real clear, when you talk about cash from ops, that's a pure GAAP measure. And so that represents the cash that would then be available to do such things as CapEx, certainly to pay for any non-GAAP items that we call out like settlements of legal liabilities and things like that and for any restructurings. But that would leave a fair chunk of dough available to continue to reduce debt.

Everyone, thank you very much for joining today, and a special thank you to all 21,000 Bausch health care team members for the great efforts in what we think is a very exciting transformation and what we always believe is the turnaround opportunity of a lifetime. Thank you all for joining us today.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.