Good morning. My name is Mary, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bausch Health second-quarter 2018 earnings call. [Operator instructions] Thank you. Art Shannon, Senior Vice President of Investor Relations, you may begin your conference.

Thank you, Mary. Good morning, everyone, and welcome to our second-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 live 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 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 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 to not 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. I'm delighted to join you this morning on our very first earnings call since we began operating under the Bausch Health name. This change was very meaningful for us as the Bausch legacy defines who we are today as a company and sets the stage for our continued transformation. With that, let me review the topics for today's call. First, I'll cover the second-quarter highlights and the core business. I'll then turn the call over to our CFO, Paul Herendeen, to review the financial results in detail and to update our 2018 guidance. Finally, we'll wrap up with a review of the segment highlights and the 2018 catalyst, including our plans for Duobrii before opening the lines for questions. Beginning on Slide 4, as I noted in the first-quarter call, our goal for 2018 is to be a year of operational excellence as we focus on revenue enhancement and optimizing our cost structure. Our second-quarter results demonstrate that we remain on track to meet this goal. We delivered a great quarter of continued progress thanks to the dedication and focus of all of our employees around the world. Moving on to Slide 5, we continued to execute on our core businesses, delivered a second consecutive quarter of overall organic revenue growth. In addition, our top 10 products in the aggregate grew by 12% organically compared to the prior-year quarter. We believe this strong, sustained performance demonstrates the early steps or beginning of our transformation. On the top right, our new product pipeline is also driving growth. I want to call it a success of the Lumify launch, in particular. As of July 29, Lumify achieved a 21% market share in the redness-reliever category. That's an incredible response to a great new product. Also, during the second quarter,…

Thank you, Joe. I'll like try to add some color to our results for the quarter. Start by looking at Slide 7, as I do a quick walk down the total company P&L. Starting with revenue, compared with Q2 of '17, revenue was down 5% on a reported basis, down 6% on a constant-currency basis as FX was a bit of a helper versus the prior year, but up 3% organically. As Joe said, this is the second consecutive quarter where we posted organic growth, a good thing for sure. A quick reminder, when we talk about organic growth that means on a constant-currency basis when adjusted for divestitures. The Salix segment was a top driver of organic growth, both in terms of percentage increase, 14%; and in dollar contribution to organic growth; followed by the B & L International segment at plus 4% organic growth. Our diversified segment was a major organic growth drag, down 8%, while Ortho Dermatologics was down 11%. Our basket of LOE assets shown on slides 28 and 29 continue to dampen our organic growth, declining some $70 million compared with Q2 of 2017, mainly in the diversified segment. Excluding the growth drag from the LOE assets, our organic growth would have been more like plus 6%. Pretty good, right? Important safety tip, though, if you look at Slide 28, you'll see that we expect the revenue growth drag from the LOE assets to be $358 million for the full year 2018 versus 2017 with a greater impact in the second half of the year. Year to date, the LOE assets accounted for a revenue decline of $125 million compared with the first half of '17, meaning we're currently expecting to see a decline in that basket of products of roughly $233 million over the…

Thank you, Paul. We have a lot to talk about the B & L International segment on Slide 17. First, this segment generated 57% of total company revenue with organic growth of 4% driven by volume, as well as growth in Europe and China. Importantly, as Paul mentioned, every business line in this segment grew organically during the second quarter, which speaks to the overall strength of this business. In the U.S., we had a number of highlights in the consumer business. In addition to Lumify, we launched three additional products, Soothe XP Preservative Free lubricant eye drops, Ocuvite Blue Light eye vitamin and PreserVision AREDS 2 Formula Chewable vitamins. The e-commerce also remains a strong trend for our consumer products. Sales through Amazon showed continuous strength, up 48% in the second quarter of 2018 versus a year ago. Global Vision Care was up 9% organically compared to the prior-year quarter. In the U.S., sales growth was driven by continued market share gains, launch of new products, and strong field execution. For International, better-than-expected results were driven by the strong execution in the Asia-Pacific region, Latin America, and Canada. On the bottom right, we've included the weekly script data for Vyzulta since the beginning of the year, the chart which shows a strong positive trend for TRx growth. Please note, the initial Vyzulta launch scripts represented approximately a two-month supply, so that’s something to keep in mind when you review this data. The other point I want to emphasize is that Medicare Part D makes up 60% of the glaucoma market, and we are expecting Vyzulta access in the Medicare Part D in 2019. So there are a number of positive factors that will create additional opportunities for Vyzulta in the future. Turning now to Slide 18 on Salix. We…

[Operator instructions] Our first question comes from the line of Gregg Gilbert. Your line is open.

Thanks, guys. Good morning. Good to see these effects and strength to continue. But on the genetic risk front, Joe, other than the state being extended yet again, do you have any insights into Teva's filing? And whether it meets FDA guidance? Or is there anything else you can glean from your interactions with them on that item? And then secondly, on the international -- pharma international piece, can you talk about -- you talked about the volatility, what's driving that? And what are some of the changes you are making there? It sounds like you're still confident in this being a growth business. But can you talk about some of the things that you've been surprised by, if anything? And what you're doing about that?

So maybe just for -- going back on your first part of your question on the Teva ANDA relative to our Xifaxan product. Yes, you are correct. We agreed to -- with Teva to extend for another 30 days the ANDA. That follows a 12-month originally then another three months and now one month. There really, to our knowledge, have been no changes. Teva appears to have some challenges with their ANDA. I can't speak to exactly their challenges, but it does appear that there are some challenges. I think, from a point of view, of somebody in the -- who's been in the generic market before, if Teva had a viable ANDA pathway, I expect they'd want to move forward as quickly as possible. At this point, we continue to extend, but I really can't make any specific comments. So I think you have to check more with Teva on the specifics here. And the second part of the question? Yes, the second part of the question, Gregg, I think you’re referring back to the international pharma business, and I called it out in my prepared remarks, it grew 1% and it’s, I said that this an area of focus, and we’re not satisfied with the consistency that we’re getting in the performance of some of the geographies. So what this goes back to is, this goes back to management, and its focus, and it’s ensuring that we have the right people in place. I think Tom Appio, who runs our international group, is doing a fantastic job. And I think you see the results of that when you looked in that the international part of the Vision Care business, you’re looking at international Optho Rx, you’re looking at international consumer results, it’s all good. But what’s lagging a bit is the consistency of performance in international and it boils down to the team that we have in place. And we’re, we’ve taken steps. Tom continues to take steps, and we’re confident that we get that to a place where it will be a more consistent driver for us. It is certainly at this stage, it is lagging behind the great performance that we’ve seen in some of the other units.

Gregg, I probably should have also said, relative to our Xifaxan, obviously, we are very strong about our intellectual property on the product. We believe we’ve got a strong intellectual property position with probably more patents and patents that run through well into the 2029 time frame.

Thanks.

Operator, next question?

Our next question comes from the line of Umer Raffat. Your line is open.

Thanks so much for taking my several questions today, if I may. First, I so Joe or Paul, one of the challenges for many of us who have tracked Valeant and now Bausch over the years has been that reported segments always change nonstop. And I understand the motivation to add visibility on product level perhaps that could be just done on a product level, not segment level. So my question really is, do you expect there to be additional segment changes over the next, let’s say, 2019, 2020? And are you willing to add disclosures for more than just four historical quarters? And I had a couple of questions on the business.

Let me just start with that. We’ve had a chance to hear a lot from our investors. And one of the things that they’ve asked us clearly as we’ve taken over as a new team is to make sure to provide some greater clarity in that business, greater transparency, and we’ve worked really hard to do that. As you can imagine, the business has changed in the sense that we made some asset divestitures in 2016 and 2017. As we looked at how we’re running the business in 2018, one of the comments we wanted to do is make sure we had the appropriate segmentations that we could share that with our investors across the board, so we’ve taken a look at that, and we’ve done that. And the other thing, of course, is that many people were asking us to have greater visibility in our Salix business versus our dermatology business, and that’s one of the other things that this accomplishes, so that is part of what we will do. Final part of your question is the additional history, we will have that available to you later this week in terms of what will be available, historical comments will be out. I think it’ll be like Friday, we’ll have it out. Paul anything you want to add on the historical comments on the question?

Yeah. No. It’s Paul speaking over. It’s -- yes, I think this segment thing, it starts with wanting to have excellence in execution and putting the right leadership in place, the right structure in place to manage each one of our individual units to drive long-term value. And ultimately, as we’ve gone through that reorganization process, the accounting and the requirements of our accounting follow that you report your segments the way you manage them. And so I'd say I know it creates some noise for those of you who are trying to follow us and follow us on a segment basis, but we will do our level best to ensure that you have historical information, so you can go back and track how we did come. But this is -- yes, we're sitting here right now, this is the way we are organized and managed and our accounting follows the way we run the business.

My question on the business really was, do you expect price increases at Valeant to be capped at something like mid-single digits sort of like the commentary we're seeing out of a lot of big pharma? And I guess, how do you expect that to impact your outlook on EBITDA going forward? And then secondly, in your slide on Xifaxan mentioned some color on FDA interactions on a new formulation. So can you just give us more color on what exactly are the indications, as well as is it the immediate release or the extended-release SSD formulation that you're trying to develop further? Thank you.

So couple comments. On the question on -- as we've noted that we do not expect any additional -- we are not planning or take any additional price increases in 2018, that is clear. On the question of go-forward discussion I think you're asking more about, where are we going forward? We've said publicly that we would keep our pricing to single-digit pricing and we put additional comment on it -- single digits and try to stay through with the average for the pharmaceutical over the last 5 years as a commentary on where we would be, which we think is a responsible approach to pricing. On the question -- second part of the question relative to the FDA on Xifaxan, yes, we have met with the FDA, that is absolutely correct. We are looking at some additional GI indications. I'm not going to go into the specifics of it. But as we post those trials on clinicaltrials.gov, you'll see those additional GI indications. And to be clear, we're looking at both the immediate release and the slow release of the SSD formulations. We've already made that public as we thought about one of the first indications that we're gone going on with Xifaxan, we posted that on the clinicaltrials.gov for that one indication, that's clinical trials aren't even published. There are some additional indications we're going after with Xifaxan, they'll be on that one.

Umar, it's Paul. I want to jump in here as well. Because I think one of the things we faced when we talk about pricing is people look at our business and categorize us as a pharmaceutical company. And as we're sitting here today, like 53% of our revenue is in branded Rx products in the U.S. and the balance is not exposed to that -- yes, to the same sorts of pressures that you're seeing out in the marketplace. I think that's an important factoid, and I'm going beg you, please call us Bausch Health.

Thank you very much.

Operator, the next question please?

Our next question comes from the line of Louise Chen. Your line is open.

I had a few. So first question I had was just on your leverage ratio. Do you still see this four to five times over the next several years as realistic? And is that going to be driven by debt pay down and EBITDA expansion or one of the other? And then also a question that we get a lot is just on the equity raise to deleverage. Is this still on the table? And what would be a trigger for something like that? And then last question is just on organic growth. What are your targets over the next several years, if you could speak broadly about that? And what are kind of the key drivers to get to you there? Thank you.

Louise, it's Paul. I'll try to take most of those. Yeah, do we have the prospect of getting to sort of less than five times levered over the next handful of years? The answer is, yes. I mean, think, you go back, and we provided what we felt was a good outlook for what you could expect for our top line and adjusted EBITDA CAGRs for the next handful of years. And if you have a model, you can come to a point of view about how we can drive our leverage down. How does that happen? It happens the two ways that I think you sort of referenced. One is by growing adjusted EBITDA, that's the best way. Second is by prioritizing the use of cash flow we generate from our business to reduce debt. And yes, those are the two things. And if you just push that over a handful of years, yes, you get a leverage down to, what I'll characterize as, a reasonable and sustainable level. Around your question about equity, is that off the table, on the table? We have said consistently for, I guess, the eight or so quarters that I've been here is that when you are levered the way we're levered, it needs to be on the table, it needs to be something we think about. Am I going to disclose on a public call the timing and exactly what we're thinking? No. But it is absolutely something that as a company we think about it to accelerate the process of getting our cap structure to be something more sustainable, and you think about why is that important? It's important for a variety of reasons. One is, we're clearly an outlier with the amount of leverage that we carry, and secondarily, if we can accelerate the process of getting our leverage down, it enables us to loosen up a little bit on the capital allocation for value generative sorts of investments that we would like to make were today, it's a very limited amount, but we would have the ability to accelerate that. So it's on our minds for sure and for obvious reasons, not going to talk about timing or strategy for equity.

Final comment, I think you, Louise, you had a quick question on the long-term guidance, and I think the only thing I'd to add to what Paul said was, we've said publicly that we believe our revenue will be in the 4% to 6% range from 2018 to 2021 and the EBITDA will be in the 5% to 8% growth from 2018 and 2021. Those are the facts that we have previously shared on the longer-term or three-year CAGRs.

Thank you.

Operator, next question?

Next question comes from the line of David Amsellem from Piper Jaffray. Your line is open.

So just a couple so first some facts. So first one's FX and -- so you had some success with the new sales force, but I guess, the question here is, given the promotion-intensive nature of the space, do you need to add more sales and marketing muscle or do more DTC? And I guess another question is how can you better leverage the sales force with additional products or bringing in additional products? I know you -- that there's the capital structure. But have you given thought to BD or at least thinking about it creatively? And then just on Vyzulta real quick. We're noticing the NRxs look flat based on the chart that you laid out. So is that just a function of Part D access not kicking in? Or are there competitive headwinds to think about like Rhopressa? Just help us understand what's going on there? Thanks.

So I'll start. In terms of the Xifaxan and the Salix team, we think they're doing a great job. They're -- we are continuing to look at more sales and marketing activities, but on balance, we think the team has done very well. I mean, if you just look at with the data we shared in terms of moving the primary care growth from 24% share to 44% share in a little more than two -- a year and a half, we think that's outstanding, and we think that's an important part of -- the message is bright, we think, in terms of what we're saying with primary care. The product performs well. It's an episodic treatment for a chronic disorder. So the large part of that fits really well in terms of the message, as well as sales and marketing. The other part of what we're looking at is, is making ourselves more productive. One of the comments I talked about earlier in my comments was cost optimization and revenue enhancement. We're looking at just trying to get more efficient and making sure that the dollars you spend in any of our product areas are going to be associated with the strong return on investment. Final area I want to make sure I touch on was your question on leveraging the business development aspects of the business. We 100% agree with that comment. That's one of the reasons why we added the Plenvu, it was a project that we added where we worked with getting a new formulation in for a colonoscopy preparation product that product we felt at a superior profile relative to the quantity of volume and also it's a very good-tasting product. So we felt it fits very well with what was happening in the marketplace…

Our next question comes from the line of Chris Schott from JPMorgan. Your line is open.

Just two here. Maybe first on the price versus volume dynamics for Xifaxan. I'm still just trying to reconcile the 26% reported growth with the volume trends you are seeing for the business. So I know you highlighted the non-retail channel benefits here. But should we expect this gap of sales growth versus volume growth to continue for the rest of the year? So if you keep growing volume high singles, does that translate to mid-20% sales growth? Or is that trend start to normalize as the year progresses? My second question was a longer-term operating margin question. How the P&L is going to evolve? I guess, when I think about your business, you got clearly growth in Bausch, you got Xifaxan doing really well, you got the new derm launch just kind of queued up here since we offset by lingering LOEs of very high-margin products. So it's like I'm able to get the margins, it just seems that you need to make investments in these growth drivers, the stuff is going away is high margin. Help me understand a little bit of how we get to operating margin expansion for the business given that mix dynamic playing out? Thank you.

Let me start with the Xifaxan question. I think you picked it up pretty well, Chris, in times of what's happening. We are seeing TRx growth, as, I think, Paul made mention, of accelerating -- and we're seeing it accelerate at 8% as it continues to accelerate, so we think that's obviously very good. Beyond that, there is a non-retail segment that is up even more than 8%. So that, we think, is another addition or certainly is up more than the retail side. So we think both the retail and the non-retail being up are an important part of it. And my recollection is that non-retail is somewhere around 20% of the total Xifaxan business. So it's an important segment for us. Beyond that, we did see some improved pricing versus 2017, as Paul made mention of it. And then we've become much more efficient on our gross to net, it's based both on a question of mix and less couponing that we did versus 2017. So if you think back 2017 second quarter was a quarter where we're just finishing some disruption in the team, so we had to give some additional couponing. This year, we've gotten to be much more efficient in the couponing structure we have in the business. So I think those are probably the three main areas for it. If you look at our inventory position, they're relatively similar. There is always going to be a plus or minuses on inventory, but on balance, we think that -- those are really the three primary areas for what's happening with Xifaxan. On the question of our longer-term margin structure, I think you diagnosed it well.All I would say though is think about the fact that we now have latest quarter in terms of where we are, Bausch Health business in total. Bausch & Lomb is 57% of the business, up 4%, Salix up 21 -- 21% of the business, up 14%. Together 78% of the business is growing 6% organically, an important part of it. Take that and once we get the derm business turned around, which we're making good progress on, then I think that's where we'll be able to see the improvements in the -- in being able to offset LOEs. And most of the LOEs, we -- the major brunt of them we've already worked our way through. As Paul made mention, there are some additional ones happening second after the year, but most of them we're working our way through. But Paul, I think you want to add to the question on the margin?

I mean, it's one of -- as everyone here knows, it's one of my favorite topics, is looking for ways that we can improve our operating margins. You look at what is now our four segments, and each of the four segments has its own individual dynamic. I mean, the B&L segment is kind of a 30%-ish operating margin business, but it has -- the advantage to it is that it has great durability, duration associated with that overall segment. How do you get better there, it's through continuous focus on operating expense efficiency in that business, and obviously, if we can continue to grow the top line on a base, we should be able to get some operating leverage in B&L. Salix is kind of at 60% operating margin and a business that if we continue to grow the top line, we should be able to get some operating leverage there as well because we're easily well configured to support the portfolio of brands that we market within Salix. The Ortho Dermatologic segment, as Joe just called out, that's a business that has been undergoing some challenges and contracting. As we introduce the new innovative products into that portfolio, we'd expect to be able to improve the operating margins in that business. And the Diversified is absolutely were the bulk of very high-value LOE assets or high-margin LOE assets resides. And frustrating thing for the team here, those LOE assets and the reason why we call them out for you and show them to you as visibly as possible is there is just nothing we can do about what's going to happen there. So we focus on the balance of the business that we think of as our base business, and we believe that we can drive improvements in operating expenses. If you include the LOE assets in there, yes, you got to wait till we put many of those in the rearview mirror, and once we do that, we would expect to expand of our operating margin from that point. Good question, Chris.

The only other thing that I would add in thinking about your question a little bit more is that I want you to be -- your hypothesis is correct, but just to be clear, the team in the neuro diversified business is not sitting still. They -- we're doing something that we mentioned shopping in our own closet. We're basically going out and promoting some of the products that are in that business. And I'd just point to maybe two examples that if you look in our appendix, you can look at the Wllbutrin and the Aplenzin promotion and response curve. You can see that those two products together in the quarter are growing significantly. If you look at the, Page 35 in our business, the growth in Wellbutrin franchise and the Aplenzin franchise, you see some very nice growth versus the year-ago quarter. And that's really the result of some of the things we're doing to help to grow some of these Diversified products. Even though we -- you're absolutely correct, we do face some LOEs, and Paul's comments stand correct as stated. But we are out looking for these opportunities where we think our products can help patients. And if we can, we think that we'll get some growth. Operator, next question?

Our next question comes from the line of David Risinger. Your line is open.

So I have two questions. First, Bausch Global Consumer was flattish this quarter. If you could just talk about the prospects for Bausch Consumer? And then second, with respect to forthcoming PDUFAs and launches, could you just discuss your expectations how we should think about those opportunities? And then also incremental SG&A spending requirements associated with those launches relative to your current spend base?

David, just in terms of the Global Consumer, impacted by divestitures. I mean, if you look at the organic change in our Global Consumer business, it was plus 5%. And as I called it out, it's really helped along by really good performance in the U.S. But globally, plus 5% on an organic basis. So that business is going well and not just well in the U.S.

The second part of your question was on PDUFA and some of the launches we have and where we were going to be spending money. I think you're referring to not just within the Bausch & Lomb segment, but across the business, is that correct David?

Yes, correct.

So I mean, I think as we said, across the portfolio, if you look at the launches we have, we feel that each business has some growth, and we're going to continue to invest on the research and development side. We're increasing our investment in research and development this year to make sure we get these products across the finish line. I will say that the Complete Response Letter on Duobrii was a disappointment, but the team has already addressed what we think the issues are, met with the FDA. Our belief is we'll get that filed within the next 30 days, if not sooner. On the question of the other products that we clearly think there's some additional dermatology products that will be forthcoming, we think that is the solution to turning around the dermatology business, launch some products, get them out to be successful. We don't foresee significant increases in operating expense. We believe we’ve already made the investment starting in the first quarter of 2018 in the incremental sales force and responsibilities for the launches of our dermatology business. In our GI category, we’re well-positioned with Plenvu, to add Plenvu to our current capable sales force, as well as the Lucemyra product, we’re going to add that to the pain team with our Relistor opioid. So we think there’s a good synergy in adding additional products to the bag of the current sales force and their capabilities. And then finally, the area in Bausch & Lomb, we have the new contact lens, silicone hydrogel daily launch that will start in the fourth quarter. We think that’s going to fit in very well with what we’ve said.

The only thing that -- Paul made mention out there, just I’ll say briefly, we do see some growth capital requirements for that that will be something that, we’re configured for this short-term fine, but as we have some good success with that, there would be some opportunities to expand in our growth capital for that. But overall, we think our overall expenditures are good. We're going to seek to make them more productive relative to using return on investment analysis.

I’m going to come back because I had -- it took me a second to find it in my binder, but I can’t - slip by. I think the Global Consumer business, again, up 5% and that was comprised of up 8% organically in the U.S. and up 4% outside the U.S. As I said, it’s better in the U.S.

Okay. Good comments.

Operator, the last question? It’s time for the last question, please.

Next question comes from the line of Douglas Tsao. Your line is open.

Just two quick ones. First, if you can provide a little color on the performance of the Ultra line from Bausch that looked up nicely on a sequential basis and the key drivers of growth there? And then in terms of the CRL on Duobrii, it sounds like you have a good hand on what the agency is looking for. Just curious, if you have any perspectives on whether that could affect the filings for Bryhali and some other products that are in the pipeline? And is this reflects sort of a change in what the FDA is looking for in terms of some topical therapies? It's actually sort of the fixed dose combinations. And whether you might need to sort of adjust the filings or make amends there as well?

So I guess, let me start with the Ultra one first. We think that obviously, the success with Ultra has been predominantly the launch of the new toric and multi-focal, those we're seeing some very significant organic growth and especially the toric that we did not have before and that's driving a large percentage of the growth. The important comment here is we've been able to make the investment in the Ultra portfolio, put additional capacity available in the last couple of years that has given us a chance to launch the full range of the Ultra portfolio, including the toric and multifocal. Once you have that full range, the physicians are -- or the doctors are much more likely to use that product for their patients. So that was an important step that we had to make and that certainly was in the U.S. And then in the rest of the world, our business is growing pretty much across the board in places that where we have the strongest position, places like China and Thailand and India, we have some pretty strong growth predominantly because we are going in markets that are growing relatively quickly would be my comments there. I think the second part of the question was Bryhali, we do not believe that the complete response letter, specific information request will have an impact on Bryhali. But having said that, we now understand what the FDA's requirements are. And as a result of that, we'll continue to work very closely with not just Duobrii and Bryhali, but in all of our applications to make sure that we answer the FDA's questions and make sure that they're put into the initial filings as we go forward. But bottom line is we do not feel at this time that Bryhali would be impacted by the same questions that Duobrii had from the FDA pharmacokinetic point of view. So I think clearly, we'll continue to learn and get better in terms of the filings that we put forward in the marketplace. Operator, that concludes our call today. I'd like to thank everyone for participating in the call. Thank you, and have a great day, everyone.