Bausch Health Companies Inc. (BHC) Q2 2018 Earnings Report, Transcript and Summary

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, Salix and US WorldMeds announced that they will be exclusively co-promoting Lucemyra, a non-opioid medication for opiate withdrawal symptoms, which was launched just yesterday. Moving to the bottom left, debt reduction remains a focus as well. Since the first quarter of 2016, we have reduced the company's debt by approximately $7 billion. Finally, on the legal front, we have resolved approximately 40 cases since January 1, 2018. We continue to achieve positive resolutions in the Shower-to-Shower cases with 24 complete dismissals since January 2017 and three pending dismissals. Johnson & Johnson continues to reimburse our legal fee and cost in these cases. Furthermore, the Philidor, Tanner, and Davenport trial has been resolved with a verdict of guilty on all counts for both defendants of defrauding Valeant. We are assessing our options to seek restitution. On Slide 6, we present a snapshot of the key Quarter 2 financial highlights for our four segments. As a reminder, we are now reporting our results in four segments. They are Bausch & Lomb International, Salix, Ortho Dermatologics, and Diversified Products. This additional transparency provides an enhanced view of how each of our businesses is performing. You can refer to Slide 27 in the appendix for a detailed breakdown of which business lines are in each segment. Historical financial data recaptured for the new segments will be publicly filed later this week. Now into the highlights of the quarter, 78% of our total Quarter 2 revenue was generated by the Bausch & Lomb international segment and the Salix segment, up from 76% last quarter. On a combined basis, these businesses grew organically by 6% during the quarter compared to Q2 '17. Breaking it down, Salix delivered 14% organic revenue growth compared to Quarter 2 2017, and Bausch & Lomb International grew organically by 4%. With that, I'll turn the call over to Paul to take you through the financial results in further detail.

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 back half of 2018. So you need to bear that in mind as you think about how the balance of 2018 will play out, particularly the impact of the LOE assets on our second-half growth rate. Next, our gross margin improved by some 100 basis points compared with last year, mainly due to improved mix in the Salix and Diversified portfolios. Gross margin in the Salix segment improved by roughly 330 basis points due to mix as we posted lower sales of Glumetza, which carries a lower gross margin relative to other Salix products. In diversified, gross margins improved. In neuro, due to mix, mainly lesser sales of Xenazine authorized generic in the U.S. generics business due to mix with lesser sales of our Glumetza authorized generic and overall due to the divestiture of Dendreon, which is in the prior-year quarter. Margins in the B & L International segment declined by roughly 45 basis points, driven by lower margins in the U.S. Vision Care due to product mix and greater user price discounts to drive unit-share increases and lower margins in our Amoun unit due to the lingering effects from the devaluation of the Egyptian pound. On the plus side, gross margins in B & L International, our gross margins improved in Europe, Latin America and in our international surgical business. On a constant currency basis, our companywide operating expenses were favorable compared with Q2 of 2017. However, adjusted for the divested assets, meaning on an organic basis, we actually increased our spending, particularly in selling, advertising, and promotional expenses as we continue to play the longer game and invest behind our growth opportunities. I’ll provide a few specifics as we go through the individual segments. On an organic basis, our adjusted EBITDA grew 3% compared with the prior-year quarter; all in all, a very strong solid quarter. Let's turn to our segments, now as Joe said, numbering four. Starting with B & L International on Slide 8, the headline here is that the segment revenue was up 4% organically versus Q2 of '17. Some important color, the 4% organic growth in the segment was driven by a 5% increase in volume, offset in part by a 1% decrease in realized net prices. So in my opinion, the best kind of fundamental growth. All five B & L business units showed organic growth over the prior-year quarter: global Vision Care up 9%; consumer up 5%; global Ophtho Rx up 5%: global surgical up 2%; and international pharma up 1%. This is the second consecutive quarter that the global Vision Care business grew 9% organically in both U.S. Vision Care under Joe Gordon's leadership and International Vision Care under Tom Appio have now delivered four quarters of solid growth compared with the prior-year’s quarters. Global consumer also grew both in the U.S. and the international parts of the business, with the U.S. a bit stronger helped along by the launch of Lumify. The organic growth in global Ophtho Rx came from outside the U.S. with strong results across most regions, including in Europe, particularly the U.K., and the Asia-Pac region. Our global surgical business continues to be stronger outside the U.S. As we improve in the U.S., we believe the global surgical business has the prospect to improve on the low-single digit organic growth we've seen over the last four quarters. International pharma has been an area of focus for us. And to be frank, we have not yet been able to deliver the consistency in performance across all geographies that we're looking for. We delivered 1% organic growth in the quarter, with strength in Latin America and modest growth across a number of other markets, and that was blunted by the impact by LOEs in Canada and weakness in some Eastern European markets, and that's mainly Romania and Serbia. We recently have taken positive steps toward reorganizing International pharma, and we're excited about the longer-range prospects for this business. Within operating expenses in the B & L International, it looks like selling, advertising, and promotional expenses were up or unfavorable on a constant-currency basis by 2%. But further adjusted for divestitures, those -- the expenses were up more than that, but for good reasons. We’re investing more to drive growth as we allocate capital to support the launches of new products in the segment like LUMIFY, for DTC advertising that continues to drive sales growth of other U.S. consumer products like our eye vitamins, and in the U.S. Vision Care business to fund more fit sets to continue the string of strong growth we've delivered over the last four quarters. Overall, another solid quarter from this segment. On to Salix on Slide 9. Mark McKenn and the Salix team continue to deliver solid fundamental performance based on excellence in execution. Xifaxan achieved record revenue of $294 million in the quarter, up 26% over Q2 of 2017, with that growth balanced between improved net pricing and volume gains. Recall that in Q1, we talked about our successful efforts to address and improve Xifaxan pricing in non-retail channels. Those changes continued to benefit us in Q2 relative to the prior year and are expected to continue to be a growth tailwind for us through Q4 of this year. Xifaxan retail Rxs were up 8% year over year and up 6% sequentially. The Relistor franchise grew 43% versus Q2 of '17, aided by a 32% increase in filled prescriptions. Apriso and Uceris showed growth in Q2 of '17 -- versus Q2 of '17 as well. The performance of the promoted assets in the portfolio overwhelmed the impact of LOEs for Glumetza and Zegerid, a really good quarter, all the more impressive when you consider that selling, advertising, and promotional expenses were 10% favorable to the prior-year quarter, great stuff. On to Slide 10, the Ortho Dermatologics segment, which includes our U.S. medical dermatology business and our global Solta aesthetics equipment unit. The dermatology business continues to face challenges based on the aggressiveness of third-party payers in limiting or blocking reimbursement of products like those that comprise much of our legacy product portfolio. Despite that environment, Bill Humphries and his sales and marketing team are continuing to drive Rxs even for our more challenged brands. For certain of our derm products where the market dynamics are a bit more favorable, we're generating real growth in prescriptions and in net sales, for example, with the Retin-A Micro franchise, with Elidel, with Onexton, and with Siliq. Siliq is a slow build, but week to week to week, we are seeing more physicians write the product, our script count grow, and we recorded net sales of $4 million in the quarter. We are committed to making Siliq a success, particularly as I referenced with Siliq, set the stage for the innovative products, Bryhali and Duobrii, expected to be launched later this year and in 2019. The other business in this segment, our aesthetics company, Solta, was an undermanaged, underperforming unit that has responded well to the introduction of a new management team led by Tom Hart. Global Solta grew 14% versus the prior-year quarter. Overall, we're looking for the Ortho Dermatologics segment to find its pace and return to a growth mode as we shift the dermatology portfolio to one based on innovative, differentiated products that will -- excuse me, will provide important patient benefits, be embraced by physicians, and importantly, be valued by payers. On to the -- our diversified segment, which is shown on Slide 11. Note that under our new segment structure, this is where you will find the 2017 results for many of our divested businesses, including Dendreon, Obagi and Women's Health. This is also where you see the majority of the impact of the LOEs, mainly in neuro, where the LOE assets accounted for a $57 million decline. So setting aside the unstoppable decline of the LOE assets and the impact of the divested businesses, the diversified segment actually grew compared to Q2 of '17 on strength in our neuro and U.S. generics businesses. On to Slide 12 and our balance sheet summary. Not a lot of change from the end of Q1. Just note that we did drawdown a net amount of $75 million of our revolver in the quarter as we had a concatenation of funding requirements, including for closing costs for the June financing transaction and some associated accelerated interest payments. Just yesterday, we repaid $132 million of debt, including $75 million of our revolver. We will continue to prioritize the use of available cash to prepay debt. Turning to Slide 13, a familiar slide, showing our continued progress on addressing future maturities of our debt. We have a very manageable amount of debts coming -- excuse me, debt coming due in -- out to 2021. If you look at the March 31, 2016 line in the graph and the degree to which we've reduced the quantum of our debt and extended our maturity profile, it shows that we've given ourselves the runway to continue the transformation of the company. We've also been able to modify our covenants such that we substantially reduced over covenant risk, enhanced our access to capital and gained flexibility to manage our financial affairs. Here is a remarkable factoid for you. Since March of 2017, a short 16 months ago, we've completed six refinancing transactions, raising a total of more than $16 billion in term loans, unsecured bonds, and secured bonds. To all of our debt investors out there, we could not have done that without you, so thank you for your support. On Slide 14, you see our cash flow summary for the quarter. First, I want to point out that our second quarter is generally a softer quarter for generation of cash from operating activities. We generated $222 million from ops, with that amount depressed by the settlement of legacy legal liabilities for roughly $50 million and the acceleration of $57 million of interest payments in connection with the June refinancing transactions. Divested assets -- compared to prior year, divested assets reduced our operating cash flow by $70 million. Working capital days decreased by some 25%, or 70 days, when compared back to March 31 of 2016, which freed up approximately $1 billion of cash, which we used to retire debt, good stuff. Finally, from me, on slides 15 and 16, you see our revised guidance for the full year 2018. We're holding our revenue guidance in the range of $8.15 billion to $8.35 billion despite a roughly $60 million FX headwind, and we're raising our adjusted EBITDA guidance by $50 million across the range to $3.20 billion to $3.35 billion, reflecting an improved outlook for our businesses. We've also updated several of our full-year assumptions, so I call your attention to those on Slide 15. Note that we've reduced our expectations for capex for the year by $50 million due to timing. Our growth capex initiatives to support our daily silicone hydrogel lens project is proceeding, but the phasing of that spend has been pushed out a bit. With that, let me turn it back to Joe.

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 continue to see strong execution across all promoted brands. First, Xifaxan increased by 26% versus the prior-year quarter on strong volume, driven largely by primary care. As the chart on the right demonstrates, new Rx share is up 20 points since February 2017 from 24% to 44% in primary care due to field execution. And we think there’s a lot more opportunity for Xifaxan in primary care. Moving now to the Relistor franchise. Revenue was up by 43% compared to the second quarter of 2017. And as you can see from the chart in the lower right, Relistor TRx were up 34% in the first 30 weeks of 2018 versus 2017. Finally, I want to touch on two new Salix products. Let’s turn to Slide No. 19. As I mentioned earlier, we are pleased with the strong fundamental execution across all Salix promoted brands, and there is more to doing -- that we are doing to build up this business, such as acquiring the rights for our sales reps to promote additional products. Our first, Lucemyra, the first and only non-opioid medication for the mitigation of withdrawal symptoms after abrupt discontinuation of opioids in adults, we believe there is a huge unmet need in this market for a non-opioid to mitigate withdrawal symptoms, which can include physical pain and sleep disturbances. Tragically, more than 115 people die every day after overdosing on opioid-related products. We now have a product with the potential to help those who are suffering from symptoms of opioid withdrawal and Lucemyra is a perfect fit for our sales reps, we’re already promoting Relistor for opioid-induced constipation. The second new product we are preparing to launch is Plenvu, a next-generation bowel cleansing preparation for colonoscopy. The U.S. colonoscopy market represents a significant opportunity with more than 15 million procedures performed annually. Patient complaints about bowel preparations typically relate to large volumes of fluid that the patient is required to consume and the unpleasant taste. Plenvu, which is designed to improve patient acceptability and compliance will be the lowest total volume bowel cleanser available in the United States. We expect Plenvu to be available in September. I also want to highlight two additional expansions of our GI portfolio. First, we’ve agreed to extend our existing collaboration with Dr. Falk by agreeing on terms to license three additional budesonide programs. And we also have announced a collaboration with Cedars-Sinai Medical Center and the lab of world renowned researcher, Dr. Mark Pimentel to further investigate the microbiome in the treatment of GI disorders. We’re excited about the scientific collaborations like these because they will help us to continue to position Salix as a trusted partner with the commitment to support clinical R&D and create new innovative treatments for patients. Moving on to Slide 20. While we saw a total organic revenue decline of 11% in Q2, global Solta organic revenue growth of 14% was a bright spot for the quarter. As we continue to stabilize Ortho Dermatologics business, our focus has been on building out our pipeline and launching new products. We plan to double our dermatology franchise by 2022, and the nine new product launches we are working are expected to drive that growth. Let’s talk about two recent launches in particular, Siliq and Retin-A Micro 0.06%. First, on Siliq, we're pleased to see that TRx weekly scripts nearly tripled in the second quarter compared to the first quarter due to marketing initiatives and continued REMS certification. We invested time and energy to get doctors REMS-certified over the last year. We have now over 3,500 REMS-certified physicians, and we are starting to see the results. The other point I'd emphasize on Siliq is the better-than-average adherence data versus the other injectable biologics. The patients who are using Siliq are sticking with it. With respect to the Retin-A Micro franchise, we've provided TRx data for 2018 versus 2017 in the graph in the lower-right corner. On a combined basis, the 0.06 and 0.08 products saw a greater than 50% TRx growth in the second quarter of 2018 versus last year, and we're pleased to see this continued strength. These results are a great example of the capabilities of our derm sales force. Despite operating in very challenging reimbursement environment for some of our legacy products, the Ortho Dermatologics sales force are doing a great job of driving prescriptions for Retin-A which speaks to our ability to commercialize our new product pipeline. Let me now take a moment to address the recent Duobrii development on Slide 21. As we announced in mid-June, we received a CRL, or a Complete Response Letter, from the FDA. Importantly, the CRL did not specify any deficiencies related to the clinical efficacy or safety of Duobrii and have identified no issues with the CMC processes. The CRL only noted questions regarding pharmacokinetic data relates to the time course of drug absorption, distribution, metabolism and excretion and leads to things like the maximum concentration. We are working to resolve this matter expeditiously. I've already met with the FDA. We understand the additional data requirements and expect to resubmit with additional data to the FDA within 30 days, if not sooner. We expect that this will be a Class 2 filing, which has a 6-month review cycle. We continue to have confidence in the -- in an approval and hope to bring forward this important new treatment option for those with psoriasis as quickly as possible. Staying on Ortho Dermatologics, let's move to Slide No. 22 and talk about Bryhali, the first high-potency topical steroid for psoriasis with expected dosing up to 8 weeks. The results of the Phase 3 study are clearly demonstrating looking at each of the signs and symptoms that define psoriasis in the graph on the right, erythema, plaque elevation and scaling at four weeks post treatment. Importantly, Bryhali provides a clinically effective therapy using a formulation that is one-fifth the strength of other halobetasol products. We're pleased with these results and look forward to giving patients another topical option to treat psoriasis. Acne continues to be an area for focus for us as well. As the most common disease in the United States, we estimate as many as 50 million people have this skin condition. On the bottom left ALTRENO, if approved, will be the first tretinoin product that will be available in a lotion form rather than a gel and cream. And importantly, it's aesthetically pleasing and deliveries efficacy with an acceptable irritation profile that will be suitable for the face. Phase 3 results demonstrated statistically significant improvement in achieving clear to almost clear scores and a statistically significant reduction in inflammatory and non-inflammatory facial lesions. Our late-stage pipeline for acne and atopic dermatitis is strong and shows a lot of promise with two ongoing Phase 2 studies for innovative new treatments and a third expected to begin in the second half of 2018. We also have ongoing Phase 2 studies for a triple combination topical acne treatment. Moving on to Slide No. 23. Here we have the Significant Seven, which represent the expected core growth drivers in our business over the next 5 years. As you can see on the timeline, four of the seven products have launched. The next anticipated launch will be the Bryhali PDUFA date in October 5, followed by an expected SiHy Daily launch in the fourth quarter. And we'll, of course, keep you apprised of the revised timeline for Duobrii as we resubmit to the FDA. On Slide 24, we put together a chart with more detail on our later-phase pipeline. As you can see, each of these three segments is actively developing and launching new products that we believe will expand our portfolio and fuel our future growth. We plan to continue to grow our investments in research and development. And finally, on Slide 25, reviews the 2018 commitments and expected targets we outlined at the beginning of the year. Having delivered two consecutive quarters of overall organic revenue growth, along with continued debt repayment and a robust late-stage pipeline, Bausch Health is well-positioned to deliver on these commitments and our targets. Anticipating questions may be on the mind of many of you with respect to pricing. We are not going to take any price increases on our U.S. branded prescription drugs for the remainder of the year. One unique advantage for Bausch Health is that approximately 54% of our revenues come from a diversified mix of medical devices, over-the-counter products, prescription and branded generic products sold outside of the United States. In other words, 54% of our products are not exposed to U.S. branded prescription drug pricing environment. In conclusion, let me summarize three takeaways. First, I want to thank nearly 21,000 employees of Bausch Health companies whose contributions have delivered another great quarter. Second, we have a durable portfolio of diversified products that represents a unique competitive strength and the segments representing over three quarters of our revenues are growing organically in the mid-single digits. Third, our top 10 products in the aggregate are showing double-digit organic growth. Overall, it's been a great first 20 days at Bausch Health. With that operator, let's open up the lines for questions.

[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 and what the market need was. Beyond that, we've also did at Dr. Falk three additional budesonide products, and we're going to look at, for example, on the Relistor team, the pain team, we had the Lucemyra for exactly the reasons that you're talking about. We can leverage the time and with the physicians that we have, the relationships we have and bringing additional product that will help make a difference to patient size. So we think all those things work out really well for us. I think the last question you had was Vyzulta and the weekly progress. I would say two things on that. First and foremost, I remind you that the initial launch quantity we had with Vyzulta was a bottle size that essentially represented 2-month supply. So that's an important note to think about in terms of looking at our numbers. The second thing I would say is though as we continue to see good development in managed care, the market access wins are very strong. We had a number of wins just starting in July, where we currently believe about -- commercially about 70% of the lives are recovered. So we look at and that has been positive for the future with Vyzulta. In addition to that, as I mentioned in the comments during the presentation, we do expect the Part D coverage to expand next year into this year -- next year for Vyzulta, and that's a big part of the market because it does drive about 60% of the overall market for glaucoma. We're very pleased with the initial reactions from physicians in terms -- and patients with the success of Vyzulta. Operator, the next question?

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.