Good morning and welcome to the Bausch Health Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator instructions]. After today’s presentation, there will be an opportunity to ask questions. [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 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 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. Then we 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 which 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 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 will cover a few other recent and upcoming launches in more detail later…

Thanks, Joe. I'll start by walking down the P&L slide on Slide 7. As Joe said, strong quarter, revenue up 3% organically from Q3 of ‘17 and adjusted EBITDA was up 5% organically. All four of our segments delivered organic revenue growth. Walking down the P&L, providing a little color with respect to the key line items, I’d just 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 for our presentation. So a good result. Next, we saw marked improvement in our reported gross margin compared with the prior year quarter, up some 250 basis points. Three of our four 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 NRx businesses in Europe and Latam saw improved gross margins due to favorable mix and better management of inventories, resulting in lesser write-offs. International Vision Care was also a meaningful contributor to the gross margin expansion. The better gross margins enable us to report organic growth at the gross profit line up 6%, double that of our organic revenue growth rate. Selling,…

Thank you, Paul. Let's go through some of the highlights in our Bausch + Lomb/International segment on slide number 16. First, this segment delivered its eighth consecutive quarters of organic growth as you can see in the graph on the left. Importantly this growth is driven by increased volume across all five reporting business 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 number one 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 as the number one brand and the number one 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 team’s mantras is comfort, vision, health and its clear focus is resonating with consumers. Vision Care’s strong performance in the third quarter was driven by continued market share gain outpacing the competitors. Internationally growth was driven by Asia, Russia and Latin America. The chart on the left illustrates the performance of our US Vision Care business, since we installed new management at the end of the first quarter of 2017,…

[Operator Instructions]. The first question will be from David Risinger with Morgan Stanley. Please go ahead.

Hi, this is Zhu Shen here for David Risinger, a couple quick ones. So could you please comment on LUMIFY’s global potential including the opportunity to be bigger than Visine? And secondly, what should we assume for Lotemax, Cuprimine and Apriso's generic prices in 2019?

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

27.

27, thank you, Paul, to slide number 27 in our deck we point to the fact that Lotemax right now based on our best estimates is a second half 2019 event. Once again, we’re going to say it's not a date certain event.

I’m going to -- I’d just follow that up and again point you directly to Slide 27, the three products that you called out all were changed. When we changed the assumption on with respect to these LOE assets, we typically highlighted in red, so all three are the ones you reference are changed, they are shown on Slide 27. Each one of those products if you want to get a guesstimate or actually a pretty accurate estimate, that’s fairly four quarters revenue, while all four are part of our top 10 products by segment or overall. So you can you can draw your own conclusions from that.

Next question will be from Gary Nachman with Bank of Montréal. Please go ahead.

Good morning. 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 pay down this year but with XIFAXAN placed 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, let me address 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. That said we forwarded these initiatives back in 2017 and the kind of the way it works is what we are reiterating is until you sought to see the actual results meaning lesser deductions gross to net, you kind of keep going on -- 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 greater products, that's when it forces you to look at your quarter calls accrual and through that accrual 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 scripts are up strongly. However we are 88% year-over-year. That's the result of that kind of magnification of the improved gross to net in Q3 of '18 relative to Q3 of '17 that, that will normalize overtime. I think you saw some of that across I called out within the GI the Salix portfolio, you saw some of that with respect to the 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 and that it would return to something it came 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 questions on it and I appreciate that, we will do…

I’d add to what Paul said on that last point, I think Paul and we all have done an outstanding job in moving the debt stack out and giving us what I really refer to as free 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 a good work by Paul and the team on this.

That will be from Umer Raffat with Evercore.

Joe first for you. So I noticed consensus models top-line growing for Bausch going forward over next several years, including next year. Is that how you understand the business to be? One. And then secondly, Paul you used the word wicked good on EBITDA, so I want to go 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 they certain -- on the distribution channel are you entering or exiting certain channels, just to understand the 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 to gross to net, just wanted to clarify this whole thing?

Sure. I will 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 has come through our strategic plans is that as we think about the growth in our business we talk about the company annual growth rate, what we've said previously on the top-line is that we will cross our Bausch Healthcare business. We expect to add annual CAGR growth of approximately over a three-year period of 4% to 6% CAGR on the revenue side and on the EBITDA side 5% to 8%. I think that's probably what I will stick with relative to what we’ve said historically and how we are modeling our business going forward. Obviously there are going to 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 a given year. Paul, you want to take that second part of the question?

Yes, sure. Yes, Umer I used that phrase wicked good because of my socks pant and I’m still really happy about how that series went. But much more seriously $100 million when you are contemplating at the adjusted EBITDA line, when you’re executing a strategy that is definitely going to reduce your expectations 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. This is revenue enhancement. By executing on this we expect we will improve in a lasting way our gross to nets with respect to these products. Now what does this mean? Let’s say if you look 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 -- results in the quarter or in any period, the results with relative expansion or contraction of pipeline inventories. If you look at that that slide what you'll see is over the course of 2018 year-to-date in our four segments that we point out on the branded pharma space, only one -- I am sorry, year-to-date the derma is up a couple of months, 0.23 relative to the prior year year-to-date period, the neuro business is down 0.22 months, the ophtho 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, now 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 eight quarters. And so…

Next question will be from David Amsellem with Piper Jaffray.

Thanks. So wanted to ask a sort of broader question about business developments and licensing and you've started to do deals that better leverage the commercial infrastructure, particularly in gastroenterology and maybe even over time primary care like the DOPTELET deal with Dova. So -- but I want 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 are 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 and transformation of this business. What we have said first and foremost we got to do is focus on which therapy areas that we want to focus on, and that for us was the ophthalmology or eyecare business, the GI and dermatology. Once we have accomplished that, it was then a question of figuring out where can we best invest the high in those business so for example we 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, bolt-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 license and finally got a chance to launch this year. LUCEMYRA for us fits perfectly with what we're doing on RELISTOR -- and RELISTOR -- and talking about how our RELISTOR helps the patients with opioid induced constipation 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 us 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 in the Finance and Treasury too, 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 multi-billion dollar opportunities. But certainly we can do the bolt-ons that are in the $100 million type range or $200 million range. Those would be the ones that we continue to look at. We think that they make a lot of sense because they're strategically perfect fit for ophthalmology, GI and derm. 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 near term.

That's helpful. Thanks.

Sure. That'll be from Dana Flanders with Goldman Sachs. Please go ahead.

Hi, thank you very much for the question. My first one here is, can you just speak to XIFAXAN in post-operative Crohn's. And just one, kind of the confidence jumping into the Phase 3. I think the European data was not in the postoperative setting that you cited into, maybe speak a little bit around, how you're thinking about that market opportunity? Thank you.

So, maybe just a little bit of the facts that some of the things that we've been looking at here. First and foremost we are 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 relief characteristics from the existing molecules, so we felt that was an important question and where it's going to deliver within the GI tract. So, that would be the first point to this formulation is different from the existing formulation. 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 post-surgical situation post-operatively 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 exist 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 post-operative 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 kind of 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? Thanks.

Sure. Dana, it's Paul. I'll answer this one. I think that we call, we did call it out, I believe it was last quarter might have been first quarter, I think it was second quarter. You know, Tom Appio, who runs our international group, he has done a phenomenal job of reconfiguring his organization to be much more effective in a 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 has run out of Mexico is doing really well. And what we're seeing is the laggards are continued 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 are yet, when we turn there, it will be a helper to us, here as we go forward from a growth perspective. Clearly that the Russian and Eastern European units were -- were the drag that deal 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. Please go ahead.

Hi guys, thanks for taking my question. So, you seem to have start stabilized dermatology this quarter. I'm trying to understand how much of 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, dermatology has been one of the favorites for reimbursement hurdles in the last few years? Thanks.

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

The only thing I'd add, Paul answered it very well there, the only thing I'd add is to give a little more specificity the Retin-A Micro 0.06%, 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 net there are very high for us. On SILIQ, as I mentioned during the call, were up 65% just versus the sequential quarter, are also our coverage in SILIQ 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, 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 business in the core perspective. Can you maybe now consider a more aggressive capital restructuring, we got a lot of questions about equity for capital restructuring, and so how do you feel about that given that your current position?

Maybe I'll start, but Paul feel free to add anything. I think what I tried to say before during previous question is, 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 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 solution for us, grow EBITDA and that by growing the EBITDA will -- 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 table, but over the long term, we want to make sure that we focus on the freedom to operate, in growing our EBITDA in the long term.

Thank you.

Yes, actually, our final question today will come from Louise Chen with Cantor. Please go ahead.

Hi, thanks for taking my questions here. 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 the debt pay down or obligations for 2019, even if it's just qualitative would be helpful? Thank you.

I'll start with the gross to net. 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 there are other opportunities, sure. I mean we continue to look at each one of our products. I'll keep calling out the other revenue enhancement part of our core -- part of our core program is designed for us to look in these further about the programs that we used 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 in 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 it's a very important achievement. If you look at some of the comments, I made on Xifaxan. Xifaxan, this quarter 20% versus the previous quarter. So, I mean the sequential quarter. So, that we feel is very good. AQUALOX just launched in Japan. We hope we've got it resubmitted for February PDUFA date, February 15th. SILIQ I made mention it was up 65% TRx versus the second quarter. LUMIFY already is the number two product in the category, is the number one 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.

Hey, sorry Louise, I'm going to come back and just -- I stop talking and then realized there is just one more point I wanted to make on that -- on the gross to net. As you'd asked about prospects for the future, I think first it's helpful to frame it. And 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 reported results. Second, in GI and then third in neuro. So, that just help you calibrate. There are opportunities across any brand that 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, -- you want to add about in terms of our approximation of what we said this year about, what we're paying down adapting our most important priority.

Sure. I mean, and called it out in my prepared remarks and we continue to prioritize the use of cash flow to reduce debt. And yes, you've seen most recently now we're prioritizing and looking at -- looking at the closest in debt stack, which is in 2021. We have -- on average, we 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 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. It 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. Well, everyone, thank you very much for joining today and a special thank you to all 21,000 Bausch Healthcare team members for the great efforts and 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.

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