Good morning and welcome to the Bausch Health 1Q 2019 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 now would like to turn the call over to your host today Arthur Shannon, SVP, Head of Investor Relations and Global Communications. Please go ahead, sir.

Thank you, Keith. I appreciate it. Good morning, everyone, and welcome to our first quarter 2019 financial results conference call. Participating on today's call are Chairman and Chief Executive Officer, 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 the presentation as it contains important information. This presentation contains non-GAAP financial measures. For more information about these measures, please refer to slide two of the presentation. Non-GAAP reconciliations can be found in the appendix to 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 thank you everyone for joining us today. I'll begin with the first quarter highlights before turning the call over to Paul Herendeen, our CFO, to review the financial results in detail and update our 2019 guidance. We will then review the segment highlights before opening the line for questions. Beginning with slide four. Bausch Health is off to a strong start in 2019 as we pivot to offense. The 21,000 employees of Bausch Health Companies are fully engaged and truly motivated to turn around Bausch Health, and the quarterly results are excellent. First, organic growth of 5% in the first quarter was the highest quarter of total Company organic growth since the third quarter of 2015. Our top 10 products grew organically by 11% in the aggregate, compared to the first quarter of 2018. We generated $413 million of cash from operations and we continued to manage debt and allocate capital strategically, reducing debt by more than $100 million using cash on hand while also completing the synergy acquisition during the first quarter. We also increased R&D investment by approximately 30% in the first quarter versus last year. Importantly, as you can see from the list on the right, our new product launches and strategic acquisitions are helping to round out our product portfolio in dermatology, ophthalmology and GI. A few highlights to note. We completed the acquisition of TRULANCE, which is a great addition to the Salix franchise and also acquire dolcanatide, an investigational treatment for ulcerative colitis and opioid-induced constipation. BRYHALI has experienced rapid uptake by dermatologists in the first four months since launch. And in April, DUOBRII was approved by the FDA and we’re planning to launch next month. Finally, we also completed number of strategic transactions that have the potential to expand…

Thank you, Joe, and good morning. I’m going to cover our Q1 financial results, mainly by focusing on slide seven and walking down the top level P&L for the total Company. Based on the hard work of our colleagues across Bausch Health, we put a really good quarter on the board. We reported revenue growth of $21 million or plus 1%, despite a $59 million currency headwind and $80 million growth drag from LOE assets and $18 million of divested or discontinued revenues contained in the prior year quarter. Over the period from 2016 to 2018, we doubled the revenue growth drag aggregating roughly $1.3 billion from a vascular product that lost exclusivity in that relatively short window. And we also absorbed the loss of roughly $870 million of revenue associated with divested assets. So, to start 2019 with 1% reported revenue growth for the quarter feels pretty good to us. Adjusting for the FX excluding the $6 million positive impact from the acquisition of Synergy and the impact of discontinued and divested assets, we posted organic revenue growth of 5% in the quarter. Tip of the hat to our various business unit leaders. Our growth was a function of solid, fundamental execution, meaning driven by increased volumes for the total Company, up 2%. Our promotional efforts, combined with roughly 300 basis points of improvements in realized net pricing enable us to deliver the 5% organic growth. Joe said it but I’m going to say it too because it feels good, a 5% organic growth for the company is the highest organic growth we posted since Q3 of 2015. The B + L/International segment representing 55% of our total revenues saw organic growth of 8% with all five sub segments posting growth versus Q1 of 2018. Increased volume accounted for…

Thank you, Paul. Let's go through some of the highlights in our B + L/International segment on slide 16. First, this segment delivered a 10th consecutive quarter of organic growth, up 8%. And quarter one ‘19 was the highest quarter of growth for the Bausch + Lomb/International segments since the Bausch + Lomb acquisition in 2013. Importantly, this growth was driven by increased unit volume across all reporting segments of the business. In the aggregate, the top 10 products in Bausch + Lomb /International grew organically by 8% compared to the prior year quarter, in Global Consumer, our eye vitamins, Ocuvite and PreserVision along with LUMIFY are the key growth drivers. Finally e-commerce is becoming increasingly important channel for the products in our global consumer business as the Amazon data demonstrates with 89% growth compared to the first quarter of 2018. Turning to slide 17. LUMIFY, which generated $10 million of revenue in the quarter is exceeding expectations. Approximately nine months on the market, LUMIFY is number one product in the Redness Reliever category with approximately 28% market share, which is reflected in the chart on the right. LUMIFY is also the number one physician recommended product in the Redness Reliever category. And we are getting great feedback from consumers, a recent home-use study with over 300 participants found that 95% were satisfied with LUMIFY. Turning now to Vision Care on slide 18. We reported 6% organic revenue growth in the international business, driven primarily by China and Japan, and 17% organic revenue growth in the U.S., driven by market share gains outpacing competitors. Moving to the Global Ophtho Rx on the right, our market access team is doing a great job. Less than a month after launching in the U.S. LOTEMAX SM already has greater than 40% commercial and…

[Operator instructions] First question comes from Chris Schott with J.P. Morgan.

Great. Thanks very much for the questions and congrats on the performance. I just had two questions really centered around gross margin. I guess, first of all, a little bit more color in terms of what drove the gross margin strength this quarter, and why we should be thinking about this kind of step down to that 71% to 72% range for the full-year? And the second question on gross margins as well is you mentioned you believe you can the increase gross margins in 2020 and beyond, just some more color in terms of the magnitude of gross margin improvement we can think about? And is this is a business that over time could get to kind of like mid-70s gross margins or are we talking about more modest improvement than that? Thanks so much.

Yes. Good morning, Chris. It’s Paul. I’ll take those questions. I mean, much like I mentioned, the variability of our effective -- global effective tax rate, a lot of this has to do with mix. But, I called out specifically that there was a fair amount of improvement that was associated with our Project CORE and involves eliminating SKUs that are kind of fall below the line in terms of profitability. Over the period of last couple of years now, we made a real effort and made a lot of progress in reducing our investment -- overall investment in our inventories, which leads to lesser write-offs, which leads to a lesser scrap and such. And we just saw a very large impact of that flowing through in Q1 of this year. The reason why I called out that we expected to be lower over the balance of the year is we expect it to be lower, because we have a lot better visibility into what we expect our mix to be over the balance of 2019, and we didn’t want people to get out ahead of themselves with respect to the assumption on gross profit margin in the full-year 2019. You and I know [indiscernible] a long time, lot of folks online, any time you look at a 90-day period comparing back to another 90-day period, it's helpful but the longer the period you look at, the better. And at this stage, we’re guiding to 71% to 72%, and as I said in my remarks, probably in the top part of that because we've got off to a very strong start. Your question about can this continue into 2020 and beyond, and where is the ceiling. There are certainly opportunities for us to continue improvement. I think that we back…

Yes. Thank you. The next question comes from Gregg Gilbert with SunTrust.

First, Paul, on that FX comment, can you just factor -- or let us know what you are factoring in for the revenue guidance impact due to FX this year? That's a housekeeping question. The strategic question I have for you guys is about the Bausch division. There's a pretty striking difference between your Company’s valuation and that for other eye care comps and obviously there are a lot of variables that affect that. But my question is, are you willing to consider a separation of the B + L segment if a valuation disconnect persists over time. And if you are willing to consider, can you walk us through the mechanics and the time that would be involved, so that we can envision something potentially tangible beyond just your willingness to consider it?

It’s Paul. I'll start with the easy one. The FX change that we saw from when we originally provided guidance in February was $30 million; you see it's on the bridge on slide 15 of our deck. That number has been a little volatile over the course of the last, I'll call it a week to 10 days. It moves around quite a bit, so we try to run it as of the last available day. It's minus 30 as we are sitting here now. I hope that answers the question. Joe, do you want to start off on the Alcon question?

Sure. I think on the Alcon question, I think since Paul and I joined, Gregg, that we've always been looking to speaking to maximize shareholders value for our shareholders. We think that the Alcon business and the IPO shines a bright light on the value, they're trading at 20 times plus EBITDA, and obviously Bausch + Lomb, our eye care business represents our largest business segment. So, we do think it shines as bright light on this. As to what happens for specifically in our business, I think what we're focused on right now is being laser-focused on just increasing the value of this business, and as you saw with the quarter, significant growth, our highest growth for this business since the acquisition in 2013. And I think our goal always is going to be over the long term to maximize shareholder value. But, I don't want to really going to get into any specifics on any other options other than to say, we are today laser-focused on just driving the value of this business over the near term and long term in terms of our total Bausch Health business but specifically our Bausch + Lomb franchise.

Yes. If I might, Joe, I want to follow on, on that because there are a lot of questions out there, now that there's some information out on Alcon, and trying to compare that to our B + L international segment. And I'd encourage you to do as Joe said is, it does appear to be somewhat of a valuation disconnect between the way people think about our business versus the way they think about Alcon. There are reasons for that, and that’s as I say is why there are markets people value things in a different way. But I'd just point out, we -- our segment presentation and you look at our -- in the quarter for example our adjusted -- I'm going to go EBITA, I said I wouldn't say EBITA again, but I'm going to. EBITA as a percentage of revenue was circa 27% in the quarter. And you compare that to I believe that the last full year that Alcon reported, I think it were something like 17%. Now, those numbers are not 100% comparable because they necessarily have corporate allocations and things that you have to have in place to be a standalone company. And what I would suggest as a financial analyst myself, I look at our business and I say there's probably $20 million -- if we're looking at the quarter now, there's probably 20, low $20 million type G&A that ought to be allocated to this business if we're standalone beyond what we see in our quarterly results for the segment; there is probably $50 million of our unallocated -- total R&D. So, total R&D would be more likely 18 that you see, plus another 50. And if you’d put those two things in place, it’s like we have an EBITA margin…

[Operator Instructions] And the next question comes from Umer Raffat with Evercore.

Joe, just to clarify something you said earlier and then I get to my question. Are you saying no to the idea of split, or is it something you're not ready to address just yet? And my question was back to your comment on volume based growth, I guess one thing that I'm trying to reconcile is, in the balance division the gross margins up 250 bps year-over-year. So there is an implication, there is a pricing component to that. And yet, you said its all volume based growth. So I’m just trying to reconcile the two, especially also because a lot of growth came in the Ophtho Rx segment?

So on the first part of your question, I’m not trying to suggest anything specific into it other than that we're committed to maximizing shareholder value over the long-term and we will take a look at whatever we can do to deal with that. On the specific question about Bausch and Lomb, our total growth in Bausch and Lomb was 8%, of which 7% was volume and 1% was price. So my commentary is clearly the majority of the growth in our Bausch and Lomb franchise is driven by the volume at 7% of the total 8%. Does that answer that question?

Its Paul, Umer, let me come on, because this business is -- that segment is comprised of five different subsegments. And yes, when you look at Ophtho Rx, it was up 16% and roughly the same internationally and within the U.S. Yes, we did get some price in the U.S. but the scale of that relative to the entire segment, it doesn’t dwarf it, Joe is exactly right and the way I articulated in my prepared remarks that 7% volume, 1% price across that segment.

Next question comes from Louise Chen with Cantor.

So first question I have was, do you have any update on your cash pay model in the derm business, and how that’s progressed relative to your expectations? Any numbers you can put behind it will be great. And then my second question here is on MT-1303, the trials it would take to get this drug approved where you are with those. And then how is your mechanism of action compare to ILs and JACKs, because there is a lot in development for INI? Thank you.

We’re going to try to get each one of those. I’m going to start in the cash paid derm model. First, I’m not going to share any specific quantitative numbers other than what I would absolutely refer everyone to this is go to dermatology.com and you will see exactly what we're doing. We think -- what's the problem. The problem out there today in dermatology is that there is uncertainty of a prior authorization, there are expensive co-pays for patients, there is variable generic formulations. And what we think we can do with our cash pay model is in one place ensure that patients get a predictable product, they get a predictable price point and they get predictable access. And if you look at, you will see a product like ALTRENO our newest product is priced at $115 and versus what some of the co-pays are for generic formulations. And we think we're very well priced and we've got a great opportunity. The initial feedback from the physicians, dermatologist has been exceptional. We really like what we're doing there in terms of getting a very predictable response. But I think it's probably little bit early to go into any specific numbers. But I would refer to go to dermatology.com. On the second part of your question on the Mitsubishi Tanabe product, we are very early on that but we do have a plan in place to look at what this opportunity is. We are making sure that as we look at the profile with this product, we do think there is an opportunity in a very inflammatory bound disease and very big opportunity there. We're looking at Crohn's ulcerative colitis as two opportunities there. There was some initial data already in this category, but one that we think there is a chance here specifically in ulcerative colitis as an example that we think there maybe the S1P class products, will give a good response based on least the data we've seen. And specifically, our product has a unique long half way we believe it could provide a differentiated dosing opportunity, especially in the maintenance and our emission setting. So look for us to have more comments on that as we bring forward the development program.

Next question comes from David Amsellem with Piper Jaffray.

So just on TRULANCE, Joe you said in the past that you're looking for, I guess parity with Linzess in terms of payor access. So can you talk about where you are now and where you expect to be later this year? And then how we should think about the gross to net on that product and then secondly, just thinking about overall strategy and acquisitions. Are you looking at adding an EBITDA generating asset or asset and to the extent that you are? Is that something where you would consider issuing equity or using the acquisition of a cash generating asset to issue equity and potentially accelerate your deleveraging to somewhat helps us understand your thought process there? Thanks.

On the first question on payor access, we actually -- we like the position we're in. We think the most important thing to do is what we did in the first quarter already is driving additional regional plans to enroll addition players -- additional patients into the marketplace by working with these regional plans. As I mentioned on the call, we've already in the first 30 days added 2.4 million lives. But the real thing that we're doing right now on the access is to make sure that we've a good pull through model on the access that’s one of the things that we're looking for in terms of driving, not only the access but just making sure that we pull through that program as we talk to physicians. The important way we're going to do that is improve reach and frequency. And as I mentioned on the call, that's already happening particularly in the first 30-days in terms of driving the reach frequency. On the M&A side, I think we've had a lot of conversations on M&A and use of equity. I don’t think we can ever rule anything. But I think right now we are focused on driving the EBITDA of our company to help us de-lever this business. And we think that's the best way to overall de-lever and drive EBITDA and that's what we're going to be focused to do it. We think TRULANCE is a good example where we are going to do exactly that. We acquired it for $190 million approximately, we will now develop that product, grow it significantly from where it is today. And I think it's just a classic textbook case of how we think in the long-term it will add to the value of the sales business and more importantly help us de-lever.

Next question comes from David Risinger with Morgan Stanley.

I have two questions. First, can you talk about the outlook for the LOTEMAX franchise? Obviously, you have a compelling line extension that was recently approved, but you also faced partial generic competition. It'd be great to get your perspective on the revenue outlook for that franchise. And then second, if you could remind us about your free cash flow expectations for 2019? Thank you.

First on the LOTEMAX SM. We're delighted with what's happening already with the teams out there promoting the product within 30 plus days of the approval. We already have, as I mentioned on the call, plus 40% commercial coverage, plus 40% Part D coverage, which is quite extraordinary. But the market access team and the business team led by Joe Gordon have done a really remarkable setting of trying to work with existing payors to make sure that we have access for the product and that physicians understood the benefits of this products for patients. As it would relate to the specifics of the LOTEMAX generics, we have not seen that launch yet. It is a little bit earlier than we expected to be clear. But yes, it's to our knowledge it has -- I've not seen it in the marketplace yet. Should it to come to the market? We will have our own authorized generic. But as of this time, we have not yet seen it in the marketplace. So I think that was the LOTEMAX portion of the question. Paul, do you want to take the cash flow?

David, we started I guess it was less than last quarter with providing a range of expectations for cash generated from operations. That's a GAAP numbers so it's after everything. And we guided to our expectations for the year of above 1.5 to 1.6. We also include within our guidance the cash items that would degrade that would be deducted from that number to arrive at a free cash flow number. And those numbers -- basically the CapEx plus contingent consideration milestones and license agreements, restructuring and other that aggregate about $385 million based on our guidance today. We have 1.5 to 1.6 minus that number. I'll point out that we did already also think about free cash flow available for other things, we did deploy that $190 million of cash to do the synergy -- the acquisitions of the assets for synergy earlier this year, something I would -- one of my favorite phrases, I'd do that a 100 out of a 100 times.

Next question comes from Gary Nachman with BMO.

First as you launch DUOBRII, how do you anticipate reimbursements and uptake will be relative to some of your other recent derm launches? Will you add any new reps just to reallocate the detailing efforts of the current derm team? And then Paul how much flexibility do you have with expenses? Seems like you're scaling back SG&A a little bit relative to your initial expectations. Thanks.

So let me start with DUOBRII. We are very excited that we think the opportunity for DUOBRII, we think actually has an opportunity to really change the treatment paradigm, because of the ability to use a high potency corticosteroid plus a retinoid. Together, there is a synergistic effect that's actually even better than if you use the two and apply them separately to the same skin. So we know we've got a very unique formulation that has some very unique qualifications, and we are really excited about that means for patients in terms of improving the lives of patients, because as I said in the comments, we know 85% of patients would prefer or use a topical dermatologic. So that's why we think it's a great situation. Specifically, as I mentioned in the call, I want to give you the specific numbers. We said that we will launch soon in next month at 30% of covered lives, and we expect that number to grow to about 75% of covered lives one year into the launch. On the question of adding reps, thing is a thing that we already added the reps in 2018, so we're well positioned for psoriasis and we believe that the actual incremental cost of selling is going to be minimal for the launch of DUOBRII. We think that we've already got that underway. Paul, you want to take the SG&A portion?

Gary, I hope I didn’t give the impression with scaling backing or cutting back, or doing anything. It’s just a reflection of we guided to the beginning of the year in February. We said 2.45 for a total of adjusted SG&A expense. We did not change that guidance. But sitting here at the end of Q1, we feel like for the balance of the year, we maybe will be a little on the lower side of that versus the upper side of that. A lot of that is as the year plays out with the passenger time you get better clarity as to where you are spending, what you're spending, et cetera. And just we feel a little bit better about being perhaps a shade below that and a shade above that. We're not cutting back.

Next question comes from David Steinberg with Jefferies.

In terms of legal challenges, the companies have a lot of cases, either dismissed or settled with favorable terms over the last couple of years. And just curious as you look at your portfolio of challenges ahead, which are the ones that are most concerning to you that are riskiest? What exposure might you have? And is there some timeline you can give us in terms of resolution? And back to TRULANCE, you've obviously been pretty healthy first year guidance. Just curious if you would offer anything in terms of peak sales potential? And do you see TRULANCE as a product that’s going to grow the market, or will be making taking share from Amitiza and Linzess? And then finally in terms of marketing tactics, Synergy had some very memorable television ads but the product didn’t do that well. Are you also going to do some D2C for TRULANCE? Thanks.

So I’m going to try to get all those, on the first on the legal challenges. First of all, Christina Ackermann and the legal team have just done an outstanding job in terms of resolving this litigation. If you think about some of the questions in front of us going back couple of years ago, it's been the first quarter 2018 to-date they resolved 80 individual cases, either resolved them et cetera and just even of the 80%, there was actually 10% that we're doing just in the first quarter of 2019. So, great work there. Obviously, one of the most important cases that came or got resolved was an arbitration with Johnson and Johnson and ourselves on the question is of Shower-to-Shower. Christina and the team have just done an outstanding job of resolving that. On the question -- the question was peak sales potential I’m not going to give any specific peak sales number. But we clearly think we can move from that 4% market share we have today that we illustrated in the graph to significantly multiples of that in terms of what's going to happen. And we do expect to grow the market. We don't view this as being something that we will simply be taking share. We do believe the market will grow as we have new therapy for treating IBS-C, especially we think there's an opportunity for growth. And the final question of the direct-to-consumer. Right now, we are engaged primarily in winning the battle in the doctor's office. We want to be able to talk about why we have a product that has some significant dosing benefits for patients and that you can dose that with or without food. It's a once a day product versus one of the products being a twice a day product. And importantly it's got one of the best adverse side effects reactions, adverse reaction side effect profile in these products. So we believe we can focus there, focus what physicians in the near-term and then the question of whether or not we do anything beyond that in terms of direct-to-consumers, I think we will just wait and see what happens there. But right now, we're focused primarily on winning the battle in physician office.

Yes, thank you. And that comes from Irina Koffler with Mizuho.

Just wanted to touch base on the $300 million guidance for the Significant Seven, I know that DUOBRII has been pushed back to June launch. So maybe you can comment on which products are doing stronger than expected to get you to that number and how confident you are in that number?

Well, first of all, we are focused on all the Significant Seven. You're absolutely right. We did raise guidance for the year despite the fact that we did have a short delay, if I can use the word short delay. But I will say that clearly with DUOBRII, the clear opportunity we see a very strong performance in our LUMIFY product, we see strong performance in RELISTOR as being the keys to what we are doing already this year. But notwithstanding that, we are excited about all the seven products, having them all approved. It's something we put forth in 2017 and now have them all approved and soon to launch the DUOBRII with a label that we think is unsurpassed. There is no product out there with a label like DUOBRII for the treatment of psoriasis that is a high potency corticosteroid. We think that's very important for patients we're really excited about that over the long-term. So that really is where I would say the Significant Seen are going for us. We're excited and we look forward to it. With that, let me wrap-up the call. We look forward to seeing many of you at the conferences over the next six weeks. Thank you, everyone. Have a great day. Thank you for joining us.

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