Bausch Health Companies Inc.

Good morning and welcome to the Bosch HealthCare Fourth Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Art Shannon, Senior Vice President of Investor Relations and Communications. Please go ahead, sir.

Thank you, Rocco. Good morning, everyone, and welcome to our fourth quarter and full year 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 Herendine. In addition to this live webcast, a copy of today's slide presentation and a replay of this conference call will be available on our website under the Investor Relations section. Before we begin, we'd like to remind you that our presentation today contains forward-looking information. We would ask that you take a moment to read the forward-looking statement legend at the beginning of our 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. And with that, it is my pleasure to turn the call over to Joe.

Thank you, Art, and thanks everyone on the phone for joining us today. Let's quickly review the topics we will cover. I'll begin with a brief summary of our 2018 company highlights before turning the call over to Paul Harradine, our CFO. Paul will take us through the fourth quarter and the full year financial results and provide our 2019 guidance. I will then review the segment highlights and catalysts before opening the line for questions. Beginning on slide four, 2018 was a year of strong execution for Bausch Health. For the full year, the total company grew organically by 2%. This was the first year of total company organic revenue growth since 2015. We also generated organic revenue growth in all four quarters of 2018. B&L International and Salix, our two largest segments, grew organically by 6% on a combined basis during 2018. Our top 10 products grew organically by 11%. in the aggregate compared to 2017. We generated $1.5 billion of cash from operations. We increased R&D investment by more than 30% in the fourth quarter and approximately 15% for the full year. And we improved our gross margin through manufacturing efficiencies both in the fourth quarter and the full year. And we resolved the Syphaxin IP litigation, which we believe preserves the product's market exclusivity until 2028. Moving to the top right, we launched 10 key products during 2018, including two co-promotions. Four of our significant seven products were launched during the year, and we are expecting a decision from the FDA on do-overry shortly. We will also continue to delever our balance sheet, having repaid more than a billion dollars of debt in 2018 and cash generated from operations. Finally, in 2018, we refinanced approximately $8.3 billion of debt to extend maturity and provide more flexibility, which gives us the ability to pivot to offense in 2019. Turn to slide five. We have a snapshot of the key 2018 financial highlights for each of the four segments. Approximately 75% of our total 2018 revenue was generated by the B&L International segment and the Salix segment combined. B&L International grew organically by 4% compared to 2017, with organic growth across all five reporting businesses. Salix grew by 12% organically in 2018, driven by Syfaxon, which had a great year with 22% growth. Great results from our two largest segments. Delivering on commitments is important to us. On slide six, we show how we perform against the guidance we provided one year ago in February 2018. A year ago, we promised to deliver 2018 revenues in the range of $8.1 to $8.3 billion. We actually delivered $8.38 billion. A year ago, we promised to deliver adjusted EBITDA in the range of $3.05 to $3.2 billion. We delivered $3.47 billion. Paul will walk you through the fourth quarter and the full year results in more detail.

So with that, I'll turn it over to Paul. Thank you, Joe. I'm going to start on slide seven, the top-level financial results for the quarter. Before I begin, I want to point out that when we talk about organic growth, that means on a constant currency basis and removing the impact of divestitures and discontinuations in the comparative period. One other note, on the Q3 call, I referenced our initiative to reduce the level of channel inventories of our branded US pharma products that would have the effect of reducing our revenues in Q4 and for the full year 2018 by an estimated $100 million. As it turned out, the actual result was a $76 million drag on revenue that was spread across all four of our segments. I'm going to reference this item a lot, and we've included a slide in the appendix that shows the impact on revenue and profit by segment. Okay, let's go. We had a very strong finish to 2018. We posted our fourth consecutive quarter of organic growth despite the completed channel inventory reduction. Q4 revenue was up 1% organically and would have been up 5% but for the channel inventory reduction. Good stuff. The B&L segment comprising 57% of our revenue was up 5% organically with four of the five businesses within that segment delivering organic growth. Salix was up 1% organically despite the dramatic impact of the channel inventory reduction on the Salix segment. Orthoderm was down 2%, and Diversified was down 9% organically. Stepping down to gross profit and gross margin, we posted a 150 basis point improvement in gross margin. A good chunk of the improvement was due to mix, but we also realized a meaningful improvement in our supply chain efficiency driven by the ongoing efforts of Dennis Asheron, our head of global manufacturing, and his team. Over the last couple of years, the manufacturing team working together with Dr. Lewis Yu and our quality organization have been implementing a right first-time ethos that has decreased costs and reduced supply chain disruptions. Down in operating expenses, if you look at the reported selling, advertising, and promotion line, it looks like we reduced those expenses by 4%. But adjusting for currency and divested businesses in the prior year, we actually spent more on our go-forward business in Q4 of 18 versus 17, mainly additional sales resources and promotional dollars to drive longer-term growth. This will be a theme for us in 2019, and that's why I'm framing it for you here. G&A was flat on a... ...currency basis and reflects our ongoing efforts to control costs that don't directly drive revenue. Investment in R&D, meanwhile, was up $30 million compared with Q4 of 2017. Consistent and increased investment in R&D is a significant part of the ongoing transformation of our company and is integral to our ability to drive long-term organic growth across our core businesses. At the operating profit lines, adjusted EBIT A and adjusted EBIT DA, we were basically flat organically versus the prior year quarter. Pretty impressive if you think about the $30 million year-over-year increased investment in R&D and the $65 million negative impact of the channel inventory reduction. Really good quarter. Four of the five businesses delivered organic growth, and the one that didn't, Global OptoRx, would have grown 5%, if not for the channel inventory reduction. From a growth perspective, Global Vision Care was the star, up 12% organically, led by the U.S. business that was up 23%, driven by the impact of increased promotional resources we deployed beginning back in 2017, and the successful launch of expanded parameters of BioTrue One Day Toric. International vision care also delivered strong growth, up 8%, driven by strength in soft lens daily disposals, ultra-monthly SVS, and cosmetic lenses. Geographically, international vision care was up 11% organically in China and 9% organically in Japan. Global Surgical was up 4% organically, up 6% outside the United States and plus 1% in the U.S. A quick comment here. The international surgical business, representing roughly 70% of Global Surgical, has delivered consistent organic growth over the last seven to eight quarters, while the U.S. surgical business only recently returned to growth in the second half of 2018. As the U.S. part of the business continues to deliver more consistent results, the Global Surgical business can deliver better growth that we've observed over the last two years. The global consumer business was up 4% organically, led by the U.S. that was up 8% on strength in our I vitamins and the successful launch of Lumify. Outside the United States, consume was up 1% as strength in our LATCAM cluster from new product launches was partly offset by lower demand for our cloth coal products in Russia. The global OptoRX business declined 1% organically on a 4% volume decline driven entirely by the channel inventory reduction in the U.S. The global OptoRX business would have grown 5% versus Q4 of 17, but for that channel inventory reduction. And that growth would have been basically split between increased volume and increased net realized selling prices. International Farmer, which is our branded generics business in Eastern Europe, Russia, Canada, Africa, Middle East, and LATAM, rebounded after four quarters of subpar performance. You may recall that I previously called out some of the challenges we faced in our Eastern European-Russian cluster, and that I suggested we would start to see improvement there based on changes we made in organization and leadership. While it's too soon to declare victory, our Russian business turned around from being a growth drag earlier in the year to being a significant contributor to the 8% organic growth of this business in Q4. A quick tip of the hat to John Connolly and Vladimir Gudkov for their efforts. Meanwhile, in Africa Middle East, that cluster continues to deliver strong growth led by Amun, which was up 25% organically for the quarter and 19% for the full year. We have a great team at Amun, and we look forward to seeing that team leverage its competitive strengths to drive increased business not only in Egypt, but ultimately in other Middle Eastern markets. On to slide nine in Salix. Salix took the brunt of the impact of the planned channel inventory reduction, $47 million, and absorbed the impact of the mid-year loss of the exclusivity of Euceris and still delivered 1% organic growth. Excluding the channel inventory reduction, Salix would have grown 12% versus Q4 of 2017, driven by Xifaxin, where TRXs were up 8% in the quarter versus the prior year quarter. The nidus of Salix's performance is the team, including Mark McKenna, Nicola Cahill, and Josh Coyle. They are performing at a very high level. Note that the salic segment was one of the major beneficiaries of our improved gross profit margin, up some 290 basis points versus Q4 of 17 due to mix and manufacturing efficiencies. On to slide 10 in the orthodermatologic segment. The segment was down 2% organically as spectacular growth in global solta was more than offset by an 11% decline in the medical dermatology business. Solta was up 32% driven mainly by the successful rollout of Thermage FLX, but also basic better fundamental performance across many of our regions under the terrific leadership of Tom Hart in his Canaris Aussie accent. To wrap up the Q4 segment discussion, turn to slide 11 in the diversified products. The segment was down 9% organically. Absent the channel inventory reduction, diversified would have been down a rather modest 5% organically. Pretty good when considering the $41 million drag from the LOE products versus Q4 of 17 fell in the neuro segment there, business there, excuse me. Our generics business was a star performer based on two factors. First, the launch of authorized generics for our branded products that lost exclusivity. In Q4 18 versus Q4 17, the big contributors were Eucerus AG and Elladel AG. And secondly, The generics team, led by Mary Saharian, worked closely with our supply chain to capitalize on market opportunities across our generics portfolio, not just in the quarter, but throughout the year. The generics business was up 18% versus Q4 of 2017, mostly on volume, but we were able to get some positive contribution from price, too. A really good job. Flip to the full year 2018 versus 2017 on slide 12. The themes are similar to what we saw in Q4. Revenue was up 2% on an organic basis and would have been up 3%, but for the $76 million impact of the completed channel inventory reduction. Salix led the way from a growth perspective, up 12%, would have been 15% if not for the channel inventory reduction. We posted really strong growth of Zyfaxin, Aprizo, and the Relastore franchise that was slightly offset by the impact of the July LOE for Euceris. B&L International was up 4% organically versus 2017, with all five businesses delivering organic growth. The orthodermatologic segment was down 13% as global filters plus 22% growth versus the prior year was more than offset by the continued rebasing of the medical dermatology business. Finally, diversified posted a 5% organic decline, modest compared with the 24% decline we saw in 2017 as the growth drag of the LOE assets moderated in 2018 and was offset in part by the solid 19% growth in the generic business. Note the gross margin improvement versus 2017, roughly 110 basis points. Same themes as we saw in Q4, mixed and supply chain efficiency. We reduced G&A by some 6% on a constant currency basis, partly on reduced legal expenses. Finally, we increased our investment in R&D by some 15% with the expectation that we'll continue to invest more in R&D in 2019 versus 18. Adjusted EBITDA was up 3% organically to $3.474 billion despite the $65 million drag of the completed channel inventory reduction. Pretty good, right? Adjusted net income grew faster organically than adjusted EBITDA as our net interest expense decreased 154 million compared with 2017 due to our successful and continuing efforts to reduce debt. And we saw a decrease in our tax rate on adjusted pre-tax earnings from 13.2% in 2017 to 8.4% in 2018. Turn to the balance sheet summary slide on slide 13. You see the progression of our debt balance since last year. Debt is down 1.12 billion from the end of 2017. We ended the year with 24.6 billion of debt, 723 million of cash, and a modest $75 million outstanding under our revolving credit facility. After year end, we did prepay another $100 million of debt. On to slide 14 in our cash flow summary. Cash provided by operating activities for the full year totaled $1.501 billion. In the first half of the year, the settlement of several legacy legal cases reduced that amount by roughly $225 million. So for the year, our cash provided by operating activities was in line with our expectations. Sequentially, our cash provided by operating activities went from $522 million in Q3 to $319 million in Q4. Note that as a result of refinancing debt, roughly one-third of our cash interest is now paid in each of Q2 and Q4. Looking backward, the settlement of interest had been relatively consistent across the four quarters. This change had a meaningful impact on the phasing of cash generated by operating activities in Q4 versus Q3, and that will continue in the future. Shifting to our guidance for 2019, the particulars of our guidance are spelled out on slide 15. The highlights, we're expecting revenue in the range of $8.3 to $8.5 billion and adjusted EBITDA in the range of $3.35 to $3.50 billion. Our guidance applies organic revenue growth in the range of flat to plus 3% and organic growth of adjusted EBITDA from minus 2% to plus 2% when compared with 2018. There's a bridge from 2018 actuals to our guidance on slide 16. The very strong finish to 2018 took a bit of the top off of our growth expectations for 2018, but we'll take the good performance that we put on the board and move forward. At Adjusted EBITDA, when looking at 2019 versus 2018, bear in mind that our guidance contemplates an approximately 10% of a $40 million increase in investment in R&D and meaningful increases in selling and promotional expenses to support our recently launched and to be launched brands. If we were managing solely to deliver near-term growth of adjusted EBITDA, I have no doubt that we could put a higher EBITDA range on the board for 2019. But we're playing the longer game, and that means sacrificing a bit of near-term profit to deliver a better, more valuable future. I want to call your attention to some other guidance details included on the slide. You see that we expect to increase CapEx in 2019. This is mainly growth CapEx for our initiative to introduce new daily silicon hydrogel lenses. but also to fund the overdue build-out of our global IT infrastructure. We've also added a few new line items to our guidance slide, namely our expected gross profit margin, which we expect to be in the range of 71% to 72% in 2019, and our expected full-year cash generated from operations, which we expect to be in the range of $1.5 to $1.6 billion. Note that our reported gross margin is sensitive to changes in FX rates, so please bear that in mind. Finally, we believe that on a constant currency basis and off of the midpoints of our 2019 guidance, we can grow over the next three years to 2022 at compound annual growth rates of between 4% to 6% for revenue and 5% to 8% for adjusted EBITDA. That's it for me, Joe. Thank you, Paul.

Moving now to page 17, our Bausch & Lomb business is a fully integrated eye health business with offerings across the spectrum of vision care, which includes contact lenses, surgical, consumer products, and prescription ophthalmology. Importantly, this integrated business is being driven by several global megatrends that we see creating increased demand for our eye health products. First, Recent statistics indicate that there are approximately 1.3 billion people in the world who live with some kind of vision impairment, and 80% of all vision impairment is generally considered to be avoidable. Another megatrend is the graying of the United States population as the baby boomers hit age 65 and above. People over the age of 65 use eight times as many eye care products than those under the age of 65. Clearly, an important megatrend. In addition, the prevalence of myopia, or nearsightedness, is increasing to epidemic levels. As the graph shows, myopia rates in Hong Kong are steadily increasing from about 30% of those born before 1950 to a staggering 87% of those born in the last 20 or so years. This data suggests that environmental factors like increased screen time with laptops, cell phones, are responsible for the high rates of myopia we are seeing in Hong Kong and in other parts of the world. Myopia statistics are important to our business for obvious reasons, but also because myopia is a risk factor for glaucoma, macular degeneration, and retinal detachment. Based on these megatrends, we are projecting growing demand for eye care, and we believe Baoshin Lam, as a global integrated eye health business, is well-positioned to provide them. On slide 18, the B&L segment delivered its ninth consecutive quarter of organic growth, generating two years of mid-single-digit growth organically. E-commerce sales through Amazon grew by 64% in 2018 versus 2017. And we saw a 44% spike in the sales at B&L's flagship store and Alibaba's Singles Day during the fourth quarter. The performance of our global vision care has been phenomenal. Driven by BioTrue One Day and Bausch & Lomb Ultra, the U.S. business significantly outperformed the market, up 13% versus 2019, compared to 4% to 5% growth for the rest of the industry. Moving now to global consumer, Lumify, which was launched in May, is now the number one product in the redness reliever category with an approximately 28% market share. Lumify is also the number one product recommended by optometrists and ophthalmologists for redness relief. The BNL iVitamins, Presivision, and Occupy grew organically by 7% in 2018 on a combined basis. Finally, in global ophthalmology, Bisolta TRX weekly prescriptions grew by more than 50% sequentially in the fourth quarter of 2018 versus the third quarter of 2018. Also, We know the data tells us that patients who start on Visalta are 34% more likely to stay on it than other branded agents, which brings us to market access, where our position has substantially improved versus earlier in 2018. We are now up to 80% commercial coverage, and Part D coverage is up to about 30%. However, more than half of the Part D prescriptions are being covered today. We are making good progress here. Finally, Visalta was approved to the second market, Canada, last month. So we believe the product has good momentum and a lot of opportunity ahead. Over to slide 19, I want to emphasize the strength of our international business, which ties into the megatrends I mentioned earlier. As you can see from the map, our brands and franchises have market-leading positions throughout Canada, Latin America, Europe, Middle East, Africa, and, importantly, Asia. Bausch & Lomb VisionCare is the leader in key emerging markets like China, Thailand, and India, which represent approximately 40% of the world's population and are among the fastest-growing markets. The key takeaway that I want to emphasize is that approximately 58% of our business is not currently exposed to U.S.-branded prescription pricing. Turning now to slide 20, we've given a sense of the near-term product pipeline across the entire iHealth business. I'll summarize by saying that Bausch & Lomb is a diversified and fully integrated eye care business. Our integrated platform is a significant strength for us, particularly given the trends that we expect to drive global eye care consumption. And as you can see from this slide, we have a number of great opportunities in our pipeline that we believe will enable us to grow at a mid-single-digit growth rate. Moving now to highlights on slide 21. Let's start with Syphaxin. I want to provide perspective on the reported 2018 revenue growth of 22%, which is one-third of the volume came from strong TRX volume gains, one-third from our project core activities that improved gross to net with better co-pays, couponing, and rebates, and about one-third falls under the category of gross pricing improvements. We think, though, that we are just scratching the surface at Sifaxin when you consider that chart on the right, which shows that 90% of the IBSD market is still being treated by antispasmodic or antidiarrheals. In other words, 90% of the market represents a significant growth opportunity for Sifaxin in IBSD. Finally, we expanded our GI business by obtaining rights to other co-promote products. Usamara, Doctylat, and Plenview complement our existing products, and we expect these additional offerings to help drive revenue growth. Let's move over to slide 22 and talk about the Salix pipeline. We're continuing our R&D investment in Rifaximin by developing a number of new formulations and, importantly, new indications that we listed on the chart. We have great opportunities with Sifaxin. We also have a potential bolt-on acquisition opportunity that we are excited about. We entered into a stalking horse agreement to acquire certain assets of Synergy Pharmaceuticals Trulance for chronic constipation and IBSC, and also an investigational compound, Dulcanitide, which has demonstrated proof of concept in treating patients with multiple GI conditions. We think these assets are a natural fit to what we are already doing in gastroenterology and primary care. And we have some capabilities in terms of scale, supply chain, and managed care expertise that can help improve the performance of Trulance. If we are successful, we expect the transaction to close in March of 2019. Moving on to slide 23, orthodermalogics. While this segment has trailed B&L International's sales turnaround, the business continues to stabilize as we launch new products. Selic generated $6 million of sales in the fourth quarter, and as you can see from the chart on the right, TRX weekly scripts grew more than 30% TRX growth in fourth quarter 2018 versus the prior quarter. We also launched two new products during the fourth quarter, Altrino, an innovative new retinoid acne treatment, and Brihali, a new potent steroid treatment for plaque psoriasis. Our aesthetics business, Global Sota, was a bright spot, driven by the strength in the U.S., Korea, and Taiwan, and the expected global launch of Thermage FLX. We also have announced a transformational new model for our dermatology products in the U.S. that we believe will give us an opportunity to grow the overall business. The business will pursue two separate access models, reimbursed medical dermatology, which is a continuation of our current model, and cash pay prescription dermatology. In light of the challenging payer environment for dermatology products, we believe this new cash pay prescription model offers improved, predictable, and sustainable fulfillment options. For example, with our new model, adult women prefer our cosmetic elegant formulation of 0.05% tretinoin lotion, will now be able to get Altreno from their dermatologist at a predictable price, which puts the treatment decision in the hands of the doctor and the patient. On slide 24, I want to talk about Duovre, which upon approval is expected to be the first and only topical lotion that contains a unique combination of halobetazole and tazeratine in one formulation for the treatment of plaque psoriasis. We announced on Friday that the FDA is close to finalizing its review, and we expect a decision from the FDA shortly. We remain optimistic about this opportunity. First, there are about 7.5 million psoriasis patients in the United States and between 150,000 to 260,000 new cases diagnosed each year. Second, research shows that 90% of patients with psoriasis are open to new treatments. And third, 85% of the patients on therapy use a topical medication. Our actuarial model suggests that by using duovir, even a small reduction in the number of psoriasis patients that need a biological treatment could result in a fairly large net savings for health plans. On slide 25, we show the anticipated revenue growth of our significant seven products, six of which have been launched to date. As the blue bar shows, this group of products represented approximately $75 million of revenue in 2017, and that doubled in 2018 to more than $150 million. We are projecting another double in 2019 to approximately $300 million with expected peak annualized total revenues of over $1 billion by the end of 2022. We're excited about what this means in terms of being able to launch new products that make a difference in patients' lives. Finally, slide 26 sets out our expectations for 2019, a year of growth for Bausch Health as we pivot to offense. First and foremost, we expect reported revenue for the total company to grow in 2019 versus 2018 at or above the midpoint of our guidance range and at current FX rates. Second, cash generation. We expect to generate $1.5 to $1.6 billion of cash from operations, and we plan to use more than $1 billion of that cash opportunistically to reduce debt and or fund bolt-on acquisitions. R&D investment is expected to increase by about 10% in 2019 as we continue to develop innovative products that improve patients' lives. Revenue generated by our significant seven products is expected to double in 2019 to approximately $300 million. Our continued efforts to improve operational efficiency, which we refer to internally as Project Core, are expected to deliver more than $75 million in operating profit in 2019. And finally, we're meeting expectations on our previous growth guidance and adding that Bausch Health expects a three-year compound annual growth rate from the midpoint of our 2019 guidance of 4% to 6% revenue growth and 5% to 8% adjusted EBITDA growth during the period from 2019 to 2022 on a constant currency basis. Based on our 2018 results and our outlook for 2019, We believe that Bausch Health is well-positioned to continue the momentum that is driving the company's transformation as we now pivot to offense. Operator, let me open up the line for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Today's first question comes from Umar Rafat of Evercore ISI. Please go ahead.

Good morning. Thank you for taking my questions. I wanted to touch up on two topics. First, as we head into 2019, can you, perhaps this one's for Paul. Paul, can you lay out for us some of the comments you shared at the conference in January where you talked about growth and three-year growth triggers relative to the roughly flattish guidance? And could you also give us a sense for the amount of gross to net improvement impact that you expect in 2019. And then my second question is perhaps for Joe. Joe, I know there's like this 300 plus patient trial for Zyfax and SSD formulation potentially due at some point this year. Could you walk us through the timing on that? And perhaps more importantly, how meaningful is that indication? Because it's my understanding that it's an acute indication which only requires a couple of days' worth of administration. So is that a trial and or an indication that's commercially meaningful? Thank you very much.

Okay. So, Paul, why don't you start with that 2019 question and some of the growth and the GTN impact?

Sure, and thanks for the questions, Omar. First of all, on the three-year growth rate, I think you characterized our guidance as flattish. I mean, I referenced in my remarks the challenge for us relative to 2018 is we finished the year really, really strong, which we're happy about. So it kind of took a little bit of the top off. What you see for 2019, what we've essentially done is re-upped our three-year CAGR guidance to, say, 4% to 6% for revenue, 5% to 8% for adjusted EBITDA off the midpoint of our 2019 guidance. You know, there are included in our deck here a lot of charts and bridges. I point out that, you know, FX has been a challenge for us, that people look and go, oh, you know, where are you relative to that? I say, we're Yeah, we feel like we're continuing to be on track with our longer range expectations for growth of both revenue and profitability. The big issue for us in 2019 with respect to profitability, I called out, we're investing more in our business. And so you're not seeing that, you won't see 2019 wherever we end up with respect to revenue, that's translate directly to adjusted EBITDA growth because the increased investment in R&D and the necessary investments behind selling and promotional expenses for our launched and to-be-launched products. So we feel pretty good about our prospects for delivering growth over the course of the next several years. Your second question, I think, was around gross to net and what can you expect. I'd say that we had a very strong year You know, with respect to gross to net, improving that, I think we called it out on our last call and even at the beginning of the year, we had some things that we were able to successfully change in a non-retail channel. We had a couple, I'm looking to make sure I get it right, about a 200 basis point improvement if you looked across the the company for gross to net in 2018 v 2017 as we look ahead to 2019 v18 we expect we would not expect that level of improvement but we would expect to grant you'll continue to improve our our gross nets across our portfolio in 19 v18 does that answer omer thank you very much for that

On the second part of your question, you're asking us about the ongoing trial that we have in overt hepatic encephalopathy. A couple of things I'll say. Number one, there are about 156,000 patients that are hospitalized because of hepatic encephalopathy. Obviously, anything we can do to reduce the hospitalization time or let them stay in the hospital as well as rehospitalization is an important question for us that we're looking at in that trial because we obviously think that's an important part. of any pharmacoeconomic model in showing the value of our product. But importantly, there's a second reason for this trial. As you probably noted in our data that we're using our SSD formulation there. We expect that that trial will give us some information on the use of SSD formulation. and potential dose response, which can then help us with some of the later trials that we also believe are the larger opportunities. So it's important for our pharmacoeconomics to summarize, and then also it's important because it will give us a dose range and information that will help us as we look at some of the larger trials. For example, the prevention of the complication of decompensated cirrhosis as an example with with the other indications and other things we're going to look at with either the Xifaxin 550 or the SSD formulation. So important to us for the near-term for pharmacoeconomics and also long-term. Operator, next question.

And our next question today comes from Dave Reisinger of Morgan Stanley. Please go ahead.

Yes, thanks very much. So I guess I wanted to start with Lumify. Could you just talk about that ramp And I know that the TV ad was well received. Do you plan to run that more frequently in 2019 to drive greater adoption? The second question is, with respect to the February 25th Lodomax franchise line extension, PDUFA, should we expect an on-time approval or could that potentially be delayed due to the FDA backlog as a result of the government shutdown this winter? And then finally, just on contact lenses, could you please talk about the potential timing for additional Sci-Hi launches globally? Thank you.

Sure. Let me start. On the Lumify, we are delighted with what we're seeing. As we mentioned in the call, that we're now up to approximately a 28% weekly share in the latest data that we've seen. Since we launched this product just in May, we're really excited about it. We are back with TV advertising now as you speak. We think that's an important part of it. But we also think the other part of it is the integrated eye care approach we have allows our teams in ophthalmologists' offices and optometry offices to drop off samples. And that's the reason we are getting great referrals and why we're the number one referral product for the treatment of redness relief from ophthalmologists and optometrists. So we think it's the integrated approach that really is helping us with what we're doing in making Lumify a better product. And, of course, the other important reason I must add is that we believe we've got a better mechanism of action. We do not constrict the arterial blood flow to the eye. We constrict the venous blood flow, which we think is a much better way than approach on the redness relief category. On the second question, it was low to max to 0.38%. You're absolutely correct. We have a late February date for the PDUFA. At this time, I really don't want to speculate as to where the FDA is in terms of approving this product. We're obviously putting together all the information. We put together that information. We know the FDA is making good progress on it, but I don't want to really speculate as to exact timing. The PDUFA date is the date, but obviously we know that the FDA is in the case of Duobree, was not able to complete their PDUFA date filing or review on time. So I'm not going to speculate on what's going to happen on the, I think it's February 25th date. Final comment, contact lenses. As you noted, we did launch the silicone hydrogel in Japan, and we've got plans to roll that out globally. That global rollout will be predominantly, for example, the U.S. will be sometime in 2020 in terms of our launch plans for the silicon hydrogel launch here in the United States.

I'm going to just finish off on that because I think the U.S. market, depending on the data set you use, is approximately 40% of the global lens market. And so it's obviously a big target for us. The U.S. is also a market where more of the lenses are, I think only about 45% of the U.S. market is in daily lenses now, which is low relative to the rest of the world. So we want to be in daily lenses, in a daily psi high, because that is a fast-growing and expected to continue to be a fast-growing segment of the market.

Great. Thank you.

Operator, next question?

Yes, sir. Our next question comes from Chris Schott of J.P. Morgan. Please go ahead.

Great. Thanks very much. Just two questions here. Maybe first on Zyfaxan and just elaborating a little bit more on the 2019 outlook. Do you see more growth and improvements this year or should we be thinking about 2019 more as a year where its volume and gross price increases driving growth there? So I know in 2018 that was a big component of growth. I'm just trying to talk about the whole business, but Zyfaxan specifically in 2019, will that be a component of growth? My second question was on organic de-levering. You're allocating more capital to deals. You're obviously pivoting to offense a bit here. I guess, can you elaborate just on how you're balancing acquisitions relative to debt pay down in the story? I guess, in general, should we still think about most of your cash flow being allocated to debt pay down at this point with some smaller deals mixed in, or could these transactions actually account for a more meaningful piece of your cash flow on a go-forward basis? Thank you.

Sure. Sure. Good questions. I'll take the Xifaxin question, and then Paul will comment about the organic de-levering. On the Xifaxin, we're really excited by what we're seeing. If I just look at what's happening, you know, so far in the 2019 timeframe, we're seeing somewhere in the, for example, in the month of January, our Xifaxin total prescriptions are up approximately 10%, so very strong growth in Xifaxin volume. What we are projecting, though, as we think about it, is the combination in 2019 will be a combination of what we're seeing on prescription growth, you know, call it high single digits there, and then call it some net price improvement, which is a combination of a growth price and also some growth to net things that we are doing. So I think it's really a combination that we think can get CIFACs and certainly to high single digits, low double digits in terms of the growth rate that we are projecting for Sifaxin. So we're very excited about it. One final comment I will say that some of you don't see, but we're also seeing very strong non-retail growth with Sifaxin. That's the non-retail category. Think of nursing homes, convalescent homes, hospital institutions, et cetera, where we're seeing actually they're also growing double-digit growth, and that's another big driver, especially in the area of hepatic encephalopathy. So those will be the primary growth factors for Zyfaxan in 2019. Paul, do you want to take the question on the delevering and the debt?

I do, but I want to chime in on the gross net on Zyfaxan because as a financial analyst, and I know everyone on the phone is a financial analyst, it's important. I mean, you remember that back when we reported our Q1, we talked about a pretty substantial improvement in gross to net from better pricing in that non-retail channel that Joe just referenced, which is growing quite nicely. We're going to lap that. So that had been kind of a step function. It had been a nice tailwind for us in Q1, Q2, Q3, Q4 for the full year. We're going to lap that, and, you know, it's a good thing. I mean, it's all good. But I think looking ahead to 2019 V18, you know, Joe said it exactly right. It's like we expect something on a unit basis and, you know, high single digits and price, you know, whatever gross selling price increase we take, you know, we don't obviously expect to net that and realize all of that. But, you know, the two drivers next year will be next year versus 2018. will be volume and whatever we can net out of price increases that we take. With respect to the question around how do we expect to deploy our cash flow, Joe finished up with a slide that said we have a billion to be used for debt and or bolt-on acquisitions. I mean, this is, our priority is to reduce that debt. Now, that said, it's not a priority. We say when you have a great opportunity that we think is value generative and helpful to all stakeholders, you know, we're going to pursue that. And I think the best example of that is the ongoing situation with Synergy where, you know, as Joe reported in his remarks, you know, we put in the shocking horse bid, it's $200 million. It's $200 million. It's If we were successful at that level, I'm not suggesting that's how that'll sort out, but if we're successful at that level, that billion dollars, 200 million of it would definitionally be allocated to business development. And there are other smaller items that throughout the year we would expect to pursue to continue to add to our R&D portfolios or to our marketed portfolios for each one of our core and important businesses. So it's a very difficult question because In the absence of something value generative, we're going to reduce our debt. That's super clear. But if there are these opportunities that we shift and deploy them against business development and it makes sense, we're going to do that. And in my opinion, like, for example, the synergy thing, that is something that makes an incredible amount of sense based on the strategic fit within our Salix portfolio and So that we will allocate capital to for BD and other small things. I know if I answer you, I can't answer your question specifically, but I hope I provided at least the way we're thinking about it. Thank you. Thank you.

Operator, next question?

Yes, sir. Our next question comes from Irina Koffler of Mizuho. Please go ahead.

Hi. Thanks for taking the questions. I just wanted to verify that your guidance for next year, does it include any benefit from Trulance or any Salesforce expansion to Salix?

The guidance that we give does not include any M&A, to be clear. It does include our plans for SyFaxon, but not specifically related to what we are planning for incremental sales reps or anything along those lines if we are successful in acquiring Trulance. Is that clear?

Yeah, and then just one follow-up. You're obviously doing very well in SOLTA and cosmetic dermatology. Is there any thought to expanding your presence in that segment? Thank you.

Yeah, Paul made a comment that we have a leader there, Tom Hart, who's doing an absolutely phenomenal job in turning around that business. And what he's doing is he's really focused on a couple things. Number one, launching some new products. He's got a new Thermage product that he's launching, and it's doing very well with that product launch. Number two, he is looking at what I would refer to as geographic expansion. He's looking at places where we have an opportunity to do better than existing business. So we do very well in the United States. We do very well in Asia. But we have a significant opportunity in Europe, as an example. So Tom is putting some incremental resources to work there to – look at what we think is a good opportunity for growth in the European and some of the other areas of the world that we just are not as well represented in. So we do think there's some opportunities from the upside, to be clear, based on what we think is really strong leadership by Tom Hart and the team. Yeah, it's Paul.

I want to follow on on that as well as I think the best way to build value is to optimize what you own and what you have in your own internal pipeline. And I dare say before Tom joined us and he was brought to us by Tom Appio, who runs our international business, which was a great thing for us. We had not optimized our existing portfolio, nor were we positioned to optimize the new products that we already had the ability to roll out on our own and drive organic growth. That's why, you know, Joe, you can hear his enthusiasm about this business and certainly mine as well. You know, we've called it out, you know, a handful of quarters in a row here. We have an interesting portfolio. If there are opportunities to add to that, we surely would. But we have a lot of opportunity within that existing portfolio plus new products that we're rolling out from our pipeline. So well positioned in global, Solta.

Thank you.

Robert, next question?

Yes, sir. Our next question comes from David Amselom of Piper Jaffray. Please go ahead.

Thanks, so just have a couple. So just coming back to M&A, I may have missed this, but maybe you can put a number on deal capacity or what your wherewithal is in terms of deal size or aggregate transaction size and how much is earmarked for transactions. That's number one. And then number two, just talking about the cash pay dermatology model, Can you just talk about the mechanics here? I mean, is this going to be products primarily dispensed in the physician's office, like what the Obagi model was? And, you know, how many medical derm products do you envision falling under this model? And then lastly, on the rifaximin studies you highlighted four, maybe give us some color on timing for data readouts on those studies. Thanks. Thanks.

Well, why don't you take the first one, and I'll take the cash payments or faxman.

Yeah, sure. I mean, David, thanks for the question. It's hard to put a number on what we might be willing to do in M&A. We obviously have a limited capacity because of the level of our debt and the limitations of our ability to generate free cash flow, which we can choose to either use to reduce debt or to deploy against value-generative BD opportunities. I dare say if we do Synergy this year, that takes a good amount of our capacity out for 2019 if we're so fortunate as to be able to conclude that deal. It is one of the challenges that we face is we are a company that carries a lot of debt. We are highly levered. And so we need to be incredibly judicious in the deployment of capital for BD, and we don't have a big checkbook. We just don't. And that's the way it is until we can change it. And I'm not sure I answered your question, but I can't give you and say, oh, it's 40% of whatever. It's not. It's based on our ability to balance between the absolute requirement that we continue to prioritize using cash to reduce debt and being willing to place strategic bets on situations that we think are really going to be good for us in the long term.

David, on the second part of your questions about the cash pay model and dermatology, what we are trying to solve here is what the problems are in the dermatology space in some of these products, especially in areas like acne, for example. There is an uncertain environment with prior authorizations. There's uncertainty there for both the physician and the patient. There's expensive co-pays often in that category. And there's variable formulations from the generic companies, especially in the topical products. What we are going to seek to do is to bring forward a brand formulation that we believe will have predictable access. In other words, patients will know, physicians will know how to get it, either through the physician's office, through retail stores, or through a mail order facility. So predictable access. And it will have known pricing, very predictable pricing. In other words, we'll be able to give our belief that we can make this product available at a set price. So that's what we think will be very helpful to a large number of patients and physicians because the market will become very predictable versus what unfortunately we see today is a very unpredictable market. So Bill Humphreys, our leader in this DERM business, is moving forward with this. We'll have a lot more to say about specific products, but think about some of the older products that we have in the areas of acne, also in some of the topical dermatitis and other areas that will be coming forth with our products. So we'll have more to say about this as we roll it out, but we think it's a good way to look at it. And the third part of your question was Rifaximin. You can hear our excitement that we're doing two things. Number one, coming out with the new formulations. And then number two, coming out with a new indication. So I don't know I can go through all of the specifics on the call now because there is a lot that's going to go on there, but I'll try to hit the highlights. In the postoperative Crohn's disease, it's a phase three trial. It's using the EIR product that we are partnering with Alpha Sigma. I remind you that we had an arbitration with Alpha Sigma, and we found a solution to that. We resolved that good work by our business development and legal team, and we'll be headed into that phase three trial with the post-operative Crohn's, and our expectations will have data on that sometime in the, let's call it the 20, data sometime in the 2021-22 timeframe, depending on what happens there. On the second slide, area that we're looking at is the OHE study. That's the acute study I mentioned previously on the call. That's really, as I said, it's trying to look at the pharmacoeconomics of Syphaxim, but importantly giving us some information on SSD that we can then leverage and take into additional clinical trials. That will hit some data later this year, but I probably don't want to give specifics about filing or anything along those lines because that's something that we'll still be assessing over the long term. On the other area of SIBO, that, as we mentioned, is in a phase two. There's a lot of patients with SIBO. We're looking at 17 million patients in the United States. As I mentioned before, we've seen somewhere approximately 12 million patients who are treating IBSD, so it's somewhat of a subset of the SIBO population. Large numbers there. I don't have a specific date that we'll share right now, but certainly it'll take a couple years to get the data on that, and then we'll make decisions on where we're going to go in that. But think certainly in that 2021-22 timeframe for data and then where we want to be thinking about for the future. So I think I've tried to answer all the questions there relative to your question on refactoring studies. But we're very optimistic, and we are going to invest behind our refactoring franchise. Operator, next question.

And our next question today comes from David Steinberg of Jefferies. Please go ahead.

Thanks very much. I have a few questions on your GI business. So first, back to Subaxone. Your unit growth has been steadily improving, I think, up to 8%, according to IMS. You recently had some positive data in pain associated with IBSD. And, Joe, you mentioned that about 90% of the market is untapped. So I'm just curious, now that you've settled, you know, with Teva and you have a runway for five, six, seven years, what sort of unit growth, given these dynamics, what sort of unit growth do you think you can put up, you know, in the near to medium term for some facts and given it's your biggest drug? And then secondly, on Synergy, what sort of sales, you know, it's a good strategic thing, but what sort of, sales would you need to achieve, assuming you get it, to start turning a profit? And what sort of peak sales expectations would you have for Trulance? And then finally, you know, COSMO has now been approved for rifaximin indicated for traveler's diarrhea. From what you can see in the market, are they taking share? And what's your view on any off-label prescriptions for indications like IBSD and HE? Thank you.

Sure. I think you got a lot of questions in there, David, but I'll try to, if I don't catch them all, let me, remind me. On the first one, though, we're very excited what we're seeing with Sifax. And the only thing I'm going to comment on is, you know, at least during the month of January, we actually saw about 10% growth in our year-over-year growth with Sifax. And so, very strong unit in growth. And as I mentioned, in the non-retail segment, we're seeing even higher growth. So, Very excited about it. But just in terms of what we're expecting over the long term, I think was really the nature of your question. I think if you think about volume growth in Syfax and somewhere in that, I call it high single digits, that's probably what I would stick with, not going into that double-digit side. Obviously, if we can get some additional net pricing, it might help show even more. But high single digits is the unit volume growth I would probably think about as you're modeling. On the question of synergy, I think I said in the call, we're really excited about it. We think there's a great opportunity there with synergy, especially given the fact that we bring some important experience. We have experience in the gastroenterologist office, which we think is helpful to what we need to do with Synergy. Number two is we've got a great supply chain capability. Dennis Asheron and the team at USU are doing really well on the supply chain. And we've got some problems we have to fix with Synergy. So that is what we think is an important competitive advantage that we bring to this situation. And then finally, one of the areas that we were concerned about As we were watching externally with the market access side for Synergy, we think we also have new leadership in our market access team and a good market access team that can help us to get the appropriate opportunity for the future, assuming we can get Synergy at the right price. Final comment, a question I think you asked was in terms of what's happening with Cosmo. I can say that our sales force has not seen any activity or sales presence in the gastroenterologist or primary care offices from Cosmo. We can say with conviction, we know there are some significant barriers for entry in the GI offices, and we're very pleased with our position for Rifaximin and specifically Zifaxin as we sit here today, but we have not seen anything from Cosmo at this time in the marketplace. I think I got all your questions, David. I think I have time for one last question, please.

Absolutely. Today's final question comes from Louise Chen of Cancer. Please go ahead.

Hi. Thanks for squeezing me in there. So I have two questions. First question I had was you've said that your significant seven products are expected to double again in 2019. Just curious which products are driving that and are there any in particular that you're very excited about? And then secondly, are you still considering options to meaningfully deliver your balance sheet And if so, what are some of those key options that you're considering? Thank you.

Sure. I'll take that first part, and then, Paul, you want to take the comment on the second part of de-levering. On the significant seven, I think probably the best way to say it is that we like all the seven. We think all seven of them are really the opportunity for growth, and we put them together specifically because, as we talked about going back to 2017, they were under, call it $75 million of revenue, and we thought about what was going to drive the growth of our business, and we said these seven products are going to be key to us. Clearly, there's a big, big opportunity in dermatology. As we bring Selic to the market, we get Prihali approved, and upon the approval of Duobury, we think those three products are going to be an important driver, not only of our significant seven, but also the turnaround in dermatology. So I'd have to say that those are clearly important drivers to our future success with our dermatology turnaround. But we do think, just to summarize my comment, all seven products are important to us for the point of view of both the the growth aspects, but also how we'll turn around the overall dermatology business. Paul, do you want to take the second part of Louise's question?

Yeah, sure. I mean, obviously, the best ways for us to delever are to grow our adjusted EBITDA, secondarily to prioritize the use of cash flow to continue to reduce that debt. And last on that list would be to consider potential equity or equity-linked securities. I'd say that we have made an enormous amount of progress in our in managing our cap structure, particularly the liability side of our cap structure over the last couple of years, great leadership from Will Woodfield, our treasurer. Right now, we're okay with where we are leverage-wise, and if we look at our forecast over the next few years, we will generate enough cash to help us significantly advance the ball in reducing our leverage in addition to the obvious benefits of growing our adjusted EBITDA. we feel pretty good about where we are right now and not compelled to do anything. You know, we'll just continue to look at managing the cap structure side at opportunities to continue to target those debt stacks that come due. I mean, you know, even though we've made such great progress, you know, looking out to 2023 where there's a hefty amount of almost circa $6 billion of unsecured debt that comes due out there that we want to start looking at and thinking about taking that out. But in terms of you know, steps that it's stay the course. Let's grow our EBITDA. Let's prioritize ease of our cash to reduce debt. And, you know, we'll see how it goes.

Thank you everyone for joining us today and look forward to having a chance to catch up with everyone over the next weeks ahead of us. Thank you. Have a great day, everyone.

And thank you, sir. Today's conference has not concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.