Bausch Health Companies Inc.

Good morning, and welcome to the Balsh Health 1Q19 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist for 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 touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. And now I'd like to turn it over to your host today, Arthur Shannon, SVP, Head of Investor Relations and Global Communications. Please go ahead, sir.

Thank you, Keith. 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 Paul Herony. 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. The financial guidance in this presentation is effective as of today only. It is our policy to generally not update guidance until the following quarter and to not update or affirm guidance other than through broadly disseminated public disclosure. With that, it's my pleasure to turn the call over to Joe.

Thank you, Art, and thank you, everyone, for joining us today. I'll begin with the first quarter highlights before turning the call over to Paul Harradine, our CFO, to review the financial results in detail and update our 2019 guidance. We'll then review the segment highlights before opening the line for questions. Beginning with slide four, Bouch Health is off to a strong start in 2019 as we pivot to offense. The 21,000 employees of Bouch Health companies are fully engaged and truly motivated to turn around Bouch 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, but 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 Trulia, which is a great addition to the Salix franchise, and also acquired Dulcanitize, an investigative treatment for ulcerative colitis and opioid-induced constipation. Briholly has experienced rapid uptake by dermatologists in the first four months since launch. And in April, Duobree was approved by the FDA and we're planning to launch it next month. Finally, we also completed a number of strategic transactions that have the potential to expand our portfolio, including the acquisition of an investigational eyedrop for itchy eyes associated with allergies, a license agreement with UCLA to develop and commercialize a novel compound for the treatment of NASH, and an exclusive license agreement with Mitsubishi Tanabe to develop and commercialize a late-stage investigational treatment for inflammatory bowel disease. So as you can see, overall, 2019 is off to a great start. We are launching new products, we are meeting our operational goals, and we are well-positioned to pivot to offense in 2019. On slide five, we present a snapshot of the key Q1 financial highlights for our four segments. In the first quarter, Approximately 77% of our revenue was generated by the Bausch & Lomb international segment and the Salix segment, which grew organically by 7% on a combined basis. B&L International grew organically by 8% compared to the prior year quarter, driven by the demand. Salix grew by 5% organically, driven by Sifaxin, which started the year with a great quarter of 11% growth. Excellent results from our two largest segments. On slide six, we laid out the attributes that make Bausch Health a unique healthcare solution. First, durable revenue flow. Our two largest segments generate approximately 77% of our revenue and are growing organically at 7% in Q1-19. Second, we have a diverse business by product, geography, and revenue type. Only one product accounts for more than 10% of our revenue. We operate in more than 100 countries, so we truly have a global footprint. And we have the opportunity to leverage that global footprint by launching our product in international markets around the world. Next, a majority of the business is insulated from U.S.-branded prescription pricing. As the chart shows, nearly 60% of our revenue is generated from products that are not exposed to U.S.-branded prescription pricing and not subject to LOAs, significant LOAs. Finally, the critical mass of people consume our products. Every day, approximately 150 million people around the world would use a Bausch Health product. With that, I'll turn it over to Paul.

Thank you, Joe, and good morning. I'm going to cover our Q1 financial results mainly by focusing on slide 7 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, an $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 dealt with a revenue growth drag aggregating roughly $1.3 billion from a basket of products 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. A 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 debt pricing, enable us to deliver the 5% organic growth. Joe said it, but I'm going to say it, too, because it feels good. The 5% organic growth for the company is the highest organic growth we've posted since Q3 of 2015. The Biennial and National segment, representing 55% of our total revenue, saw organic growth of 8%, with all five subsegments posting growth versus Q1 of 2018. Increased volume accounted for 7% of the organic growth in our largest segment. That's good stuff. Global vision care was up 9%. We continue to be on a roll in vision care. In the U.S., which currently accounts for roughly 30% of our global vision care business, we're up a gaudy 17%. And in international markets, we posted a solid 6% increase. The BioTrue one-day family of daily disposables was the main driver both in the U.S. and internationally. In the U.S., the ramp of BioTrue one-day TORIC was the biggest contributor, but BioTrue SVS and our Ultra Silicon Hydrogen lens contributed to growth in the U.S. as well. Internationally, the growth was driven by the BioTrue one-day family and our Silicon Hydrogel lenses, including both Ultra and daily disposable Aqualox lenses. Growth was strongest in the Asia-Pac region, but we saw growth from many markets. The head of international B&L, Tom Appio, and the head of our international vision care group, Young Young, continue to deliver solid results. Our head of U.S. B&L, Joe Gordon, took over a somewhat stagnant U.S. vision care business in early 2017, and he, together with his lieutenant, John Ferris, and many others in the U.S. vision care team, have delivered an impressive string of quarterly growth. Global Surgical was up 4% organically. International Surgical accounts for about 70% of the revenue in this subsegment and delivers 7% organic growth, mainly on strength in anterior and posterior disposables, including for our Stellaris and Stellaris Elite systems. Geographically, growth was seen across all international markets. Almost all, excuse me. Our head of International Surgical, Luke Bonifoy, has provided terrific leadership of this group as evidenced by the growth delivered quarter after quarter. Global consumer revenue was up 6% organically, with roughly half of that revenue coming from Lumify that we launched in the U.S. in May last year. Global sales of our iVitamins, particularly Preservision, continue to grow in response to continued promotional inputs. Note that the global shift to daily contact lenses was and will be a headwind for our solutions business within global consumers. Global OptoRx was up 16% organically, about the same in the U.S. as in international markets. Visulta was a growth driver for us, accounting for about one-third of the segment growth, mainly on increased volume. Internationally, we had strong performance across a number of geographies, especially in China, the U.K., and Germany. International Rx was up 9% organically. This segment had had its challenges as we worked to put in place the right team to sort through a number of legacy issues, including channel inventory levels and supply chain disruptions. I mentioned in February that it looked like we might have turned the corner with this business. After 8% organic growth in Q4 of 18 versus Q4 of 17 and 9% in Q1 of 19 versus Q1 of 2018, it feels like we're pointed in the right direction. We had especially strong contributions in the quarter from Canada, Russia, Amun in Egypt, and Eastern Europe. Before I move on to sale, an important safety tip with respect to the international RX business. Q1 of 2018 and Q4 of 2017 represented favorable comps for this business unit. We expect the growth of international RX business to moderate over the remainder of 2019. Over time, we'd expect the segment to be a relatively consistent mid-single-digit grower on a constant currency basis. Turning to Salix, Salix revenue was up 5% organically. The story here was the continued momentum of Zyvaxin, up 11%. Zyvaxin TRXs, a good proxy for units, were up 8% compared with Q1 of 2018. The growth of Xifaxin plus contributions from Relastor and Glumetza helped Salix overcome the $26 million growth drag from a loss of exclusivity on Euceris. The entire Salix team, led by Mark McKenna, Josh Coyle, and Nicola Kael, continues to perform at a high level. The orthodermologic segment was down 1% organically. The medical derm business was down 10% on a 29% volume decline overall. offset in part by continued improvements in our realized net selling prices. We have made purposeful changes to our copay assistance programs in this business to improve gross to nets and to reduce non-profitable volumes. Nearly offsetting the decline in medical derm was a 34% organic growth of SOLTA. The rollout of Thermage FLX has progressed very well, in fact, ahead of expectations, particularly in the Asia-Pac region. I'm going to recognize, again, the leader of Solta, Tom Hart. He's done a remarkable job with this business. The diversified segment was down 4% organically. The neuro business was down 11% due to the continued decline of the LOE assets, and that decline was offset, in part, by another good quarter from our generics business, which was up 16%. That performance was aided by sales of authorized generics of our brands that lost that exclusivity and by the continued ability of our generics team working closely with our supply chain folks to capitalize on shortages of products in the market. For the avoidance of doubt, long-term, you should not expect our GRX business to be a grower. Instead, think of it as a means for us to capture and preserve some of the economics of our brands that lose exclusivity and as a way to leverage our manufacturing capabilities to periodically capitalize on market opportunities. I want to spend a minute on our gross profit margin, as this is where you can see evidence of the work that we started back in 2016 to improve the efficiency of our supply chain. We've now wrapped that initiative into what we call our core program, cost optimization and revenue enhancement. In Q1 of 2019, we saw a 210 basis point improvement in our gross margin compared with Q1 of 2018. Part of that favorability is mixed for sure, but a meaningful part of the improvement flows from the work that Dennis Asheron, our head of global manufacturing, and his team are doing to reduce costs, including by eliminating non-economic SKUs. We expect to continue to improve our gross margins in 2020 and beyond. With an operating cost, total company-adjusted selling, advertising, and promotion expenses were up 6% on a constant currency basis. This reflects our allocation of additional promotional resources in certain of our businesses where we believe we can drive sustained growth, particularly the global B&L vision care in consumer businesses and in salings. Total company adjusted G&A expense was 15% favorable down on a constant currency basis. A meaningful component of this improvement is from the reduction of outside legal costs associated with cases that we settled or disposed of. Our general counsel, Christina Ackerman, and her team have done a wonderful job of systematically dispatching legacy cases and, in doing so, reducing our fees for outside legal counsel. R&D was up 29% on a constant currency basis. Normally, with an expense, you'd call that unfavorable, but I'm going to say that this is a good thing. We've been working to ensure that the projects that make up our development pipeline deserve to be there and ensure that the allocation of our investment as between businesses is aligned with our view of opportunities for value creation. Sounds straightforward, but it took us a bit of time to ensure that we are investing our R&D dollars productively. The net result of the things I've just talked about was that our reported adjusted EBIT A for Q1 was up 6% versus Q1 of 2018. This is the only time in my remarks I'll mention EBIT A. Main drivers were the 1% reported growth of revenue, the 210 basis point improvement in gross margins, and the reduction of G&A expenses, offset in part by the increased investment in R&D and increased advertising and promotion expenses to support brands and launch phase. Adjusted EBITDA was up 2%, that's 400 basis points less than adjusted EBITDA, due to transactional X gains of $27 million in Q1 of 2018. Looking at adjusted net income, Reported ANI was up 15% on the 2% increase in adjusted EBITDA due to a decrease in interest expense of $10 million compared with the prior year quarter and a lower effective tax rate on adjusted earnings in Q1 of 2019 versus Q1 of 2018. All right. I've covered many of the highlights of the four segments, so I'm not going to step through slides 8, 9, 10, and 11, but will point out that the improvements in gross profit margin were seen across all four segments. On slide 12, the balance sheet summary, you see that by March 31 of 2019, the principal amount of our outstanding debt declined by $158 million from the year end 2018 as we used available cash to retire debt. We finished the quarter with $784 million of cash on hand. On to slide 13 in the cash flow summary, cash generated from operations was $413 million for the quarter, in line with our expectations. This amount was reduced a bit by an increase in our investment in inventories during the quarter, including API and finished goods as we gear up and ramp up to support products in launch phase. When thinking about the quarterly phasing of our cash from operations, recall that we stated that our interest expenses paid out disproportionately in Q2 and Q4. Approximately one-third of our interest expense settles in each of Q2 and Q4 and one-sixth in Q1 and Q3. So bear that in mind when you're thinking about the quarterly phasing of cash generated from operations. You also see the roughly $190 million of cash that we paid to acquire certain assets of Synergy. On to our updated guidance for the full year 2019 on slide 14. We increased the ranges for both revenue and adjusted EBITDA guidance by $50 million. Other changes to our guidance include a reduction in our expected effective tax rate on adjusted earnings from roughly 10% to roughly 8%. The main driver of this was a discrete, meaning non-recurring type, item from a favorable tax ruling in the quarter. The mix of pre-tax earnings by jurisdiction was also favorable. An important point, Our effective tax rate on adjusted earnings is very sensitive to the mix of pre-tax earnings by tax jurisdiction, and our tax rate, especially in quarterly periods, can be vagarious. While we are presently guiding to an effective tax rate on adjusted pre-tax earnings of roughly 8% for the full year 2019, that's due mainly to the discrete item. For modeling purposes, I'd stick with circa 10% for 2020 and beyond. Our guidance for depreciation and stock-based comps changed slightly, and we increased our guidance for contingent consideration, milestones, and license agreements by $10 million. To the extent that we license rights to development assets in the future, this is where those upfront payments would show up. Finally, we held our guidance range for gross margin at 71% to 72% despite the 73.4% gross margin we posted in Q1. This tells you that we expect lesser gross margins over the balance of the year. but it's safe to assume that at this time it's more likely that our margin will be in the upper part of that range. Let's move on to the guidance bridge on slide 15. First, as of today, changes in FX rates from the date of our prior guidance in February reduced our full-year expectations for revenue by $30 million and for adjusted EBITDA by $5 million. Second, the changes in assumptions around LOE assets netted to zero and had no impact on our full-year revenue or adjusted EBITDA guidance. Third, We've added the impact of Trulance into our full-year guidance. We recorded $6 million of revenue for Trulance in Q1, and a good portion of those sales were to refill the channel as pipeline inventories were quite low at the time we acquired the Synergy assets. For the full year, including the $6 million realized in Q1, we're expecting revenue of $55 million and no operating profit in 2019. We're essentially relaunching this brand and are committed to investing the promotional resources needed to establish momentum for Trulance. For a branded farmer product, TrueLance currently has a relatively high cost of goods sold, roughly 30% of net revenue. That's something we expect to improve upon in the future, but not in 2019. So with the promotional resources that we're committing, we are not expecting TrueLance to be a contributor to profit in 2019. We feel that the brand will be a meaningful contributor to reported revenue and profit in 2020 and beyond. We will exclude the results for TrueLance organic growth for the next year. Finally, our base business. Our base business accounted for $25 million of the increase in the revenue guidance range and $55 million of the increase to the adjusted EBITDA guidance range. The $55 million improvement in adjusted EBITDA from the base business was comprised of three pieces. The gross profit on the incremental $25 million of revenue, higher gross margins across the total business, albeit still within the guidance range for gross margins, And third, slightly lower expected SG&A costs. That's it for me, Joe. Back to you.

Thank you, Paul. Let's go through some of the highlights in our B&L International segment on slide 16. First, this segment delivered its 10th consecutive quarter of organic growth, up 8%. And quarter 119 was the highest quarter of growth for the Bausch & Lomb International segment 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 iVitamins, OptiVite, and Presivision, along with Lumify, are the key growth drivers. Finally, e-commerce is becoming an increasingly important channel for the products in our global consumer business as the Amazon data demonstrates with 89% growth across compared to the first quarter of 2018. Turning to slide 17, Lumify, which generated $10 million in revenue in the quarter, is exceeding expectations. Approximately nine months on the market, Lumify is the 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're getting great feedback from consumers. A recent home use study with over 300 participants found that 95% were satisfied with Lumify. Turning now to VisionCare 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 OptoRx on the right, our market access team is doing a great job. Less than a month after launching in the U.S., Lodomax SM already has greater than 40% commercial and Medicare Part D coverage. Visalta TRX weekly scripts grew by approximately 20% quarter over quarter, as we show in the chart, and in terms of adherence, We have found that patients who start on Visalta are 34% more likely to stay on it than other branded agents. On the slide 19 for a salix update, organic revenue growth of 5% during the first quarter was primarily driven by Zyfaxan, and this was the eighth consecutive quarter of organic revenue growth. In addition to our internal development activities, we are expanding our GI business through acquisition and licensing deals. We completed the purchase of certain assets from Synergy Pharmaceuticals, which provided a marketed product to Lance and a development candidate. We entered into a license agreement with UCLA to develop and commercialize a novel compound for the treatment of NASH, and we have an exclusive license agreement to develop and commercialize a late-stage investigational treatment for inflammatory bowel disease. Moving to Zyfaxan, which grew 11% in the first quarter, it was fueled by IBSD prescriptions, which were up 18%. This is an important metric when you look at the graph on the right, which shows that 90% of the IBSD market is still being treated with older antispasmodic or antidiarrheal products. In other words, 90% of the market in opportunities still remain, which means there is still significant growth opportunity for Zyvaxin in IBSD. We're seeing that in the IBSD script growth. Finally, relative revenues grew by approximately 30% in the quarter versus a year ago. Moving over to slide 20, as I mentioned earlier, we acquired Truliance from Synergy Pharmaceuticals during the first quarter. Truliance is a treatment for chronic idiopathic constipation and irritable bowel syndrome with constipation with a number of competitive advantages, including more patient-friendly dosing and the lowest incidence of adverse reactions in the category. BALIC now has an opportunity to establish the best-in-class IBS product portfolio on the market with the potential for leading products in both categories by Faxon for IBS-D and Trulance for IBS-C. We've also done an excellent job in increasing commercial coverage. In the first 30 days since the acquisition of Trulance, we have achieved the following. We added approximately 2.4 million covered lights across five regional plants. We increased the Trulia's reach and frequencies of calls to high-volume prescribers by more than 30%, and in the last four weeks' data, TRX is up about 2.3% versus the previous four weeks. With this in mind, we expect to generate approximately $55 million in Trulia's revenue in 2019 and invest in the Salesforce advertising and promotion in R&D. To sum it up, our GI portfolio is well-positioned for growth, and we believe Trulance has significant potential. Moving on to slide 20, orthodermalogics, let's start with some product highlights. First, Sleek generated $5 million of U.S. sales in the first quarter, and TRX scripts grew by more than 500% versus Q1 2018, albeit 2018 was early in the launch. Altrina, which is the first formulation of tretinoin in a lotion for the treatment of acne, had a great quarter, with TRX scripts growing by more than three times in the first quarter versus the fourth quarter. In addition, we have launched a new cash pay prescription model, which is available through dermatology.com and offers improved and predictable fulfillment options for patients and prescribers. The initial feedback from healthcare providers is quite positive. With organic revenue growth of 34%, Global Sofa, our medical aesthetics business, delivered another strong quarter. Growth was driven by strong demand of Dermage FLX following the launch in Asia Pacific. Finally, I want to provide an early read on Brie Holly, which has experienced rapid uptake by dermatologists in the first four months since launch. The fact that we have been successful in changing prescriber trends in a highly genericized market is very encouraging and and speaks to the strength of the product attributes and our team in launching innovative new products that improve people's lives. And in terms of market access, starting in June, Breholly will have approximately 50% commercial coverage, which accounts for about approximately 90 million covered lives in the United States. On to slide 22, Duobree is now approved after a brief delay, and we're planning to launch next month. We believe Duobre is well-positioned within the large and growing plaque psoriasis market and has the potential to change how psoriasis is treated due to a number of differentiating features. First, it's a unique combination, the first and only topical lotion combining halibutazole and tazeratine in one formulation. Second, Duobre provides an opportunity for a longer duration of use. Safety was established in a long-term study of up to 24 weeks of continuous use and up to 52 weeks of as-needed use. Also, do ovary has the potential to delay some patients from switching to more expensive biologic treatments, which could result in substantial healthcare savings. Next, there's patient preference. More than 85% of psoriasis patients on therapy use a topical medication. Finally, expected coverage. We are laser-focused on getting early access to commercial coverage, and we are using the team's success with Reholit in setting aggressive goals. We expect to launch with approximately 30% of covered lives and expect that number will grow to around 75% of covered lives 12 months post-launch. To sum it up, we believe do-over has the potential to become a preferred treatment for adult plaque psoriasis patients based on efficacy, safety, and affordability relative to other treatments. On to slide 23, I'm happy to report that all of the significant seven products have now been approved and six of the seven have already been launched. Anticipated revenue growth is shown in the blue bar from approximately $75 million of revenue in 2017 to approximately $300 million in 2019. In the first quarter of 2019, the significant seven products revenue increased by more than 125% versus the prior year quarter. We've also provided highlights and charts so you can see the progress each product is making in its respective market. Slide 24 lays out our expectations for 2019. In summary, 2019 is off to a great start. Our new product launches, promising pipeline, and focus on project core have positioned the company to pivot to offense in 2019, and strong operational execution is leading us to raise our full year 2019 revenue and adjusted EBITDA guidance. To review our expectations, we expect revenue to grow in 2019 versus 2018 at or above the midpoint of our guidance range and at current FX rates. Second, we expect to generate approximately $1.5 to $1.6 billion of cash from operations, and we plan to use more than $1 billion of that cash to reduce debt and or fund bolt-on acquisitions. R&D investment is expected to increase by about 10% in 2019. Revenue generated by our Significant 7 product is expected to approximately double in 2019. Project Core is expected to deliver more than $75 million of operating profit in 2019. And finally, we've Continue to expect a three-year CAGR from the midpoint of our 2019 guidance of 4% to 6% revenue growth and 5% to 8% adjusted EBITDA growth over the period from 2019 to 2022 on a constant currency basis and excluding trillions. With that, operator, let's open up the line for questions.

Yes. Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using your speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster. And the first question comes from Chris Stratt with J.P. Morgan.

Great. Thanks very much for the questions and congrats on the performance. I said 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 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 a business that over time could get to kind of like mid-70s gross margins, or are we talking about more modest improvements than that? Thanks so much.

Yeah, good morning, Chris. It's Paul. I'll take those questions. I mean, you know, much like I mentioned the variability of our 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. That involves eliminating SKUs that kind of fall below the line in terms of profitability. You know, over the period of the last couple of years now, we've made a real effort and made a lot of progress in reducing SKUs Our overall investment in our inventories, which leads to lesser write-offs, which leads to lesser scrap and such. And we just saw a very large impact of that flowing through in Q1 of this year. You know, the reason why I called out that, you know, we expect it to be lower on 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 have known each other a long time, a lot of folks online. Anytime you're looking at a 90-day period, comparing it 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 got off to a very strong start. Your question about can this continue into 2020 and beyond and where's the ceiling? There are certainly opportunities for us to continue improvement. I think that we back – well, it's been a while now. We back a while back said we could probably get a couple hundred basis points of improvement in our gross margin performance. related to improvements in efficiency over a period of time. As I say, a wise man once said, you can forecast an amount of time, but not both. We will continue to go through that process. It is a never-ending process. Dennis Asheron and his team are on this. Joe, myself, and a handful of others meet on this once a month. So we think we can continue to get improvement from improvements in efficiency. Last safety tip on this, FX plays a role here. It plays a role. That's not what drove us this quarter versus a prior year quarter, but it plays a role. We are a global company. We manufacture in a number of different currencies where the inputs are denominated in those currencies, and then we sell elsewhere based on local currency. So there is an impact with respect to how this gets recognized through our P&L regarding FX. But Important points are we are making progress. We expect to continue to make progress and don't get out ahead of yourself based on Q1. It was fortunate and I think we'll be in the upper end of that range for 2019. Operator, next question.

Yes, thank you. The next question comes from Greg Gilbert with Sundress.

Thanks. First, Paul, on that FX comment, can you just factor or let us know what you're 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 BAUSH 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 it, can you walk us through the mechanics and the time that would be involved in so that we can envision something potentially tangible beyond just your willingness to consider it.

Thanks. Hey, Greg. Good morning. It's Paul. I'll start with the easy one. You know, 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 on slide 15 of our deck. That number has been a little volatile over the course of the last, I'll call it week to 10 days. It moves around quite a bit, so we try to run it as of the last available day, and it's minus 30 as we're sitting here now. I hope that answers the question. Joe, you want to start off on the Alcon question? Sure.

I think on the Alcon question, I think since Paul and I joined, Greg, that we've always been looking to speaking to maximize shareholder 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 a bright light on this. As to what happens 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 really 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 franchises.

Yeah, if I might, Joe, I want to follow on on that because there are a lot of questions out there, you know, now that there's some information out on Alcon and try to compare that, you know, to our B&L International segment. And I'd encourage you to do that. As Joe said, 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 they say, this is why there are markets. People value things in a different way. But I just point out, our segment presentation, and you look at our – in the quarter, for example, our adjusted – I'm going to go EBIT-A. I said I wouldn't say EBIT-A again, but I'm going to. EBIT-A, you know, as a percentage of revenue was circa 27% in the quarter. And you compare that to, I believe, the last full year that Alcon reported, I think there was something like 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, you know, I look at our business and I say, you know, there's probably, you know, 20 million looking at the quarter now. There's probably 20, low $20 million type G&A that ought to be allocated to this business if it were standalone beyond what we see in our quarterly results for the segment. There's probably 50 million of our unallocated, well, total R&D. So total R&D would be more like the 18 that you see plus another 50. And if you put those two things in place and say we have an EBITDA margin in our business of about 20, I think we called it out on the call earlier today. Our business is growing nicely now that we've put a very solid team in place, and we think that the results for this segment may be a little bit underappreciated. This is a very, very good business. Last thing, I might as well continue on because we get the question a lot. is people say, well, gee, what about that international RX revenue that flows in there? I will tell you that the net margin, so when you get down to even a percentage of revenue for that business is very similar to the balance of that B&L international segment results. And the second part about it is I would say that the durability duration of those revenue streams, if we continue as we have so far, to invest behind them in terms of R&D has very similar economic characteristics to the balance of that business. So we like this segment. We like it a lot. And it's good for us that there's a viable comp out there that people can look at and say, well, how does this stack up relative to another competitor? So thanks for the question. Operator, next question.

Yes, thank you. And once again, we do ask that you limit yourself to one question and a follow-up. If you have additional questions, please re-enter the question to you. And the next question comes from Uma Rafik with Evercore.

Hi, thanks so much for taking my question. 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 bounce division, the growth margin is up 250 bits year over year. So there's an implication there's a pricing component to that. And yet you said it's all volume-based growth. So I'm just trying to reconcile the two, especially also because a lot of growth came in the off the Rx segment.

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

Well, it's Paul Omer. Let me come on because, you know, this business, that segment is comprised of the five different subsegments. And, yeah, when you look at OptoRx, 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, you know, dwarf it. You know, Jack is exactly right in the way I articulated my prepared remarks. It's 7% volume, 1% price across that segment.

Thank you very much.

Thank you. Next question? Yes, next question comes from Louise Chen with Cancer.

Hi. Congratulations on the quarter, and thanks for taking my questions here. So the 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 would be great. And then my second question here is on MT1303, the kind of trials it would take to get this drug approved, where you are with those, and then how does your mechanism of action compare to ILs and JAKs? Because there's a lot in development for INI. Thank you.

Okay, we're going to try to get each one of those. I'm going to start on the cash-paid germ model. First, I'm not going to share any specific quantitative numbers other than what I would absolutely refer everyone to is go to dermatology.com, and you'll see exactly what we're doing. We think that what's the problem? The problem out there today in dermatology is that there's uncertainty over prior authorizations. There are expensive co-pays for patients. There's 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 it, you'll see a product like Altrino, our newest product, is priced at $115. And versus what some of the co-pays are for generic formulation of the tretinoin, we think we're very well-priced, and we've got a great opportunity. The initial feedback from the physician 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 a little bit early to go into any specific numbers, but I would refer everybody 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, you know, 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 bowel disease, a very big opportunity there. We're looking at Crohn's use – Alternative colitis has two opportunities there. There was some initial data already in this category, but one that we think there's a chance here specifically an ulcerative colitis as an example that we think there may be the S1P class products will give a good response based on at least the data we've seen. And specifically, our product has a unique long half-life, and we believe it could provide a differentiated dosing opportunity, especially in the maintenance in a remission setting. So look for us to have more comments on that as we bring forward that development program. Did I get all of your questions? Thank you. Operator, next question.

Yeah, thank you. And it comes from David M. Solomon with Piper Jaffray.

Hey, thanks. So just on Trulance, Joe, you said in the past that you're looking for, I guess, parity with Linzess in terms of payer 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 assets? 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 you're deleveraging somewhat. Help us understand your thought process there. Thanks.

Sure. On the first question on payer access, we actually, we like the position we're in. We think the most important thing to do is what we did in this first quarter already, is driving additional regional plans to enroll additional players, I'm sorry, 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 have a good pull-through model on the access. That's one of the things that we're looking for in terms of driving the 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 just really in the first 30 days in terms of driving the reach frequency. On the M&A side, you know, I think we've had a lot of conversations on M&A and use of equity. I don't think we can ever rule out 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, drive EBITDA, and that's what we're going to be focused to doing. We think TrueAns 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 value to the value of the Felix business, and more importantly, to help us deliver.

I've read our next question. Yes, thank you. And that comes from David Weisinger with Morgan Stanley.

Yes, thanks. Sorry about that. I am in transit. I have two questions. First, can you talk about the outlook for the Lodomax franchise? Obviously, you have a compelling line extension that was recently approved, but You also face partial generic competition. It would 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.

Okay, first on the load of access. We're delighted with what's happening already with the team that's here 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 thing of trying to work with existing payers to make sure that we had access for the product and that physicians understood the benefits of this product for patients. As it would relate to the specifics of the Lodomax generic, we have not seen that launch yet. It is a little bit earlier than we expected to be clear, but yet, to our knowledge, I've not seen it in the marketplace yet. Should it 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 Lodomax portion of the question. Paul, do you want to take the cash flow?

Yeah, sure. And, David, we started, I guess, it must have been last quarter, with providing a range of expectations for cash generated from operations. You know, that's a gap number, so it's after everything, and we guide it to our expectations for the year of about 1.5 to 1.6. We also include within our guidance the kind of cash items that would be deducted from that number to arrive at a free cash flow number, and those numbers, it's basically a capex. plus contingent consideration milestones and license agreements, restructuring and other, that aggregate about $385 million based on our guidance today. So we have one five to one six minus that number. Point out that we did already also, if you're thinking about free cash flow available for other things, we did deploy that $190 million of cash to do the Synergy, the acquisition of the assets of Synergy, earlier this year, you know, something I would, one of my favorite phrases, I do that 100 out of 100 times.

Okay, operator, next question, please. Yes, thank you, Council Member Gary Nachman with BMO.

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

Sure. So let me start with Duobre. We are very excited about, we think, the opportunity for Duobre. We think actually it 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 used the two and applied 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 what 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, 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, this is a thing that we already added the reps in 2018, so we are well-positioned for psoriasis, and we believe that the actual incremental cost of selling is going to be minimal for the launch of Duobree. We think we've already got that underway. Paul, you want to take the SG&A portion?

Yeah, sure. Gary, I hope I didn't give the impression we're scaling back 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 just SG&A expense. We did not change that guidance, but sitting here at the end of Q1, You know, we feel like for the balance of the year, maybe we'll 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, you know, with the passage of time, you get better clarity as to where you're spending, what you're spending, et cetera. And just we feel a little bit better about being perhaps, you know, a shade below that than a shade above that. We're not cutting back. Operator, next question.

Yes, again, that comes from David Steinberg with Jefferies.

Thank you. In terms of legal challenges, the companies have a lot of cases either dismissed or settled at favorable terms over the last couple of years. And I'm just curious, as you look at your portfolio of challenges ahead, which are the ones that are most concerning to you, the riskiest? What sort of exposure might you have? And You know, is there some sort of timeline you can give us in terms of resolution? And then back to Trulance, you've offered some 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 more taking share from Amateza and Linzess? And then finally, in terms of marketing tactics, you know, Synergy had some very memorable – television ads, but the product didn't do that well, are you also going to do some DTC for Trulance? Thanks.

Okay, so I'm going to try to get all those. On the question first on the legal challenges, first of all, Christina Ackerman 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 a couple years ago, just since the first quarter of 2018 to date, They resolved 80 individual cases, either resolved them, settled, et cetera. And just even of that 80, there's actually 10 that were done 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 & Johnson and ourselves on the question of shower to shower. Christina and the team have just done an outstanding job of resolving that. On the question, the second question was peak sales potential. I'm not going to give a 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 therapies for treating the IBSC especially, we think that 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 it 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 adverse side effect reaction, adverse reaction side effect profiles in these products. So we believe we can focus there, focus with physicians in the near term. And then the question of whether or not we do anything beyond that in terms of direct consumers, I think we'll just wait and see what happens there. But right now we're focused primarily on winning the battle in the physician's office. Operator, next question.

This is probably our last question, please. Yes, thank you. And that comes from Irina Koster with Mizzou Health.

Hi. Thanks for taking the question. Just wanted to touch base on the $300 million guidance for the Significant 7. I know the do-over 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.

Sure. Well, first of all, we are focused on all of the Significant 7. You're absolutely right. We did raise guidance for the for the year, despite the fact that we did have a short delay, if I could use the word short delay. But I will say that clearly, with Do-Over, the clear opportunity we see are very strong performance in our Lumify products. We see strong performance in Relastore 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. This is something we put forth in 2017, and now to have them all approved and soon to launch the Duobre with a label that we think is unsurpassed. There's no product out there with a label like Duobre 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 seven are going for us. We're excited. 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 you for attending today's presentation. May God bless your lives.