Bausch Health Companies Inc.

Good day and welcome to the Bosch Health fourth quarter and full year 2019 financial results conference call. All participants will be in a 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 touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Arthur Shannon, Senior Vice President of Investor Relations and Global Communications. Please go ahead.

Thank you, Alicia. Good morning, everyone, and welcome to our fourth quarter and full year 2019 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 live presentation and a replay of this conference call will be available on our website, under the investor relations section. Before we begin, we'd like to remind you that our presentation today contains forward-looking information. We would ask that you take a moment to read the forward-looking statement legend at the beginning of our presentation as it contains important information. This presentation contains non-GAAP financial measures. For more information about these measures, please refer to slide two of the presentation. Non-GAAP reconciliations can be found in the appendix to the presentation posted on our website. Finally, the financial guidance in this presentation is effective as of today only. It is our policy to generally not update guidance until the following quarter and not to update or affirm guidance other than through broadly disseminated public disclosure. With that, it's my pleasure to turn the call over to Joe Papa.

Thank you, Art, and thanks, everyone, on the phone for joining us today. Let's quickly review the topics we will cover today. I'll begin with a brief summary of our 2019 company highlights before turning the call over to Paul Harrington, our CFO. Paul will take us through the fourth quarter. and full-year financial results, and provide our 2020 guidance. I'll then review the segment highlights and catalysts before opening the line for questions. Beginning on slide four, in 2019, our theme was pivot to offense, or focus on driving organic growth in our core businesses. We have now delivered eight consecutive quarters of organic growth, and 2019 was our first full year of reported revenue growth since 2015. Bouch Health grew organically by 4% in 2019, and reported revenues were up 3%. Our largest segment, B&L International, delivered its third consecutive year of mid-single-digit organic revenue growth. Salix reported full-year revenue of more than $2 billion for the first time ever. We generated $1.5 billion of cash from operations. We increased R&D investment by 14% compared to 2018, and we used approximately $1.1 billion of cash to pay down roughly $900 million of debt and fund approximately $250 million of bolt-on acquisitions or licensed end products. Pivoting to offense also included launching new products and driving their growth, and our new products continue to grow. First, following the launch of Thermage FLX in Asia Pacific, the Thermage franchise saw 73% organic revenue growth compared to 2018. This exceptional growth rate made the Thermage one of the Bausch Health's top 10 franchises in 2019. Lumify achieved a weekly market share of approximately 43% in 2019 compared is the number one physician-recommended product in the redness reliever category. Truliant's TRXs grew by 31% year over year, and we have improved the market access position for approximately 35 million lives since we acquired the product in the first quarter of 2019. Duovre has been another standout. Weekly, TRXs grew by 25% from the third to the fourth quarter of 2019, and we have now achieved 63% commercial access. Overall, the entire Bioshock team of 22,000 employees delivered on a promise to pivot to offense in 2019 and demonstrated the durability of our business, which we grew both organically and through strategic bolt-on acquisitions. Great effort by the entire Bioshock team. Paul is going to walk you through the fourth quarter and full year results in more detail. So with that, I'll turn it over to Paul.

Thanks, Joe. A lot to cover, and I'll try to go fast. A good quarter and a good year. A little different approach this quarter. I'm going to start with slide five, a summary of the changes in revenue by segment in major business unit for both Q4 and the full year 2019. I'll then walk down the top-level P&L for the quarter and provide some observations about the full year before turning to our guidance for 2020. A quick reminder, when we talk about organic growth, that means excluding the impact of changes in FX rates, the impact of divested and discontinued businesses in the prior year periods, and the impact of acquired businesses. Okay, slide five. In the quarter, we posted 4% organic revenue growth versus Q4 of 2018. Recall that last year we took steps to reduce our channel inventories held at wholesalers and that that had the effect of reducing Q4 of 2018 revenue by an estimated $76 million. So that's a tailwind for us this quarter. Excluding the impact of the inventory contraction, we still posted top-level organic revenue growth of plus 1%. There were a lot of moving parts, but a lot of good stuff within each of our segments. Let's start with Salix, as it was the largest contributor organic revenue growth in the quarter, up 17% organically on continued strong performance from Xifaxon, up 29%. Relastor, up 29%, and Plenview also contributed growth. We lost exclusivity for Aprizo in the quarter, and that, combined with the continued generic erosion of Euceris, offset some of the growth. While not a factor in organic growth, Trulance sales totaled $18 million in the quarter, and filled TRXs were up 69% versus Q4 of 18. A strong quarter from Salix to wrap up a great year, posting 13% organic revenue growth for the full year versus 2018, despite LOEs. B&L International segment revenue was up 3% organically in the quarter led by Global Consumer, plus 7% organically on Strength and Lumify in the U.S., and our Global Contact Lens solution brands Renew and BioTrue Multipurpose. Global Surgical was plus 5% organically in the quarter on Strength and Consumables for the back of the eye and Investor IOLs. Global Vision Care was plus 4% organically in the quarter on strength in ultra-monthly silicon hydrogel lenses, our Aqualox daily CyHi lenses in Japan, and BioTrue one-day lenses. Our international pharma business was essentially flat versus Q4 of 2018, while global ortho-RX declined 2% organically as growth of Visulta and ProLenser were more than offset by the decline of the Lodomax brand family due to generic erosion. For the full year, B&L International grew 5% organically, consistent with our belief that this diverse and durable segment can deliver mid-single-digit growth over time. All five of the B&L International business units posted organic revenue growth for the year, led by Global Consumer, up 6% organically on strength and lumify in the U.S., and our iVitamins globally, followed by Global Vision Care, up 7% organically with contributions from our BioTrue one-day lenses, our monthly ultra lenses, and our Oculox daily side-high lenses in Japan. Our international pharma business was up 5% organically on strength in Russia, Egypt, and Canada. Global OptoRx was up 2% organically. Unlike in the quarter, for the full year, growth of Visulta, Prolenza, and a portfolio of our international ophthalmic brands overcame the LOE drag from low to max. The orthodermatologic segment declined 1% organically in Q4 of 2019 versus 2018 as spectacular growth In our global aesthetics business, Solta, which is up 42%, nearly overcame the 18% decline in medical dermatology. In the Solta business, the Thermage platform is now solidly in the top 10 products for the entire company and was a significant contributor to company-wide growth. Eloise played a big role in the quarterly decline in medical derm, mainly Elodel and Zovirus creams. The balance of promoted products in medical derm, including Duovre, Dublia, Salique, and Reholly, all grew versus Q4 of 2018. It's pretty much the same story for the orthoderm segment for the full year. Strong growth from Global Solta, plus 45% organically for the year, more than offset by the decline in medical dermatology. For the full year, medical derm was our business most impacted by LOEs, a minus $121 million growth drag versus 2018. On the plus side, Jubileo was one of the top 15 contributors to company-wide revenue growth in 2019 versus 18. As the impact of LOEs moderates in this segment, Jubileo, together with our brands in growth phase, that's Duobree, Salik, and Briholly, form the core of our medical derm portfolio and the basis for an expected return to growth in this business in 2020. Finally, the diversified segment, which declined 5% organically in the quarter and as LOEs were a $29 million drag on the neuro business. Our generics business grew 3% organically in the quarter with authorized generic versions of our branded products that lost exclusivity, mainly Euceris, Aprizo, Lodomax, and Elidel, providing the bulk of that growth. For the full year, diversified declined 5% organically as 11% growth of our generics business offset some of the $116 million LOE growth drag in our neuro business. Total company revenue for the year grew 4% organically, with 2% coming from improved realized net selling prices and 2% from increased volume. Flip to slide six, the P&L summary for the quarter. Our gross margin of the quarter was 71.4%, down about 20 basis points versus Q4 of 2018, mainly due to higher inventory write-offs in Q4 2019 relative to the prior year quarter. Note that for the full year, our gross margin was 72.7%, favorable by 80 basis points versus 2018, with mix a big driver, particularly the impact of the growth of Zypaxon, but also from improvements associated with our project core activities. Our final guidance for the full year for our gross margin was roughly 73%. Selling and advertising expenses in the quarter were up or unfavorable on a constant currency basis by 6% versus Q4 of 2018 due to the addition of Trulance to the Salix portfolio and and higher A&P costs in vision care to support new launches and an international farmer for product launches, particularly in Canada and Russia. Adjusted G&A expenses on a constant currency basis were 8% unfavorable in the quarter compared to Q4 of 2018 due to increased costs of business development initiatives and higher ongoing IT costs as we continue to work to improve our global operating systems. I want to point out that in Q4 of 2019, adjusted G&A run rate is above what I would expect on average the quarterly run rate to be in 2020. The go-forward adjusted G&A run rate is likely between the $163 million we saw in Q4 and the $140 million average over the first three quarters of 2019. R&D was down in the quarter, favorable by 5% on a constant currency basis. I would not read much into that. It was just how the timing of expenses fell in both periods. For the full year, R&D was up 15% on a constant currency basis to $471 million, slightly below our final 2019 guidance for R&D of $480 million. Again, just the timing of how expenses fell. As you'll see when I get to 2020 guidance, we intend to commit more capital to R&D activities. Adjusted EBITDA in the quarter was $898 million, up 5% from the year-ago quarter on a constant currency basis, a solid quarter that enabled us to post adjusted EBITDA of $3.571 billion for the full year, which was plus 4% on a constant currency basis from 2018 and just below the top end of our final guidance range for 2019. Turn to slide 7. I think it's worth taking a look back at how we did in 2019 relative to the midpoint of our original 2019 guidance, which was $8.4 billion of revenue and $3.425 billion of adjusted EBITDA. Our actual 2019 revenue was $201 million above the midpoint of original guidance, with the favorable result a function of four things. The acquisition of Trulance added $55 million. Revenue from LOE assets was plus $53 million. Our base business was favorable by $115 million, and offsetting the good guys, changes in FX rates reduced revenue by some $22 million. Adjusted EBITDA was $146 million above the midpoint of our original guidance. FX had no impact. Trulance had no impact. The better LOE revenues added $36 million of profit. The better base performance added $71 million of profit. while investment in R&D and S&A spending were both a bit above our original view. The biggest single factor in the improved adjusted EBITDA was our gross margin coming in 120 basis points better than initially forecast, which accounted for roughly $100 million of lift. The point of the story is that as the year played out, we had some good fortune with the LOE assets, but the lion's share of the better results came from our commercial units driving improved performance in our base businesses, from our project core activities to improve gross to net, and from our relentless efforts to improve efficiency in our supply chain. A good year. Turn to slide eight, the cash flow summary. Our net cash provided by operating activities in 2019 came in at $1.501 billion, the low end of our expected range, as we increased inventories of certain key products and API to ensure uninterrupted supply. Note that at year end, we had $3.244 billion of cash on hand, As we completed an offering of $2.5 billion of unsecured notes in late December and had not yet applied those proceeds to the payment of the U.S. securities litigation, that's $1.21 billion, and the prepayment of other debt totaling $1.24 billion. Net of those amounts and related fees, our working cash at year end was roughly $750 million. Similarly, on slide 9, the cash and debt on our balance sheet at year end are inflated due to the timing of the $2.5 billion debt raise and the use of those net proceeds. I think of it like this, pro forma for the deployment of those funds, our net debt at year end would have been roughly $24.2 billion. Settling the U.S. securities case set us back in our progress reducing the quantum of our debt and improving our leverage ratios, but it was absolutely the right thing to do to quantify and settle a significant overhanging uncertainty. A quick aside, just last week we began the process of calling another $100 million principal amount of bonds. We intend to continue to systematically grind our debt down. One last thing on the balance sheet. During the quarter, we accrued for the settlement of the U.S. stock drop case, other related cases, and ongoing legacy litigation and investigations. The total accrual was for $1.39 billion and is included in GAAP, other income and expenses in our P&L. For the avoidance of doubt, we exclude this expense from the computation of adjusted EBITDA and adjusted net income. Finally, and on to the money slides for me, starting with slide 10, showing our guidance for 2020. Our revenue guidance for 2020 is a range of $8.65 to $8.85 billion, and that represents a range of growth of plus 1% to plus 3% at current FX rates. Our adjusted EBITDA guidance is a range of $3.5 to $3.65 billion, representing a range of growth of minus 2% to plus 2% at current FX rates. I want to cover the other elements of our guidance on this slide before talking about how to think about those revenue and profit growth rates for 2020. Adjusted SG&A expenses were $2.5 billion in 2019 and were guiding to approximately $2.6 billion for 2020. The roughly $100 million or 4% increase is higher than it may be as we look ahead to 2021 and 2022. In our 2020 plan, we rationalized OpEx across several business units, but we also allocated incremental selling, advertising, and promotional resources to some units to support launch products and products in launch phases, including daily SciHi lenses, Lumify, Duobree, and Thermage. In G&A, we're continuing to build out our global IT organization and infrastructure, and that comes at a cost, increasing our adjusted G&A in 2020 versus 2019. As we move forward into 2021 and 2022, we should be able to hold the growth of SG&A below that of revenue growth. We're guiding to roughly $500 million in R&D for 2020, up roughly $30 million from 2019. If you go back to 2017, our investment in R&D totaled $361 million. Over the last few years, we've built up the R&D organization and infrastructure to support an increased volume of products to sustain each of our core businesses. That includes reducing the investment intensity in some areas while increasing commitments to other areas where we have been underinvested over a number of years, and that's specifically GI, B&L Surgical, and OptoRx. While a 6% increase in R&D reduces our near-term earnings and earnings growth, it's the right thing to do to enhance our prospects to deliver long-term organic growth. For interest expense, we're guiding to $1.55 billion, down from $1.6 billion, despite the addition of $1.21 billion of debt to fund the settlement of the U.S. securities class action. Our tax rate on adjusted earnings was 7.8% in 2019. We expect that rate to be about the same, roughly 8% in 2020. Towards the bottom of the page, note that we're guiding to capital expenditures in 2020 of roughly $300 million. In the past, I've said that our steady-state CapEx might be roughly $160 to $175 million per year, and that the uptick in 2019 was mainly due to investments in connection with the daily silicon hydrogel lens initiative and our build-out of our global IT systems. Over time, we've determined that underinvestment, particularly in our supply chain, over the last number of years necessitates increased investment in 2020 and beyond. It's our current view that after roughly $300 million of investment in 2020, we will likely see CapEx requirements decrease in 2021 and again in 2022. Our steady state a few years out may be closer to $225 million of CapEx per year. Continued consideration, milestones and license agreements totaled $58 million in 2019, and we're guiding to roughly $100 million in 2020. The increase is related to a forecast sales milestone on Relastore, and payments related to the recently acquired rights to Zypier and Novo 3. Finally, restructuring and other. In 2019, these items totaled $52 million. In 2020, we're guiding to $75 million, pointing out that this item represents our estimate of restructuring costs, some systems integration, and settlement of legal cases and investigations. Turning to slide 11, the bridge from 2019 actual results to our 2020 guidance. First, focus on the LOE impact. We're forecasting $275 million of growth drag from the basket of LOE assets in 2020. The good news here is that we are finally, finally, close to putting the impact of the large bucket of LOEs behind us. In 27 versus 16, the growth drag was $486 million. In 18 versus 17, it was $289 million. In 19 versus 18, it was $360 million. Over the last three years, our revenue growth was trammeled by more than $1.1 billion of LOE drag. In 2020, we expect the drag to moderate to $275 million. And here's the good part. That's based on us realizing revenues on the LOE basket of $237 million in 2020. And while that amount will decline into 2021 versus 2020, the drag will be substantially reduced. We did not add any new LOEs to the LOE basket in 2020. And looking out over the period from 21 to 23, we expect the impact of future LOE assets to be quite manageable. The base performance of plus $415 million is impacted in negative ways by a few things that I called out on our last call and a few others worth noting. First, there's the non-recurrent portion of the improvements in gross to nets that we saw in 2019, and especially in Q3. that are a headwind to 2020 growth. Next, the trajectory is the trajectory of Blumetsa. Blumetsa had been a strong performer through the first three quarters of 2019 before, as we forewarned. It dropped almost in half in Q4 and is now expected to trend downward from there in future quarters. Next, and one I had not previously called out for you, we had terrific performance in our generics business in 2019 with major contributions from the authorized generic versions of Euceris and Elidel. As more generic versions of these products have launched, we will see significant declines in revenue for our AGs in 2020. Think of the AGs as us stretching the tail of brands that lose exclusivity. It's good, but it's fleeting. One other bit of color. The base performance could have been better, but our guidance includes an estimate of a meaningful headwind on our Asia-Pac region, especially China, associated with the coronavirus situation. Our revenue guidance includes a roughly $50 million coronavirus impact. That's an estimate, and we'll see how this plays out over 2020. Obviously, this impacted our adjusted EBITDA guidance as well. So, these items are part of the reason why the revenue growth in 2020 implied by guidance is only in the range of 1% to 3% at current FX rates. Turning to the EBITDA bridge at the bottom of the page, the currency, LOE, and R&D impacts are self-explanatory. Within the base performance, we're absorbing the roughly 100 million or 4% increase in SG&A, and the coronavirus impact on our revenue expectations impacts our adjusted EBITDA as well. All these items together are drivers of the adjusted EBITDA growth rates applied by our guidance ranges being below that of our revenue growth rate. That's it for me. Back to you, Joe.

Thank you, Paul. On slide 12, there's a lot of information, but the important message to highlight is we have now delivered three consecutive years of mid-single-digit organic revenue growth for B&L International. B&L International was up 6% in 2017, up 4% in 2018, and up 5% in 2019. Turning to slide 13. Global Vision Care has been a strong performer, and I want to highlight two products that have been key drivers of the growth in this business, BioTrue One Day and Ultra Contact Lenses. We've shown five-year reported revenue for each in the charts on the bottom of slide 13. On the left, from 2015 through 2019, BioTrue One Day Lenses had a 22% compound annual growth rate, and organic revenue grew by 23% in 2019. On the right, ultra lenses had a 32% CAGR over the past five years and grew organically by 24% in 2019. We've called out the significant milestones that drove incremental growth, including the launches of lenses for astigmatism, presbyopia, and extended wear. This strong performance underscores the durability of these products and the strength of the Bausch & Lomb brand. We are seeing increased market share in U.S. vision here. This business gained 1.6 share points to 11% unit share for the month of December 2019 versus a 9.4% share in December 2018. Finally, we plan to launch our daily silicone hydrogel lenses in the U.S. later this year. Silicone hydrogel lenses are one of the fastest growing segments of the content lens market. Turning to slide 14 for an update on global consumer, I want to highlight two franchises. First, our top-selling iVitamin portfolio in the U.S., Occuvite and Prezavision, grew organically by 4% in 2019 and had a CAGR of about 7% from 2015 to 2019. And second... Lumify, the number one physician-recommended product in the redness reliever category, had sales of $63 million in 2019 and achieved a weekly market share of approximately 43%. On slide 15, we highlighted Invista's performance in our global surgical business. The Invista family of intraocular lenses, or IOLs, are clear, artificial lenses that eye surgeons use to replace a person's natural lenses when it becomes too cloudy due to a cataract. Invista grew organically by 36% in 2019. The chart below provides Invista's reported revenue for the past five years, which grew at a 22% CAGR. We also launched an Invista Toric in 2019, which will be shown on the bottom right. Looking ahead to the 2020 catalyst, we expect to launch an extended depth of focus intraocular lens platform in 2020. With the introduction of this platform, we'll be entering the premium IOL segment outside the U.S. And finally, we expect to launch a preloaded IOL injector platform for Invista IOLs in the second quarter of 2020. Moving now to slide 16. Before we go through the key highlights for Stelis, I want to address two updates. First, After reviewing our GI portfolio in light of market opportunities, we decided to increase promotional focus on Sifaximin and Trulance and have discontinued promoting Doptilax and Lusamira. Also, we recently received notice that Norwich Pharmaceuticals has filed an ANDA for a Faximin 550mg tablet. Alpha Sigma and Bausch Health will file suit against Norwich, alleging patent infringement and will trigger a 30-month stay of approval. We remain confident in the strength of the 23 patents covering Sifaxon, and we will continue to vigorously defend our intellectual property. The chart on the right shows Sifaxon's TRX growth over the past nine quarters. As you can see, TRXs grew by 7% from 2007 to 2018, and by 8% from 2018 to 2019. For IBSD specifically, TRXs grew by 15%. in 2019 compared to 2018. Moving now to Relastore, TRX has grew by 6% in 2019, and beginning in 2020, we recently improved Relastore's oral market access position for more than 50 million lives. Finally, Trulia, TRX has grew by greater than 30% in 2019, and since the acquisition, we have improved the market access position for approximately 35 million lives. We are seeing progress in the IBSC-branded market, where Trulia's new Rx market share grew from 3.9% to 6.4% in 2019. On to slide 17, orthodermalogics. First, Duobree TRXs were up 25% in the fourth quarter compared to the third quarter, and we're very pleased with this launch. As we show in the chart on the bottom left, within two quarters of launch, Duobree is capturing approximately 40% of new patients who were started on a first-line branded topical or oral psoriasis product. When you look at Duobree against these three competitors listed, we believe it gives a perspective on the opportunity for Duobree and the potential savings that could result from delaying the need to start patients on a biologic. Also, I'm delighted to say that Duobree is now at 63% commercial access for the United States. and as we gain incremental coverage, we expect to reduce couponing support and expect growth to net will improve over time. Importantly, average selling price increased from the third quarter, and we ended the year with a higher ASP. We are clearly moving in the right direction. We are very enthusiastic about the opportunity for do-over, primarily because for the first time, we can officerize the face of the topical product with a high-potency corticosteroid that they can treat to clearance rather than being limited to a certain duration of time. Moving now to Selic, TRXs grew by 100% in 2019 compared to the prior year, and we achieved 67% commercial access. Reholly TRXs were up 60% in the second half of 2019 compared to the first half, and Reholly now has 71% commercial access. We believe access rates of 60% to 70% demonstrate that managed care recognizes the value and the efficacy of our psoriasis products in helping to improve patients' lives. On the right, we highlight a new CACPAY model for our prescription dermatology product in the United States that's now available online at dermatology.com. Telemedicine and e-commerce are available on the platform as of yesterday. Iconic products such as Retin-A will be available on Dermatology.com, as well as new products like Altrino. The platform was launched with a portfolio of 15 products, and we plan to expand the number of cash-paid products over time. We believe that Dermatology.com has the potential to meet patient needs and help grow our dermatology business. Turning to slide 18, our aesthetics business, Global Sosa, grew organically by 42% in the fourth quarter of 2019, versus the fourth quarter of 2018, and 45% in the full year, driven by the global expansion of Thermage FLX. Thermage is a non-invasive radiofrequency therapy that can address the signs of aging skin. You can see the trend in the chart on the left with a 46% CAGR from 2017. Looking ahead to 2020 and beyond, we expect to see continued global expansion for Thermage FLX, including geographic expansion in the U. On slide 19, you can see we have a good number of late-stage development programs in each of our core business segments. We increased R&D investment in 2019 versus 2018 and allocated a greater percentage of our R&D budget to Bausch & Lomb and Felix on a full-year basis. Launching new products will drive our future growth, and we are pleased to have active late-stage pipeline of innovative new programs with the potential to expand our iHealth, GI, and dermatology portfolios. I've talked about some of the programs along the way, but I want to highlight a couple of them in more detail. Before we turn to slide 20, at the beginning of 2018, we identified the significant seven as key drivers of future growth, and these seven products grew collectively by 68% in 2019. While we are pleased with that growth, Limiting ourselves to seven products and excluding growth products like BioTrue, Ultra, Preservision, Invista IOL, Thermage, Aplensin, Trulance, and Zyfaxin doesn't give a complete picture of the expected drivers of our future revenue growth. Accordingly, we will continue to report revenue for our top ten products for each business and overall for Bausch Health, but will no longer report combined revenue for the significant seven. Let's turn to slide 20 for additional detail on our promising late-stage programs in GI and eye health. Imicelamide is a late-stage oral component that targets the S1B receptor, which plays an important role in autoimmune diseases such as inflammatory bowel disease. Approximately 1.6 million Americans currently suffer from IBD, and as many as 70,000 new patients are diagnosed in the U.S. annually. We entered into an exclusive licensing agreement with Mitsubishi to develop and commercialize MSL mod in April 2019. In January 20, we completed an FDA-approved cardiovascular clinical trial protocol that compared MSL mod to placebo and moxifloxacin. The primary endpoint demonstrated that MSL mod had no effect on QT interval prolongation and no other secondary safety signals were identified. We expect to initiate a multi-arm randomized placebo-controlled Phase II study in 2020 in ulcerative colitis 4M cell mods. On slide 21, we highlight NOVO3, which we recently licensed in for the U.S. and Canada. NOVO3 is a non-aqueous eye drop for the treatment of dry eye. The prescription dry eye market represents a great opportunity with 6.8% of the U.S. adult population projected to have diagnosed dry eye disease. and prevalence will increase with age. If approved, NOVA 3 will be the first new prescription treatment for dry eye disease with a mechanism of action that is different from currently available products. A Phase 2 study has already been completed, which showed significant and clinically meaningful improvements in both signs and symptoms of dry eye disease. There's a Phase 3 study underway, and we expect to initiate a second Phase 3 study later this year. To wrap up on slide 22, we have provided an overview of the 2020 vision for our three core businesses, which includes both a look back on what has driven performance and a look ahead to what is coming into focus for 2020. First, fashion law. We expect mid-single-digit growth to continue for 2020 based on five years of organic revenue growth for Ultra, BioTrue, and Occupy and Preservision, and new products like Lumify and Vizulta. Looking ahead, we see significant opportunities in the Sci-Hi launch in the U.S., in the EU, and the rest of the world. A ramp of our Invista IOL platform and the expected launch of an extended depth of focus for the IOL platform. Next in sales, while absorbing the headwinds from a pre-sale in 2020, our GI business will be based on two years of high single TRX growth for Cyfaxon, increased market share for Trulance, and double-digit growth driven by market access for our Relastore oral business. In 2020, we are planning to look forward to also the PlenView ramp-up, continued development of new formulations and indications for refactoring and pipeline expansions, including Dulcanitide and MSL Mod. Third, in orthodermalogics, we expect this business to return to growth in 2020, based on a 73% organic revenue growth for the Mod franchise, weekly due looking ahead we see opportunity in building out the cash pay model with more products telemedicine and e-commerce and the launch of Araslo finally We continue to expect to deliver on our three-year CAGRs on a constant currency basis, and from the midpoint of 2019 guidance, we expect revenue to grow at 4% to 6% CAGR and adjusted EBITDA to grow at 5% to 8% CAGR. With that, operator, let's open up the line for questions.

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 are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble the roster. The first question today comes from Terrence Flynn of Goldman Sachs. Please go ahead.

Great. Thanks for taking the questions. Maybe two for me. Just wondering at a high level what's embedded in your 2020 guidance for net pricing across the portfolio, how that compares to 2019. And then on SAIHI, the launch in Japan, I was wondering any details you can share on market share and then how we should think about pricing and positioning as you approach the U.S. launch. Thank you.

Okay. Let me start on our pricing, net pricing. Our expectation is that we'll have somewhere in that 2% range approximately. That's very consistent with what we saw in our 2019 information. Net pricing was approximately 2%. We expect it to be something comparable to that. Now, there will be some variation between product A and product B, but on balance there. On terms of the SIHI market share gain in Japan, we're pleased with our initial launch in Japan. There were some issues that we had to deal with. as we launched a new product, but on balance, we're pleased with what we've seen in terms of that launch. And as Paul said it in previous quarters, are importantly, as we look at the Japan market, we believe the side high market as a percentage of Japan is about 15% and is growing by about 31%. So the side high market that is. So we think it's an important contributor to growth and will be an important contributor for a long time. and also as we launch here in the U.S. later this year. The U.S. is a little smaller percentage of total market. In the U.S., it's less than, I think, 13%, but we also see it growing quickly. So we're excited about what that means for us. We probably aren't going to say anything about pricing yet on the Sci-Hi Daily, but I think you can take it that we'll be competitive with the other products out in the marketplace in the U.S. Sci-Hi Daily business. Next question, Operator?

Before we take our next question, as a reminder, we ask that you please limit yourself to one question. If you have additional questions, you may reenter the question queue. The next question comes from David Anselm of Piper Sandler. Please go ahead.

Thanks. I wanted to focus on Xifax and then looking at the QVIA retail data. It's been January. It looks like the growth trajectory of prescriptions is a little more muted compared to 2019. So, I'm wondering if there's any indication that the franchise is maturing in any way, and how should we think about the trajectory of volumes for both IBS and HE as we move more into 2020? Thanks.

Sure. I'll start with that one. We always see some normal variation in the early year especially as patients have the donut hole questions and different reimbursement challenges as they start the year. So we don't see anything specifically happening there that is unusual relative to what we've seen in the past. I think as you think about trajectory, I mean, one of the comments I made earlier, was talking about Sifaxin specifically relative to IBSD. I remind you that within IBSD, we were growing, I think it was mid-double digits, somewhere around 15%. And importantly, we believe the opportunity there is still very significant for us with Sifaxin. I remember that the IBSD category, for example, has about nine, I'm sorry, has about 12 million antispasmodic prescriptions. And as we've looked at that, we're less than, let's call it, 10% of that business. Therefore, we believe we've got a great product for IDSD patients where with a episodic treatment, you can potentially get these patients to just move off of these products like the antispasmodics, like a benzodiazepine, and actually get relief from long-term relief for use of Xifax. And so we're going to continue to promote that area and we continue to expect to see that growth going on into the future to be clear. Operator, next question.

The next question comes from Ken Cassiator of Cowan & Company.

Good morning and congratulations on all the progress. I know from time to time you're asked about splitting or selling some of the businesses. But I was wondering, as you get more credit for your performance and the underlying value of all the entity and everything that you're doing, your equity is clearly responding. So I just wanted to know strategically, how do you view your equity? Is this something that you would think about using to deleverage? Is it something you're thinking about in terms of maybe larger acquisitions? Just wanted to get your thoughts on that. Thank you.

Yeah, thanks for the question, Ken. It's Paul. Yeah, as our equity has responded, it kind of opens the door to potentially using that equity in some way. I'd say that for now, I mean, we have a great deal of runway to continue to run our businesses and using equity to reduce our leverage, you know, just based on a quantum of our debt and what it would take in order to make a meaningful change, probably not the path we go down. Now, using equity in the context of a value-generative transaction obviously would have to be the right transaction and something we were incredibly excited about, but we would indeed, you know, consider that. I want to touch on because it's interesting. We haven't heard the question as often about splitting the company up over the last, I'd say, several months as the stock has performed better. But I think when you look longer term, the overall trend in financial markets is for a preference on the part of investors for pure plays. And we own a a bunch of great businesses that are, you know, today together, and I think that they're stronger. We are stronger with those businesses together today in light of our capital structure. But as we look down the road, you know, someday down the road, there may be opportunities to pursue more pure plays with respect to one or more of our businesses, but that's just something that's down the road.

Thank you.

Operator, next question, please.

The next question comes from Umar Rafat of Evercore.

Hi. My question. I have two, if I may. One for you, Joe. Maybe both for you, Joe. Okay. Joe, you clearly characterized the pivot to be a fence and the EBITDA growth of 5% to 8%. But in light of the guidance for this year and in light of our raising investor debate on whether the base business is truly a growth business in the first place, I'm curious. Do you feel strongly that the 5% to 8% CAGR is achievable, especially if you're tracked at the midpoint of the guidance? And secondly, I was very curious about the S1P1 pressure leads you guys put out in January, not only because I could still never find the trial online anywhere, so I was curious where it was actually done, but also – It seemed to me that the issue with the drug was cardiovascular adverse events and not exactly a QT signal. So I was curious, did FDA ask you to do a QT study as a training event for larger trials? Thank you so much.

Okay. So I'll start on the first part of the question of what we're thinking about pivot to offense and guidance, but I'm going to also turn it over to Paul, who's worked his way through that, and then I'll comment on the S1P modulators. So the simple answer to your question on the CAGR is are we confident? The answer is yes. We continue to look at that revenue guidance of 4% to 6% growth, and then the 5% to 8% on the EBITDA as something that is achievable. And I'm going to let Paul comment more about that specifically. But the simple answer is yes. And, Paul, do you want to make some specific comments? And then I'll come back on the MSL model.

Yeah, sure. I mean, and thanks for the question because we do get this question a fair amount. Joe said his remarks. Let's refresh what we meant when we said four to six and five to eight. It was off the midpoint of our original 2019 guidance at constant currency. If you adjust that, you could come up with a range of targets for 2022 in order to meet that data. you know, in the range of, say, circa $9.4 billion to $9.95 billion in revenue, you know, $3.9 to, you know, $4.29 for adjusted EBITDA. Yeah, we continue to believe that we can and will produce revenue and adjusted EBITDAs in that range. I mean, that's our current belief. Obviously not a – you know, a forecast or a bit of guidance that we take lightly. It is fully supported by our bottoms-up, long-term view of what we think we can do with each of our businesses. I want to point out, because people lose sight of this, is that it was off the midpoint of 2019 guidance. Now, I spent some time in my prepared remarks talking about how we did in 2019 relative to that original midpoint. We did better So, you know, that helped us along the road. I think people are going to look at our revenue, our forecast revenue off of our guidance range of plus 1% to plus 3% and adjusted EBITDA minus 2% to plus 2%. Say, gee, you know, you're not on track. You say, first of all, we've said this a million times, it's not linear, and we're focused on where we need to be in 2022 in order to be able to achieve those targets that we set for ourselves, and we remain confident that we can achieve those targets. The good news is we had a great 2019. You know, the bad news is part of that was, you know, through LOEs that continued on. We're delighted to have earned the profit and have generated the cash from those LOEs. But, you know, that goes away. And so it's a bit of a growth track for us in 2020. You know, net-net, we are on track.

On the second part of your question, Umar, on the S1P modulator, MSL mods, The trial that we did was an FDA-approved protocol that we had gone and had the FDA approve the protocol, so we had that in place. We wanted to solve that question or answer that question so that we were assured that there was no QT elongation issue. As you know, other products in this category have had that problem, and we wanted to make sure that that was not going to happen with this product. Belief that it wasn't, but we wanted to finish the definitive trial for MSL mod to get to that answer. So that is the reason we did it. There was no request for anything. It was just we had asked and had that as part of the information that we acquired when we received the product from Mitsubishi on MSL mod. So I think that answers that part of the question. On the rest of it, we will publish this. This trial, it has not been published yet, but it will be published and presented in a poster session in the not-too-distant future. And I think that was the other part of the question. Okay, operator, next question, please.

The next question comes from Greg Gilbert of SunTrust.

Thank you. It's Greg Fraser on for Greg Gilbert. On Cyfaxin, can you comment on payer coverage for the IVF indication and whether there's any room for improvement there? And can you also please comment on your initiatives to drive higher growth for the HE indication? Thank you.

Sure. We have very strong coverage for Cyfaxin. Overall, it's 98.7%. HE is a little bit stronger, but at that level, it's you know, it's essentially universal coverage. I mean, we've got very strong coverage on Cypax. There is some variation from Plan A to Plan B, but we're very pleased with that. On the question of HE, our view is that we are going to continue to try to improve the compliance and adherence to the product. We have great data that says that If a patient stays compliant with Xifaximin, you can reduce rehospitalization for hepatic encephalopathy. And if we're able to do that, obviously we can save the healthcare system a tremendous amount of dollars. So that's our plan and our focus, and we continue to go out and share that data with plans so that they can help lower the cost. Our fundamental belief, though, is that as healthcare plans grow, and there's mergers where the medical and the pharmaceutical come together, we believe we're going to have even more traction on that as we look at the opportunity to not only lower the total cost of the patient from the point of view of both the drug cost and the cost of re-hospitalization, et cetera. So that's our plan, and that's how we've been working on it. We think it's going to be important for patients going into the future with hepatic encephalopathy. And you may recall from our previous comments, We're even looking at trying to get to some of these patients before the actual hepatic encephalopathy by going after some clinical trial evidence that we see in patients who have cirrhosis. So a lot more work to stay tuned to that for the future. Next question, operator.

The next question comes from Jason Gerberry of Bank of America.

Good morning. Thanks for taking my questions. So quick question on Zypax, and I think previously in September you communicated around a 10% to 12% range of growth with minimal contribution from Project Core. I just wanted to confirm if that's still the fundamental outlook. And then just on the significant seven, is the change in disclosure more or less, hey, this isn't, you know, indicative of our broader pipeline value, or is there a diminished outlook as it pertains to the billion-dollar target end of 2022? Thanks.

Well, I'll have you take the first part of that.

Yeah, on the first part of that, I think what we said was we kind of continued to believe that, as I faxed it, in 2020 versus 2019, that the best way to forecast that would be to think about TRXs, in growth and use that as a proxy for unit growth. And I think we continue to believe that that can be in the high single digits. And to that, you need to add a couple hundred basis points of net price increase. And the reason it's only a couple hundred basis points is that non-recurring part of the revenue that we saw in 2019 related to the non-durable part of the improvements in gross to net, you know, Some of it is reflected in, you know, absolutely improved net selling price increases that we've realized in 19, but some of it is it just goes away and becomes kind of a growth headwind. So net-net, I think we pretty much said high single-digit units and a couple hundred basis points of growth. So, you know, circa 10%.

On the second part of your question on significant seventh, The way we looked at it, if you go back historically, in 2018, early 2018, we identified seven products that we felt were the key growth drivers for us. And as we thought about that, we had great success. This year it was up 68% and achieved $269 million. And expect to see it continue to grow to be clear going forward. But what we felt is that that's going to leave out some really important growth drivers like Cyfaxan. like Truliant, like Thermage, like BioTrue, Ultra, Preservision, Invista, Eplenzen. And we really came up with a group of not seven, but actually, I could be fair to say, so closer to 15 products that are clear drivers for our future. Now, we're not going to, you know, comment specifically about those, but my point was that there are some big opportunities there for the future relative to where we saw the future of this business. And specifically, you know, you get a product like Cyfax and our large product growing, you know, double digits. It really is a meaningful contributor, and you can't leave that out of the equation as you're thinking about the future for our business. So that was really the issue was no concerns about our expectations for the future on that one. Chris Schott, next question.

The next question comes from Chris Schott of J.P. Morgan. Please go ahead.

Great. Thanks very much. First question was maybe one for Paul and just following up with the potential for a split in terms of those comments you made, investor appetite for pure plays. I think you mentioned that's a trend to think about down the road, but just maybe a little more color in what you'd need to see to enable a split. Is this simply just a matter of getting leverage to a lower level, or is there something fundamentally we need to think about in the businesses before you would consider maybe separating out into individual kind of units as compared to the portfolio you have today? My second question was just a quick one on the second Zyfaxan filer. Just any color about this filer relative to Sandoz as you think about the defense of that franchise over time? Thanks very much.

Yeah, Chris, thanks for the question. I'll obviously take the first one. Leverage, you know, I would say our level of leverage today is a – would make it challenging to pursue – you know, something where we spin out one of our entities or whatever. It's not impossible, but it would make it a fairly significant challenge. That is the primary thing that we sit there and say. It becomes more clear for us with the passage of time. And, yeah, I don't think I'm saying anything here that's groundbreaking. You know, pure play is a thing. I mean, people love pure play. We get it. We own businesses that are very attractive and very attractive in their own right. As we're sitting here today and for the near term, we continue to believe that we are, based on our cap structure, stronger together, and we'll continue to evaluate opportunities for providing that pure play as we go forward.

On the second part of your question, news by Fox and Filer, As I mentioned in my comments, that company is Norwich. My understanding, although we don't have all the information yet, is they filed specifically on both the IBSD and HE. Our belief is that we have 23 patents. So when we initially settled with the largest generic company, Teva, we had 22 patents. We have now supplemented that with another patent, so we have 23 patents. So we feel very strong about our intellectual property position relative to this filing, and we don't see anything specifically different from this, from what they filed versus what TEVA filed. So, we continue to believe we've got a strong intellectual property position. So, no other specifics, any differences that we've observed. Operator, I have time for one more question, please.

The last question comes from Akash Tiwari of Wolf Research.

Hey, guys. Thanks so much. So, look, if we take into account the $275 million LOE impact, the roughly $160 million kind of inventory true-up accrual benefit you had in 2019 that we might not necessarily carry over, it looks like you need over $500 million in new product sales year-over-year to kind of hit the midpoint of your guidance on REPS. Can you walk us through where that growth is coming from? I'm assuming maybe like $150 million is on Zyfaxan. But, you know, what's the contribution on Significant 7? What's the contribution on Thermage, et cetera, et cetera? Any color would be really appreciated. And then just a bit on the cash flow. There was a bit of dip in Q4. I'd love a bit more color on what happened and then how we should think about it in 2020. It looks like your 2020 cash flow from operations is $1.5 billion, which is a bit lower than what I had expected. So if there's any color on that, we'd really appreciate it. Thanks.

Okay. I'm going to start, but, Paul, we're going to – there's quite a few questions here. We're going to have to take pieces here. I think the fundamental first question is where can we grow and how can we grow in 2020 and beyond? And what I would simply go back to is that as we look at our business, we think the overall B&L international business is going to grow at that mid-single-digit rate. I think your characterization of Syphaxan, you know, growing ballpark, you know, 10%, I think that's a fair characterization. Solta, I think you saw the growth that we experienced at Solta in 2019. We clearly think that that's a great opportunity. And then the final area I'd say is the DERM returning to growth is a really important message. If you think about our business, the B&L business, the Stalix business have been important to us, but we've had a headwind with dermatology as that dermatology grows, especially with some of the new programs, new products like Duovre Plus, the Derm.com, Dermatology.com contributions to our business, we think are all going to be important parts of that growth for the future. And obviously, you know, we've got less LOEs versus we had in the past. But, Paul, do you want to add to that portion or talk a little bit about cash flow with us?

Well, sure. I mean, actually, I do want to talk about the, you know, kind of the growth and where it's going to come from first. I think you stated a number on kind of an inventory issue that was well above what it really was. In 2019-18, the aggregate amount that was kind of a one-timer, if you will, of us taking those wholesale inventories down was $76 million. You know, a big number in the quarter, you know, a couple hundred basis points of inventory. a volume growth that was based on that relative, basically what was a relative expansion, although it was not an expansion at all. And for the year, yeah, it was also baked into our year versus 2018, but not as big a factor on a total revenue base of $8.6 odd billion. If you look at the bridge on slide 11 of our presentation, that $415 million of increase in coming up from what we call base performance is obviously net of any pipeline, you know, things that, you know, that would have come up. So that bridge shows you, I think, how we will get to, you know, in the aggregate at a company-wide basis, how we'll get to within our revenue guidance. You know, with respect to cash flow, I mean, I want to start with 2019 because, as I said on my prepared remarks, you know, we were at 1.501% So just at the low end of our guidance range. And to be super clear, that is for cash generated from operations, and that's on a GAAP basis. The primary difference between us, it being 1.5 and being 1.55 or 1.6, was that we did at the end of the year have more inventory than we had perhaps been thinking about when we started the year. and that was based on specific decisions that we took to increase inventories of both finished goods and of API for key products to ensure that we had consistency of supply. You'll get our balance sheet later this year. You'll see the increase in our inventory, you know, at the end of the year, and that was a primary driver. You know, looking ahead to 2020, you know, we have – all the factoids that you essentially need to come up with a forecast for cash flow from ops. You've got your adjusted EBITDA from the guidance range. You've got our interest expense. You've got restructuring and other. You've got milestones and license agreements. You have a pretty good idea of what our taxes will be based on our guidance there. And the one wild card is working capital. We will grow in 2020 v. 2019. And accordingly, that growth, if you assume we're currently at the right level of adjusted working capital, which I would comment on in a minute, that you would add some working capital. So you'll do that math and you're going to come out somewhere near 1.5. That's the way the math works out. I mean, the pieces that you can't see or can't forecast as well as we can is the interaction or the impact of you know, accruals and other things that are very difficult to forecast. But I think the 1.5 will be consistent. I mean, interesting. If you look at the history in 2018, it was 1.501. In 2019, it was 1.501. And we're guiding to 1.5 in 2020. You know, that's what we expect today. You know, it could be more than that. But, you know, we'll just have to wait and see. how that year plays out. On my last comment, I said about inventory and working capital, I want to provide an additional texture. Over time, we are going to drive our inventory balance down. We made some progress, and we've now taken some strategic steps that have moved us in the opposite direction. Longer term, we will be able to unlock cash from our balance sheet by better managing our inventory balances. We're not seeing it in 2020. and essentially telling you we're not going to see it in a significant way in 2020. Stop there.

Okay. Let me just thank everyone for joining us, and we'll see you soon as we will be on the road for the next few months at the various healthcare conferences. Thank you everyone for joining us. Have a great day, everyone.

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