Bausch Health Companies Inc.
Q4 2016 Earnings Call Transcript

Published: 28 Feb 2017

[Operator:]

Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Valeant Fourth Quarter and Full-Year 2016 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Elif McDonald, Director of Investor Relations for Valeant Pharmaceuticals, you may begin your conference.

[Elif McDonald:]

Thank you, Chris. Good morning, everyone, and welcome to Valeant Pharmaceuticals Fourth Quarter and Full-Year 2016 Financial Results Conference Call. Participating on today's call are Chairman and Chief Executive Officer, Mr. Joe Papa; and Chief Financial Officer, Mr. Paul Herendeen. In addition to this live webcast, a copy of today's slide presentation and a replay of this conference call will be available on our website under the Investor Relations section. Before we begin, we would 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. In addition, this presentation contains non-GAAP financial measures. For more information about these measures, please refer to slide 2 of the presentation. Non-GAAP reconciliations can be found in the appendix to the presentation posted on our website. Finally, financial guidance in this presentation is effective as of today only. It is our policy not to update or affirm guidance except as required by law. With that, it is my pleasure to turn the call over to Joe.

[Joseph C. Papa:]

Thank you, Elif. Good morning, everyone, and thank you for joining us today. Let me take a minute just to run through the topics we'll cover this morning. I'm going to kick off the call with some brief remarks about the progress we made in 2016 to create the new Valeant, focusing on performance updates since our third quarter call in November 2016. I will then hand it off to Paul Herendeen to review our fourth quarter and the full-year 2016 financial results, both for the company as a whole and for each of our three reportable business segments. He'll also talk us through the guidance for 2017. Then, I'll share my perspective on our business, our new product pipeline, and what you can expect for the remainder of 2017. So, let's get started with slide 4, I'm not going to talk through each of these points in detail, but you can see from this list that there were numerous positive developments in the last quarter of the year and the first quarter of 2017 is off to a good start. First, Paul will walk through the Q4 2016 in greater detail, but importantly, our Q4 revenues and adjusted EBITDA were in line with the revised guidance and we have delivered on our Q4 commitments. In terms of divestitures and debt reduction, we've been able to reduce the complexity of the portfolio by agreeing to divest CeraVe, AcneFree, and AMBI to L'Oreal for $1.3 billion; and Dendreon to Sanpower Group for $819.9 million. We are also in the process of divesting certain businesses in several non-core geographies including Vietnam, Indonesia, and Brazil. Finally, we closed on the sale of Ruconest, and realized additional milestones for our OEM business. The proceeds from these divestitures will enable us to deliver on our commitment of paying down debt. In 2016, we paid down approximately $1.84 billion of permanent debt, which included $519 million since the third quarter. And during 2016, we have made all of the amortization payments due in 2017. Also, as we announced yesterday, we have recruited and launched a new primary care sales force for Xifaxan. We also remediated the issues that arose at our Tampa manufacturing facility, and we believe that our Tampa manufacturing quality process in that location are on track now. We've hired new leadership for our dermatology business which is recovering from past disruption. And importantly, we entered into an agreement in principle to settle the legacy 2014 Salix securities litigation for $210 million. The proposed settlement agreement remains subject to court approval, and the amount has been fully accrued for the company's consolidated financial statements as of December 31, 2016. And finally, with respect to our pipeline, we have achieved several very important milestones. First, earlier this month, we received FDA approval for Siliq or brodalumab. We refiled with latanoprostene bunod, Vyzulta, an innovative new treatment for glaucoma. We completed two successful Phase 3 studies of IDP-118, a topical psoriasis treatment. We also licensed EGP-437 from EyeGate Pharmaceuticals for a new eye care indication. We announced last week, we are partnering with Nextcell to expand our Obagi franchise. We are launching incremental Bausch + Lomb Ultra lenses, and we assigned a binding letter of intent to evaluate Relistor in an oncology indication. So, from a new product pipeline perspective, we are improving the probability of future success. That said, we also experienced some recent challenges that have impacted our business and will likely have an effect on 2017 results. In the first quarter of 2017, we saw increased sales force turnover owing to some voluntary and involuntary changes. I'll discuss sales force turnover in more detail later on, but we feel that we have addressed the issues and generally stabilized that turnover in our sales force. Moving onto products, as we expected and announced in November 2016, a competitor to Nitropress entered the market in December 2016. In general, loss of exclusivity will impact the 2017 results. And finally, from my process perspective, fourth quarter realized pricing was down 3% year-over-year. We also experienced a significant devaluation in Egyptian currency, and a continued decline in dermatology Rx that negatively impacted fourth quarter results. But even with those headwinds, from my perspective, the team has accomplished a great amount since May 2016, and I'm proud of the efforts of this leadership team to create the new Valeant to create good solutions for our patients, and importantly, to create long-term value for our shareholders. On that note, I'm going to turn the call over to Paul to go through the fourth quarter and full-year 2016 financial results.

[Paul S. Herendeen:]

Yeah, thanks, Joe. Before I start, let me point out that when I talk about adjusted numbers, those are non-GAAP measures, and we provided reconciliations of all adjusted amounts to the related GAAP measures in the appendix to the slides on our website. Next, as I stated last quarter, from here forward, we intend to focus on revenue and adjusted EBITDA as our primary performance and evaluation metrics. And first, the headlines. Revenue for the year came in at $9.674 billion, slightly above the high end of our revised guidance range which we provided in early November. Our adjusted EBITDA is right in the middle of the guidance range, and our adjusted net income per share of $5.47 was in the upper portion of the range. The team here is working hard every day to improve our ability to forecast our various businesses. It was an important step for us to meet the expectations that we set for the quarter. So, okay, let's start. Top level, look at our results for the fourth quarter. In the quarter, we posted revenue of $2.403 billion, roughly a 13% decline when compared with Q4 of 2015. The B+L/International segment revenue was roughly flat, down 1% on a reported basis but adjusted for currency, which was a headwind of roughly 360 basis points, was up 2.6%. On a constant currency basis, pricing across the B+L and International segment increased revenue by 1.7%, and volume was up contributing about 0.5% of growth. Note that in Q4, we continued to reduce the level of pipeline inventories in our Eastern European cluster, mainly in Poland, and that had the effect of reducing our performance compared with the prior-year quarter. The Branded Rx segment in the quarter declined 17%, with roughly half of the decline coming from our GI business and half from our derm business. The GI business was down 17% compared with the prior-year quarter with the decline almost all on volume, as net pricing was about the same. The decline in the GI business compared with Q4 of 2015 is mainly due to the loss of exclusivity with Glumetza and Zegerid, and the transfer of the Zegerid authorized generic out of the GI business and into our generics business, which is in our Diversified segment. Together, Glumetza, Zegerid and the transfer of Zegerid – of the Zegerid AG reduced our GI unit revenue by some $128 million. The balance of our promoted GI brands, Xifaxan, Uceris, and Apriso, were up 13% compared with Q4 of 2015. Pipeline inventories in the GI business increased roughly one-tenth of a month in the fourth quarter; and relative to the prior-year quarter, the net expansion on pipeline inventories was roughly two-tenths of a month. So, a portion of that 13% growth in the promoted brands was due to the relative pipeline expansion. Year-end pipeline inventories in GI stood at 1.57 months compared with 1.8 months at the end of 2015. Our derm business was down 28% compared with Q4 of 2015. A reduction in realized prices reduce revenue by about 6% compared with Q4 2015, as we transitioned in late 2015 and early 2016 away from a specialty pharmacy model to our current model that features our unique relationship with Walgreens, supported by increased contracting with managed care to provide patients with access to our products, and finally, co-pay assistance programs to help bridge potential affordability gaps for patients. Volume in the derm business was down 24%, as we saw a dramatic decrease in the refill rates for our prescriptions under the new model as compared with the old. In the latter part of 2016, the derm team was able to get new prescription volumes back to near last year's levels. Pipeline inventories in the derm business decreased by roughly 0.36 months in the fourth quarter, but relative to the prior-year quarter, pipeline inventories expanded by just more than one-tenth of a month. Year-end pipeline inventories in derm stood at 1.34 months compared with roughly one month at the end of 2015. Revenues in the Diversified segment were down roughly 30%, with most of that decline coming from the neurology business which decreased 35%. Decreases in realized prices across the neuro portfolio reduced revenue approximately 15%, and the remaining roughly 20% decline came from decreased volumes. Our neuro portfolio had a number of LOEs that impacted Q4 of 2016 versus Q4 of 2015, including Xenazine, Mestinon, Ammonul, and Sodium Edecrin. Pricing in the neuro business declined due to increased managed care rebates, lower price appreciation credits relative to the prior year, and higher group purchasing discounts provided for products including Isuprel and Nitropress. Our generics business was also off, declining roughly 19% compared with the prior-year quarter. And the main reason was the relative change in pipeline inventories. In Q4 of 2016, pipeline inventories for generics decreased 0.16 months on hand. And in Q4 of 2015, we saw a pipeline expansion of 0.41 months. So, the relative impact of the pipeline inventories was almost six-tenths of a month, which accounts for a good portion of the decrease in Q4 of 2016 versus Q4 of 2015. Year-end pipeline inventories in our generics business went from 1.46 months at year-end 2015 to 1.01 months at the end of 2016. Adjusted gross margin in the fourth quarter decreased by some 330 basis points compared with Q4 of 2015, with about (13

[Joseph C. Papa:]

Thank you, Paul, for a comprehensive review. Turning to slide 15. Our dermatology business has a new leader, Bill Humphries, who joined us at the beginning of the year. Bill and the team have been working very hard to continue to build our reputation with dermatologists, podiatrists, payers and patients and to stabilize the dermatology market for us. Onexton TRx growth is accelerating, and Jublia, our refill prescription growth is recovering. But we continue to expect volume pressure from higher co-pays and gross-to-net rebates in 2017. One of our goals for 2017 is to leverage our relationship with Walgreens. We are pleased with the recent progress with Walgreens during the past six months, and we expect to launch a brand for a generic pilot program with Walgreens later this year. Moving to slide 16, our GI business. We are encouraged by the prescription trends we are seeing in total. Xifaxan scripts were up 18% in 2016. Uceris was up 6%. Apriso was up 4%. Since we launched oral Relistor at the end of the year, TRxs were up 13% in the fourth quarter. And we expect this positive trend to continue. In addition, Relistor has greater than 80% of lives covered by commercial insurance. Looking ahead to 2017. We are investing in a primary care sales force expansion, launch of a nurse educator program and expansion of the pain sales force that we expect to further drive results in the GI business. We're also looking at new GI product development opportunities. For Xifaxan, we will initiate a next-generation formulation and evaluate a potential oncology indication for Relistor. Moving to slide 17. This slide shows the progress we have made in retaining our sales force over the last four quarters. As you can see from the chart, early in 2016 our retention numbers were not where we wanted them to be. The turnover has stabilized over the past three quarters. And at the end of the fourth quarter, our sales force retention rate was approximately 94%. To be clear, there was some sales force turnover in quarter one 2017, but this turnover is expected to launch over new year and a new incentive time period. To be clear, I want to anticipate your questions, overall sales professionals promoting the GI business in Q1 2017 are up by 40%. On to slide 18, with this, the important investments we are making to drive growth across our businesses. First, let me provide additional details on our new primary care sales force for Salix. As we announced in the press release yesterday, we have hired approximately 250 highly trained and experienced sales representatives and managers to bolster, create and sustain deep relationships with primary care physicians who are key potential prescribers for Xifaxan and for oral Relistor. Approximately 70% of the IBS-D patients initially present with symptoms to a primary care physician and we believe our efforts will enable us to reach physicians that account for nearly 75% of the primary care market opportunity. We've also expanded a number of dedicated pain sales representatives we have in the OIC market and established a nurse educator team to educate clinical staff. In dermatology, we are increasing our market access team to support Walgreens in the independent retailer model. At Bausch + Lomb, we are investing in contact lens manufacturing capabilities to yield improved capacity and cost per lens. We're also investing in research and development and increasing the investment in the pipeline by approximately 150 basis points over 2015. This is an important part of creating the new Valeant. We also evaluated the broader portfolio and identified several, what I would refer to as, hidden gems in the diversified product segment. These include Migranal, Diastat and Zelapar. We're launching sales efforts to promote these underappreciated assets and position them for future growth and success. Finally, in women's health, we are relaunching Addyi. We have recently collaborated with the American Sexual Health Association on an educational awareness campaign about female sexual difficulties called Find My Spark. Turning now to the late stage pipeline on slide 19. As we've migrated to the new Valeant, we are investing more in research and development, quality and new product launches. R&D spend has also increased by 21% year-over-year. The increased spending has been productive. We are prepared to launch more than 50 new products in 2017 which we expect to drive approximately $100 million in annualized revenues. In the U.S., these products will include Bausch + Lomb Ultra for presbyopia, Zen's scleral contact lenses and Addyi. We're also preparing for product launches in EMENA and Asia Pacific regions. Slide 20 lays out our expected R&D catalyst in 2017. I think this slide does a good job of showing that we have active and productive R&D organization that is working to create innovative new solutions for patients and customers who rely on our products. First, we have a number of late phase projects. The group includes a new Xifaxan formulation expected in the second half of 2017 and this may represent a more patient friendly formulation and bring additional intellectual property protection. Another area we are focused on, submissions that we made in 2017 are important catalysts for sales our opportunities in 2018 and beyond. We anticipate a submission for Luminesse, our eye brightener product, very soon. And IDP-118, a psoriasis product in the second half of 2017, we will plan to submit along with an acne lotion and another product for psoriasis, IDP-122. As I briefly mentioned at the onset of the call, we are preparing for a number of product launches in the coming year including Stellaris in our surgical business, Vyzulta for glaucoma in the second half of the year, Bausch + Lomb Ultra contacts for astigmatism and Siliq in the third quarter. Slide 21 provides an update on Siliq or brodalumab, a treatment for psoriasis that was approved by the FDA on February 15, 2017. We are very pleased with this approval as psoriasis is a large and growing market, just the U.S. alone is estimated at approximately $7 billion in 2018. We expect to be in position to launch later this year. The reason we believe this product is an important advance in treating psoriasis is how it works. It's a receptor blocker. So, if you look at the diagram on slide 24, the other biologic products on the market operate higher up in the pathway. But when you actually can block the receptor, you may get a longer duration and a higher – or a high percentage of efficacy. Now I will point out the label includes a risk for suicide and suicide ideation, and there is a REMS for – I believe this product represents a real opportunity to help patients with a rapid and durable efficacy. Moving on to slide 22. Also, in the treatment of psoriasis, we are working on a unique topical product that we are calling IDP-118. It's a combination of a steroid and a retinoid that may allow patients to use topicals for a longer time period. We've got positive results in the second Phase III trial, and we're excited about the prospect of bringing this product to the market for patients to utilize topicals for the treatment of psoriasis. On slide 23, I want to briefly mention latanoprostene bunod or Vyzulta, a novel monotherapy for the reduction of intraocular pressure in glaucoma, a disease that affects approximately 3 million Americans and represents a $3 billion market opportunity. We've got a complete response there late last year and refiled on Friday, February 24, with an opportunity for an approval later this year. We are working to get ourselves ready and prepared for a commercial launch later this year. In summary, let's turn to slide number 24. This slide is how we are thinking about the Valeant turnaround, and the last of the steps we've taken to stabilize the business by delivering on our commitments. The middle column represents where we are now, beginning the turnaround phase, which means executing on our plans. We'll do this by strengthening our balance sheet, focusing on specialty driven markets, markets that we believe have above average growth rates, and our leadership position and pipeline. By allocating resources efficiently across this, we think we can maximize the opportunities in front of us. Executing on these plans will be our focus over the next 2017 to 2018 time period, and we believe our team is well positioned to execute in the year ahead. Looking to 2018 and beyond, our focus will be transforming the company by innovating for the future, leading in our categories, launching more new products, and balancing organic growth with inorganic growth as appropriate. With that, operator, let's open up the line for questions. Operator?

[Operator:]

Your first question comes from the line of Gregg Gilbert with Deutsche Bank. Your line is open.

[Gregg Gilbert:]

Thank you. Good morning, gentlemen. First, Paul, what can you say about your desire and your ability, per market conditions, to address your debt load in a bigger way that was not discussed – or beyond what was discussed in the prepared remarks? And secondly, can you paint us at least a preliminary picture of the potential for revenue and EBITDA growth in 2018 versus 2017, perhaps by framing LOEs that you can see, or any other color or hand signals you're willing to offer? Thanks a lot.

[Paul S. Herendeen:]

Sure. Let me start with the debt question. I think I said in my prepared remarks, we look at the capital markets all the time for opportunities to improve both our financial and operating flexibility, and also to extend maturities. I can assure everyone on the line, this is something that myself and my Treasurer, Linda LaGorga and her team, we think about it every day. And we look out at 2018 and the maturities in 2018, look out at 2020. Certainly, there are (47

[Gregg Gilbert:]

Thank you.

[Joseph C. Papa:]

Gregg, I just simply refer – Paul's comments are absolutely right, and just refer you to page 14 in the presentation. It does look at some of the segment revenue growth expectations and some of the CAGRs on 2017 to 2020, in addition to those comments that Paul had. 4% to 6% on the Bausch + Lomb international, the 8% to 10% on the Branded Rx, in terms of the CAGRs that we're thinking about.

[Gregg Gilbert:]

Sorry, guys. One nitpicky one on that. Is the base year 2017 in that slide? Or is the base year 2016? Just so I'm clear on that.

[Paul S. Herendeen:]

It's 2017.

[Gregg Gilbert:]

Okay. Thanks.

[Joseph C. Papa:]

Operator, next question.

[Operator:]

Your next question comes from the line of Umer Raffat of Evercore ISI. Your line is open.

[Joseph C. Papa:]

Umer? It sounds like we might've lost Umer, so maybe we take the next question and come back to him if he's there.

[Operator:]

Your next question comes from the line of Louise Chen from Guggenheim. Your line is open.

[Louise Chen:]

Thanks for taking my question. I noticed that there's an increasing number of organic new drug approvals and opportunities coming out of Valeant. So just curious if you are thinking about R&D differently than you have historically, and if so, what's your new go-forward R&D strategy? Thanks.

[Joseph C. Papa:]

Well, certainly, Louise, it's an absolute comment about how we are viewing the new Valeant, as one can look at what we're investing in research and development. If you just look at historical numbers, you can see that, 2016 versus 2015, we were up, (52

[Paul S. Herendeen:]

Yeah, and before we move on, Louise, I want to jump in on this as well, because R&D is a very important activity for us as we go forward. And as you see, we are investing more in 2016. We're providing guidance that we're going to invest more in 2017. I will tell you that the realities of our capital structure cause us to invest less in R&D than we would like if we were less levered. So there is a bit of a challenge, but I can assure everybody that investment in R&D is a very high priority for us. I think, after the third quarter people asked about, well, what – things that we can do. Having higher earnings at the expense of R&D may – I'll add air quotes around that – may feel good in the short-term. But we need to invest those dollars in R&D to support, not just our Branded Rx business but all of our businesses; our global eye care business, our – on and on. So it's a balancing act. If we were less levered, we would invest more. We think we have good productivity, and we're pretty focused on ensuring that we get maximum efficiency and productivity out of the dollars that we do commit there.

[Joseph C. Papa:]

Operator, next question?

[Operator:]

Our next question comes from the line of Chris Schott of JPMorgan. Your line is open.

[Christopher Schott:]

All right. Great. Thanks very much for the questions. Just two here. First, can you just help us understand the 8% to 10% Branded Rx growth as we think about the 2017 through 2020 in terms of pipeline versus core products? As I think about your business, you're still transitioning this year. I think, as you mentioned, you have some LOEs on the derm side that you're facing in that timeframe, so just elaborate a little bit, again, as we think about the core growth versus how much you're looking for some of these pipeline opportunities in those longer-term targets. And the second question is on Siliq. I don't know if I'm pronouncing that one right. But now that you have the approval and label, can you just help us understand a little bit how you see differentiating this product from the two other IL-17s in the market? I realize it's a large opportunity for the category as a whole. But when we think about the REMS and the black box you have, how do you see dealing with that relative to your competitors? Thanks very much.

[Joseph C. Papa:]

So I'll start with your first one and then, Paul, jump in and then I'll get to the Siliq question. And you did pronounce it correct. Thank you, Chris, for the correct pronunciation. Talking about 2000 – looking at the revenue CAGR, the big part of what we're really looking at here is key product launches in 2017, 2018 and 2019 and 2020. Now, admittedly, some of our launches in the 2017 timeframe, as Paul said, would be more second half weighted in terms of their activities. But looking at 2018 going forward, we've got the, obviously, the full year effect of brodalumab, the IDP-118 which is the retinoid and corticosteroid combination. We've got Vyzulta. We've got the EyeGate project. We've got a lot of different opportunities. We'll have the Luminesse product that I mentioned. So there's a lot of new product launch opportunities in the 2018 that's going to help us with the – some of the growth specifically as we think about the future opportunities in derm. We also obviously are very excited about bringing in the primary care capability for Xifaxan and for Relistor. We think that's going to accelerate our ability to reach the physicians for the IBS. So I think that's probably the two major points I'll talk about in terms of the launches and the incremental investment that Paul referenced in his comments. (57

[Christopher Schott:]

Can I just ask you one quick question on derm, just quickly? If I think about derm prior to – with the IL-17 and 118 launching, should we think about the base derm business still declining beyond 2017? Or should we think about that as a business that can stabilize before we add in those new product launch opportunities?

[Joseph C. Papa:]

We think that the total business is going to grow as we said of course. There is some loss of exclusivity that we expect in that business in 2018. For example, there are some products like an Elidel that we may we may see some generic activity on. But absent that, we think we'll start to turn it around. We've got a lot of confidence in our new – Bill Humphries, our new leader in the business, and that's really I think probably the primary area I'd talk about. Let me talk about Siliq and I'll turn it to Paul. I think Siliq, first and foremost, what we are most excited about with Siliq is it represents a significant opportunity based on the efficacy data we have. As you know, these patients with psoriasis do have unmet clinical need for efficacy. We have, based on the clinical trials, significantly improved efficacy against – in the clinical trials, we tested it against the Stelara product. So we believe that increased clinical efficacy that we saw certainly versus Stelara is one core part of the question. I'd also point out to you though that, in the treatment of psoriasis, we know that there are other risks – some of the other products have other risks. There's a risk of cancer with some of the products. So there are other risks that other products have, and our view is that, for the appropriate patient, we believe that Siliq could represent a very important advance based on the efficacy. And the primary reason we believe that we're seeing the efficacy result is that we are a receptor blocker and the use of pharmacologic agents, when you can actually block the receptor, you tend to get a better, a quicker response and also a response that is more durable because of the fact that you're actually blockading the receptor versus products that inhibit the pathways above the generation of the interleukin product, body can sometimes compensate for that. So we always believe, we always see, as an example, treatment of hypertension in the androgen's receptor blocker had a much more profound impact on hypertension as a simple example. We think that receptor blocker is the reason why we may have some very – be able to help patients with psoriasis. Paul, you got...

[Paul S. Herendeen:]

Yeah, yeah, I think you covered it, Joe. Good.

[Joseph C. Papa:]

Operator, next question?

[Christopher Schott:]

Thank you.

[Operator:]

Your next question comes from Umer Raffat of Evercore ISI. Your line is open.

[Umer Raffat:]

Thanks so much for taking my question. Sorry about the trouble of my headset. So I just wanted to drill down the EBITDA a bit more. So the guidance of $3.55 billion to $3.7 billion, Paul, if I may, so divestiture is about $200 million on a pro forma basis, is that right? So that's one part. And the second part is accounting changes. What exactly is the delta from that from year-over-year at? Like I realize PP&E step-ups are no longer in there. So I just want to get to the pro forma EBITDA, assuming there were no accounting changes. And then the third part of it is the difference in definition versus covenant. I feel like if I could just get a clarity on that, that would be super helpful. And then finally, what exactly is the target for management's cash compensation that's tied to EBITDA? What's that target EBITDA number for the cash comp? Thank you.

[Paul S. Herendeen:]

Yeah, let me start with the impact of the divestitures. This is based on if we close the consumer asset sale to L'Oreal here, call it end of this month or shortly, the impact on EBITDA will be about $70 million. And if you close Dendreon midyear, it's about $65 million. That's on 2017. So I think that answers your question. With respect to the definition of adjusted EBITDA, as I said, we're trending towards a, I'll call it, middle of the fairway. I think that the items that we add back, and I did tick them off, are the ones that are most often used by companies in arriving at a definition of adjusted EBITDA. It is perhaps a little bit shrunk down from what we might have seen based on our prior definitions, but it's not hugely different. I think what's really important, at least for us internally, is that we've implemented policies and procedures to ensure that any item that is going to be an add back, to arrive at adjusted EBITDA, is subject to a lot of scrutiny, and importantly, control. Not to say that it wasn't before, but it is to say we put in place procedures that Joe's used to, I'm used to, Sam Eldessouky, who is our Chief Accounting Officer, are used to, to maintain control over those items. The revised definition brings you very close to the definition that you would find in our credit agreement. Very close.

[Joseph C. Papa:]

Maybe just a final area that I think Paul said everything (1

[Umer Raffat:]

Got it, Joe. And, Paul, just to be super clear since investors are so laser focused on it and investors care about $100 million or $200 million in EBITDA. So, the impact of accounting changes plus the delta versus the covenant, is that in the $100 million to $200 million range, or not?

[Paul S. Herendeen:]

Well, I think what I said was our revised definition – yeah, I wouldn't call it a material change to our EBITDA – definition of adjusted EBITDA in account of (1

[Umer Raffat:]

Got it.

[Paul S. Herendeen:]

I mean, Umer, let me restate the – what I think was the important point in my prepared remarks. Based on sour plan, we expect to be in compliance with the terms of our credit agreement throughout 2017. I mean, I think we (1

[Joseph C. Papa:]

Operator, next question?

[Operator:]

Your next question comes from the line of David Risinger from Morgan Stanley. Your line is open.

[David R. Risinger:]

Yes. Thanks very much. So, I have a couple of questions. First, with respect to the franchises (1

[Paul S. Herendeen:]

Yeah, sure. Let me start – it's Paul. Let me start with a discussion on (1

[Joseph C. Papa:]

I think maybe – I agree with everything Paul said. I think what we're trying to do is be as transparent as possible, and we put our assumptions there. And if you have a different view, we understand it. But certainly, we wanted to just try to provide the transparency, as Paul said, just to be as conservative so that we – as we think, going forward, we don't have any negative surprises. On the question of the Vyzulta, once again, I'll say that's a name that we are provisionally using. We are awaiting the final approval on that, but we do think that that's an opportunity for us to launch. We think right now the best time we should say is a third quarter 2016 – 2017 launch – a third quarter 2017 launch is the best assumption there based on the status with the FDA in re-inspecting our facility. I think you asked one last question on the Xifaxan and the ANDA that was filed against it in 2016. We don't want to comment on any ongoing litigations, but we do expect a – the only thing I'll say is that we do expect a trial in 2018 on that. Obviously, we think we've got very strong intellectual property on the product. I think our patents run through 2029. So, we feel very good about the number of patents I have – we have relative to the intellectual property associated with the product.

[David R. Risinger:]

Great. Thanks so much.

[Joseph C. Papa:]

Operator, any next question?

[Operator:]

Your next question comes from the line of Annabel Samimy from Stifel. Your line is open.

[Annabel Samimy:]

Hi. Thanks for taking my question, and thanks for all the information you've given us to figure out the cash flow. But I just want to see if we can be a little bit more simple about this. If you take the EBITDA number that you've given us and strip out the $135 million EBITDA impact you expect to have from divestitures and you go through the calculations, I guess, the question comes to a very simple question. How much debt have you already paid down to achieve the $5 billion target that you have? How much cash flow will you have, and how much more divestitures do you need to do to be able meet that $5 billion target? That's my first question because we're drowning in a lot of these numbers, but I think it's a very simple answer that we're looking for. And then, going back to brodalumab or the Siliq differentiation, there is another IL-17A receptor out there. The efficacy seems somewhat comparable to Siliq. And I just want to know how you're going to differentiate it when it has its own suicidality black box warning on it. Is the certification process too onerous for physicians to adopt it? Can you just talk to us about how you think this is going to play out with regard to the competitive products out there that are similar mechanisms? Thanks.

[Joseph C. Papa:]

Let me just start with the big picture on the cash flow and the debt repayment. And then, Paul, you can please add color to (1

[Paul S. Herendeen:]

Sure.

[Joseph C. Papa:]

And then, I'll address the brodalumab competitor question. On the question of the cash flow and what we pay down – what we haven't paid down. Just to be 100% clear, the numbers we paid down in permanent debt in 2016 was the $1.84 billion, which was ahead of our permanent debt payment that we committed to $1.7 billion, we did $1.84 billion. When it comes to the actual total debt repayment that occurred in 2016, it was approximately $1.2 billion. So, there was some increase in short-term debt. So, $1.2 billion, I think, is what Paul referenced. On the question of the incremental amount of major asset sales that we have, we have not closed. As Paul said, the CeraVe transaction or the skincare transaction, that was $1.3 billion of proceeds, and we have obviously not closed the Dendreon transaction, which we expect Dendreon to close some time in the – I think we said the second half of 2017. Now, those together generate proceeds of approximately $2.1 billion, $2.19 billion, to be clear. So, that's approximately the numbers that we will have available. There are some transaction expenses, taxes, et cetera, but those are not going to be a major component that comes off of that. So, that $2.1 billion, if I could just round that, will be the basis for the ability for us to pay down debt in 2017. Paul, is there anything you wanted to add to try to answer the rest of Annabel's question? And then I'll come back on the brodalumab.

[Paul S. Herendeen:]

Yeah, sure. On the progress against the $5 billion target – and Joe covered this, but I'll give it as simply as I can. Before the two remaining assets – excuse me, asset sales are on the table, Dendreon and the consumer products to L'Oreal, we paid off about $1 billion of debt. Those two – the proceeds from those will actually be a little bit less than $1.3 billion plus $0.8 billion. We have to withhold some taxes – or, I should say, pay some taxes. We'll get them back, but not right away at closing. So, we expect to have proceeds from those two transactions over the course of the next, call it, six months, of about $1.9 billion, and the six months is to get to Dendreon, we expect to close the L'Oreal transaction shortly. And so, in the aggregate, it's about $2.9 billion towards the $3 billion goal. We obviously continue to use free cash flow from our business to reduce debt, and we would expect to continue to look at additional asset sales, particularly of non-core businesses, in order to be able to meet that $5 billion number by Q1 of 2018. And then, on your question of Siliq and our positioning, we recognize our label includes a suicide ideation warning, and we will have (1

[Annabel Samimy:]

Okay. Thank you.

[Paul S. Herendeen:]

Can I – before you click off, Annabel, you made the comment, drowning in numbers. I hope we have not provided too much information that somehow makes us difficult to follow. I think the intention was certainly to provide transparency, to provide lots of information and context for people to develop models. We understand that it was a lot that we put out here this morning. And I would expect that, as people look through that information, particularly folks on the sell side, but buy side as well, will have questions with respect to that information. By putting all this information out there under Reg FD, it enables Joe, myself, Scott and others to have discussions about the information we provided. So, again, the intention was not to just throw a lot of information out at the market. The intention was to provide you with information that improves your ability to measure how we're doing.

[Joseph C. Papa:]

And transparency. I mean, that's what we want to be, is very transparent as we form the new Valeant. Operator, next question?

[Annabel Samimy:]

Thank you.

[Operator:]

Your next question comes from the line of Gary Nachman with BMO Capital Markets. Your line is open.

[Gary Nachman:]

Hi. Good morning. How far along are you with divesting other assets besides the ones you announced? Are you still anticipating similar type multiples that you had indicated previously? And have you changed your view of what's non-core in terms of geography and therapeutic area? And then, in terms of the target growth rates of the core businesses, how much – that you guys have been talking about – how much of that is price versus volume? It seems like you've still been taking a bunch of price increases, even if they all sort of fall below 10%.

[Joseph C. Papa:]

All right. Let me start with the first question. First of all, where are we with the processes? We do have additional processes underway. So, yes, there are some additional processes underway. We do have a very active process for a number of the assets. Relative to the first part of your question also was, what's core, what's non-core. We have not changed our definition. Core for us still is the – what we refer to as three potential core areas. Number one is the Bausch + Lomb business and how that represents the eye care growth opportunity. Number two, it is the GI business. And number three is just our dermatology business. We've also supplemented core versus non-core by looking at geography. There – the U.S. and Canada are strong geographies for us and represent a very important core. There are some geographies in the world that are not core. For example, that's why, one of the things we did was divest the business in Vietnam and Indonesia. It just wasn't a core for us that we felt, by reducing complexity, we helped simplify the business model and get the focus on really where we can really grow for the business for the future. On the next part of your question...

[Gary Nachman:]

Well, actually, Joe, before you move on, just in terms of the multiples that you're seeing, I guess, with the assets, could you just comment on that versus the types of targets that you've thrown out there previously, sort of on a broad level?

[Joseph C. Papa:]

Yeah. I think what we originally said is that – a couple comments we said. Number one, we said that we would expect to pay down $5 billion of debt, both from asset sales as well as our operational results, and we stand by that one. The other thing we talked about is that we identified what we referred to as $2 billion of revenue for what I would refer to as non-core. We think that those can generate somewhere in the $8 billion of proceeds. But I think really, we're not trying to suggest every one of those is going to get sold. We're just really trying to use that as an illustrative opportunity to identify non-core asset sales that we think are going to help us to pay down and reach this $5 billion of debt repayment. I don't see major changes just from – as a general comment, in how we're looking at potential asset sales. If you think about what we've sold so far, I think the range has been anywhere from – for the larger ones, anywhere from about 7-plus to 20-plus (1

[Paul S. Herendeen:]

Yeah, sure. I think embedded in the 2017 guidance and 2018 and beyond in those CAGRs is an expectation that we can get low- to mid-single digit price increases. Those are net across our portfolio, as we go out. Now, is it – it's not always the same. I use (1

[Gary Nachman:]

Okay. Thank you.

[Joseph C. Papa:]

Gary, one other question – I think you had a part of that you asked a question about, how we were relying on it. One of the important things I want to make sure is that – clear is that, if you think about our Bausch + Lomb business and how much of our business is not dependent on U.S. pricing, it's our Asia business, for example; our European business; our Bausch + Lomb business, certainly in the contact lens business. There's a significant part of our business that is not dependent upon the U.S.-based pricing system. Operator, next question?

[Operator:]

Your next question comes from the line of Douglas Tsao of Barclays. Your line is open.

[Douglas Tsao:]

Hi. Good morning. Thanks for taking the questions. Just a couple quick ones. First of all, Paul, maybe you could provide some commentary in terms of the progress that you saw from the Walgreens business in terms of ASPs. I think you said there was some further improvement. I know there was pretty sharp improvement in the third quarter versus the first half of the year. How much more room do you think there is? Or should we sort of then optimized? (1

[Joseph C. Papa:]

Let me address the first – the Walgreens question, and then I'll give it to Paul for the second part of that question. On the Walgreens question, in terms of performance, (1

[Paul S. Herendeen:]

Yeah. Doug, if I get this wrong, if it's not responsive to your question, I'll try again. But let me start. If you look at that key product LOE divestiture impact, what we put there is, I'd tell you, the impact that you'll see on revenue, meaning the growth drag on revenue in 2017 versus 2016 is $785 million. Now, I think the nature of your question is the remainder, which is the $260 million of this basket of products. How should you think about that? And that was – that's what led me to – in my discussion around guidance, to talk about the prospects for the diversified segment in 2018 versus 2017 in saying we'd still face some above-average declines in that business. I said 15% to 20% in 2018 versus 2017. And in part, that is due to the balance of those LOE products when they go from $1.043 billion in 2016 to circa $260 million. In our forecast in our guidance in 2017, that $260 million doesn't stabilize. That $260 million, based on the timing, it goes away. It goes away – I shouldn't say entirely, but it drops pretty dramatically into 2018. So, I think, both from a revenue and profitability standpoint, you got to look at the impact on 2017 and then think about what happens to the remainder of that basket in 2018. And then, as it normalize, as I said, that business will continue to decline but not nearly as precipitously as you've seen in 2016 versus 2015 or expected 2017 versus 2016. (1

[Douglas Tsao:]

Yes, that's very helpful. Thanks a lot, Paul. And then, just maybe in terms of the impact of the divestitures on EBITDA contribution, is that $135 million in 2017 guidance the EBITDA number?

[Paul S. Herendeen:]

It is not. We will update guidance with respect to our divestitures at the time we close the deal. So, we'll provide information about such things as net proceeds, use of the proceeds, the impact on revenue for the full year, the impact on interest for the full year and the impact on adjusted EBITDA for the full year. So, when we have certainty about those closures, we will update our guidance accordingly.

[Joseph C. Papa:]

Okay. Operator, next question, please?

[Operator:]

Your next question comes from David Amsellem of Piper Jaffray. Your line is open

[David A. Amsellem:]

Thanks. So, I just wanted to ask a couple of questions on Xifaxan. So, with this – with the primary care sales force in place, I just wanted to get your rationale here on the investment in a primary care sales force in the context of what is an increasingly competitive environment. And with that in mind, I mean, how does the presence of big primary care sales push impact your discussions with payers regarding contracting over the long term? What gives you confidence that you can see net pricing stability over the long term on what will be ostensibly an increasing primary care focused product? So, maybe just give me some color on those dynamics, if you can. Thanks.

[Joseph C. Papa:]

Sure. This is Joe. The important question for us as we thought about Xifaxan is we believe that many of the patients that are presenting with the IBS-D indication are going to the primary care physician first. Ultimately, we also – many of them will see a gastroenterologist, but many of them are seeing the primary care first. We had limited numbers of sales resources in primary care. It was approximately 100 individual sales reps available in primary care, and there were many of these primary care physicians we just could not reach with those 100 sales representatives. We felt that, given the longevity of the product, given the opportunity to help improve these patients, we would get out there with an incremental primary care capability. As we mentioned, we hired over 250 individual sales professionals to help join us in delivering the message to primary care. I believe that the actual ability to reach primary care will now be approximately 75% of the prescriptions from primary care for IBS-D, we will be able to reach those physicians. So, that's an important part of what we're going to do, but we're going to do more that. We're going to do things with the nursing clinical educators, we're going to continue to talk about a very strong clinical program for Xifaxan that will allow us to really show how this product makes a difference. I know you didn't specifically ask about it, but I will make the mention specifically about Xifaxan in hepatic encephalopathy. We've got very strong data that shows it will reduce hospitalizations, which will, by definition, reducing hospitalizations will reduce the overall total cost of healthcare which is so important to the managed care programs and why we believe we will be very successful with Xifaxan for the future.

[Joseph C. Papa:]

I think that – next question? Operator, I think it's my last question, please?

[Operator:]

Your next question comes from Tim Chiang of BTIG. Your line is open.

[Timothy Chiang:]

Hi. Thanks. I have a couple of debt questions. Paul, if I look at your capital structure, you've got about, what, a little over $10 billion in senior debt still on the balance sheet. But most of that, I think all of it is actually tied to floating rates. I mean, is there anything you can do to lock in interest rate in an environment where rates probably are going to go up?

[Paul S. Herendeen:]

Yes, yes, yes, we certainly could. I mean, the impact of a 1% increase in our variable rates would impact us by some $100 million of net incremental interest expense based on our current cap structure. So, yeah, I mean, we've been focusing on mitigating or reducing our exposure through the pay-down of debt – the pay-down of that variable rate debt including, hopefully, shortly, through – with the proceeds from asset sales. So, good – absolutely good thing to look at. We think the question is whether to hedge some of that interest or not. We have elected to not hedge that at this time.

[Timothy Chiang:]

And, Paul, just one – sorry. One last question on that. It looks like your principal repayments are going to accelerate in 2018 and I know a couple of questions highlighted. Is it possible that you could refinance some of those principal repayments and extend those maturities out? I mean, Paul, are you pretty confident you can do that, potentially, this year?

[Paul S. Herendeen:]

Well, yeah, I think, in my prepared remarks, what I said is we look at the situation in the financial markets, in the debt markets every day and with great urgency. I mean, if you focused on the 18s. (1

[Timothy Chiang:]

Okay. Great. Thanks.

[Paul S. Herendeen:]

Thank you.

[Joseph C. Papa:]

Thank you, everyone, for joining us today and listening to our plans for 2017 and what we are guiding. We look forward to updating you as we go forward with the closing of some of the asset sales and as we move forward with the rest of the year. Thank you, again, for joining us today. Have a great day, everyone.

[Operator:]

This concludes today's conference call. You may now disconnect.