Bausch Health Companies Inc.
Q2 2015 Earnings Call Transcript

Published: 23 Jul 2015

[Operator:]

Good morning. My name is Angela, and I will be your conference operator. At this time, I would like to welcome everyone to the Valeant Pharmaceuticals Second Quarter 2015 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. [Operator Instructions] Thank you. I would now like to turn the conference to Ms. Laurie Little, Head of Investor Relations. Please go ahead.

[Laurie Little:]

Thanks, Angela. Good morning, everyone, and welcome to Valeant’s Investor Conference Call, where we will be discussing our second quarter 2015 financial results. Participating on today’s call are J. Michael Pearson, Chairman and Chief Executive Officer; and Robert Rosiello, Chief Financial Officer; Dr. Ari Kellen, Company Group Chairman; Anne Whitaker, Company Group Chairman. In addition to a live webcast, a copy of today’s slide presentation can be found on our website under the Investor Relations section. Before we begin, 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 non-GAAP financial measures, please refer to Slide 2. Non-GAAP reconciliations can be found in the press release issued earlier today and posted on our website. Finally, the financial guidance in this presentation is effective only as of today. It is our policy to update our firm guidance only through broadly disseminated public disclosure. And with that, I will turn the call over to Mike.

[Mike Pearson:]

Thank you, Laurie. Good morning, everyone, and thank you for joining us. We are pleased to report exceptional results across all financial and operational metrics for our second quarter. Driven by a strong sales growth and profitability across our regions and businesses, and once again demonstrating the strength of our diversified and decentralized business model. Before we begin discussing the details of our performance I wanted to provide the highlights of the quarter. First, we will review our strong first quarter financial results. Second, provide you with the highlights of our first quarter business performance. Next, we’ll update you on the progress with the integrations of both Dendreon and Salix. And finally, we’ll discuss our financial performance and update our 2015 guidance. This morning, we reported Valeant’s first quarter results for 2015 which were driven by strong sales growth and profitability across all our regions, once again demonstrating the strength of our diversified and decentralized business model. Before we begin discussing the details of our performance, I wanted to provide the highlights of this quarter. We have now delivered four consecutive quarters of more than 15% same-store organic growth. Strong performance throughout our businesses resulted in both our top and bottom line exceeding the Q2 guidance that we provided on our last call. These results were driven by the continued out performance of our US businesses and strong results around the world including Asia, Australia, Canada, Mexico, and the Middle East and North Africa. I’m also pleased to report that sales is off to a fast start. The productivity of Salix’s R&D portfolio is demonstrated by the approval of Xifaxan for IBS-D in May and the NDA filing for Relistor Oral in June, two significant milestones for our GI business. We remain focused on reducing Salix’s wholesaler inventory and are on plan. Specifically we have reduced inventory levels for Salix products to approximately 3 to 3.5 months as compared to 4 to 5 months at the April 1 close. Finally, we have already achieved $500 million in run rate synergies and fully expect to achieve $530 million by the end of the year. Third, Dendreon continues to exceed our expectations for both revenue and profitability. We achieved $74 million of revenues for the second quarter, an increase of 18% versus the previous quarter, and gross margins of approximately 64%, an improvement of 15%, and operating margins of approximately 40% to 45%, which we expect to continue to improve through the remainder of the year. This is a huge turnaround for a company that was unprofitable just last year. On the business development front we remain quite active with eight tuck-in deals already signed and/or closed so far this year. Later in the presentation we will provide an annual update on M&A performance since 2008. Based on our strong base business performance and the approval of Xifaxan for IBS-D we are raising 2015 cash EPS guidance to $11.50 to $11.80, and our revenue guidance we are raising to $10.7 billion to $11.1 billion for the year. We continue to expect total company same-store sales organic growth to exceed 10% for the remainder of the year despite the genericization of Targretin in July, and the expected genericization of Xenazine in August. For the quarter, our total revenue was $2.7 billion, an increase of 34% over the prior year, largely driven by the exceptionally strong growth in many of our US businesses, which offset negative headwinds from foreign exchange. Adjusting for the negative impact of FX of $173 million, revenue grew 42% over Q2 2014. Cash EPS was $2.56, an increase of 34% over the prior year, which includes the negative impacts of $0.13 from the strengthening US dollar. Adjusted for FX, cash EPS grew 41% over Q2 2014. As mentioned in our press release, sales had a negative impact of $0.04 on our cash EPS this quarter. Therefore our cash EPS would have been $2.60 for the quarter without Salix. Rob will take you through the math later in the presentation. Turning to organic growth, our overall same-store total company organic growth was 19% for the quarter. the exceptional growth of our US businesses driven by the strength of dermatology, contact lenses, dental and Obagi was complemented by many of our emerging markets, including China, Middle East, North Africa, Russia and South Korea. As we’re now halfway through the year our same-store sales organic growth was 17% for the first six months. Our overall pro forma total company organic growth was primarily impacted by Salix as we continue to reduce inventory in the wholesaler channels. Sales revenues declined by approximately $16 million in Q2 2015 as compared to Q2 2014. Our overall pro forma total company organic growth, excluding Salix, was 20%. B&L continued to demonstrate strong organic growth led by Rx Pharmaceuticals in the United States, our US contact lens business, and our emerging markets. Q2 revenues increased to $836 million from Q1 revenues of $745 million. We continue to expect B&L organic growth to be approximately 10% for the full year. As we approach our two-year anniversary of the B&L acquisition, we have fully integrated the business and manage it as an integrated eye health portfolio. Therefore this will be the last quarter that we breakout the US B&L organic growth by sub-category. Turning to our top 20 products, our top 20 products represented 40% of total second quarter revenue with the top 10 products contributing approximately 28% of revenue. Our top 20 products delivered organic same-store growth of 32% for the quarter. Excluding new product acquisitions, roughly half of our growth came from volume and half came from price. Our largest product, Xifaxan, represented approximately 5% of Q2 revenues despite revenues that were muted due to excess inventory in the channel. Jublia is now our second largest product with [end year] run rate sales of approximately $450 million. Due to the generic launch of Targretin in July and the generic launch of Xenazine expected in August, we believe both products will fall out of our top 20 products in Q3. I would also like to note that one of our new products, Glumetza, loses its patent protection in February 2016 and will fall out of the list in 2016. Our US dermatology business had another excellent quarter with our launch brands leading the way. Both launched and core brands contributed to the dermatology revenue growth of 55% year-on-year. Jublia scripts grew 37% in Q2 versus Q1, which equates to an increase of 55% on our 4 mm equivalent basis. Our DTC campaign featuring John McEnroe is having a positive impact on the product, and continues to expand prescribing volume, particularly with the primary care physician base. Onexton has demonstrated rapid TRx uptake since its January launch, and recently reached 8000 scripts per week. A fully integrated DTC campaign with TV, print and digital has accelerated growth. The current annualized run rate for Onexton is approximately $70 million. Luzu scripts have produced a new record high with volume up 55% relative to Q1. Luzu continues to grow with our new DTC campaign driving awareness. The current annualized current rate for Luzu is approximately $26 million. Lastly, our script trends for our base dermatology business, including Solodyn, Ziana, Atralin, Elidel and Zyclara are all demonstrating strong double-digit growth rates. Our US eye health business continued its strong growth trend and delivered 10% growth over the prior year. Contact lens grew 19% organically over the prior year. Biotrue ONEday continues to grow four times faster than its category. Based on the growth of the Biotrue franchise over the last five quarters, six additional Biotrue lines are currently planned. B&L’s Ultra contact lens continues to be well-received by eye care professionals. Our first commercial manufacturing line for Ultra is operational and continued to sell to capacity. We recently approved lines 5 and 6 for Ultra to support the long term global demand. Our prescription drug ophthalmology business continues to see strong – extremely strong growth from other brands, fuelled by the Lotemax franchise and prolensa. We are also quite pleased to announce that we have filed Vesneo with the FDA. Organic growth for surgical was 1% for the quarter. Adjusted for the continued shift from sales to leasing models of femtosecond lasers organic growth would have been 3%. We expect to see improving organic growth for surgical for the remainder of the year driven by market share gains across our product lines, including our IOLs and our surgical equipment. The strong performance of neuro and other as well as the generics portfolio was driven some other brands including [Indiscernible] Cuprimine and Syprine. In our consumer business, CeraVe [Indiscernible] and Biotrue Multi-Purpose Solution all demonstrated strong double-digit growth demand. Finally, our dental business continued its track record of strong double digit growth. In March, we expanded our dental product portfolio through the acquisition of Neutrasal, a treatment for general dry mouth and oral mucositis. When we acquired Neutrasal, its annual revenues were approximately $8 million. After four months, the run rate revenue for Neutrasal is over $16 million. This is another example of our ability to quickly have an impact on our acquisitions. Now turning to the rest of the world. In our emerging markets, organic growth for our business in Asia was 10% versus the prior year. We continued to see strong growth in a number of countries including China at 15% and South Korea at 23%. In Latin America, we delivered 7% organic growth with Mexico at 12%, offsetting more modest growth in Brazil and Argentina. Central and Eastern Europe, the Middle East and North Africa delivered strong double-digit growth of 18% and Russia returned a positive organic growth this quarter. Overall growth in other central and eastern European countries were slightly negative this quarter, as they were primarily impacted by Ukraine and Greece. For the rest of the world and developed markets, the underlying business remained strong as with our Australian, Canadian and Western European businesses performing well with 6%, 7% and 5% organic growth respectively. Now, let me turn to our Salix acquisition. We completed our acquisition of Salix on April 1st. We have already achieved several significant R&D milestones with the approval of Xifaxan for IBS-D, the submission of Relistor Oral NDA, and the approval of the Relistor injection in Europe. Obviously the big event was the IBS-D approval, where we saw immediate growth in script uptake of Xifaxan post-approval. Our soft launch commenced right after approval with our sales force undergoing training in the first week of June. At this time, we continue to promote the package insert as we are still awaiting regulatory approval for our marketing campaign, including our first DTC advertisement. Based on our quick start, revenues and EBITDA are both significantly ahead of the deal model and the integration is nearly completed. In addition to the realignment of the sales force, which we discussed in our last earnings call, we [Indiscernible] the sales force compensation model to be in line with our existing performance-based compensation structure versus sales structure, which [Indiscernible] the sales team. We believe these adjustments will maximize the effectiveness of our sales team going forward. Finally, as I mentioned earlier, we are pleased to report that our wholesale inventory reduction program is on plan. We are currently at approximately 3 to 3.5 months as compared to 4 to 5 months at April 1st close, and we still expect inventory levels to be reduced to 1.5 months or less by year-end. Rob will take you through the details later in the call. As Slide 15 shows, we have experienced a significant increase in script trends from 15% to 33% year-over-year growth for Xifaxan since the approval for IBS-D on May 27. Following the close of the acquisition we held a pipeline review session with the Salix R&D team, the Valeant R&D team and several external experts. The purpose of the session was to provide an in-depth discussion of the pipeline products and determine which ones will move forward. I’m pleased to report that the vast majority of the programs are still ongoing and are detailed on Slide 16. As expected, we continue to be very active in the business development activities. We have closed or signed eight deals so far this year with the most significant one being Amoun, an acquisition we announced last week. This acquisition adds approximately $225 million to our existing Middle East North Africa sales, which is one of the fastest-growing emerging markets in the world. Including Amoun, our Middle East business will be approximately $500 million in 2016. As we have mentioned for a number of quarters, we’re continuing to look for opportunities to grow in Latin America, and we recently agreed to acquire Humax, a branded generics company in Colombia that provides entry into a new market and will complement our current business in Mexico. Finally we recently agreed to buy Commonwealth Diagnostics, a company that sells recently approved tests for IBS-D. And we believe this test will represent an important piece of our efforts to tap into the underdiagnosed IBS-D patient population. When we embarked on a new strategy in 2008, we began to acquire assets that will build a strong foundation and fuel future growth. Since 2008 we have completed over 140 acquisitions, license deals and co-promote agreements and deployed over $40 billion in capital. Our IRR hurdles continue to be the highest in the industry. We target IRRs of at least 20% based on local statutory tax rates and a cash payback period of six years or less. We monitor the process of each deal by tracking both top line and EBITDA by quarter. We share these results with our board of directors every quarter and provide an update to investors on an annual basis. Today is that update. I would also like to note that senior management’s compensation is tied to past deal performance. As we breakdown our deal performance into large, medium and small deals, our track record I believe speaks for itself. Our large transactions such as Biovail, Medicis, Bausch & Lomb and Salix have all performed in line or ahead of the deal model. We believe there are several factors contributing to the success of our large deals including the benefits of our decentralized model, detailed review of the key business rate drivers, and pipeline or other unexpected product upsides. For our medium sized deals, those $300 million to $1 billion, 10 of the 11 transactions are tracking towards or delivering well above our 20% IRR hurdle, and all have delivered above our cost of capital. We have had a number of home runs in this category, including Ortho, Dermik, Aton and Sanitas. Finally our small deals, approximately 50 of our small acquisitions, approximately 50, which are less than $300 million in aggregate, are performing well above our expectation. That is greater than – return an IRR greater than 20%. This category also includes several home run deals of greater than 35% IRR fully taxed, such as Coria, Natur Produkt, and Targretin. While we have had great success on the small deal front, we do have four failed deals, which performed below our cost of capital, Neotensil in the US, Vita Direct in Russia, PFI in Australia and Vital Science in Canada. We have analyzed the performance across all of our deals since 2008. Our achieved cumulative EBITDA growth exceeds our deal models by 18%. This reflects performance of our deals before applying the benefits of our lower tax rate. On a cumulative net income basis the deal model net income reflects our analysis using statutory tax rates, the approach we take when reviewing potential acquisitions. The cumulative achieved net income includes the benefit of our lower tax rate. When comparing the deal model and achieved cumulative net income, our achieved outcome exceeds our deal models by 59%. Based on our performance of deals today, our expected IRR, excluding the benefit of our tax rate is approximately 26% and our expected IRR, including the benefit of our tax rate is greater than 37%. An important part of our deal analysis is our targeted six-year payback period. We have reviewed our largest deals since 2008. We are pleased to report that five of these deals have already been paid back entirely, including Coria, Dow, Aton, Biovail, Ortho and Dermik. While many of the small or mid-sized deals including Targretin, Elidel, and [Indiscernible], which are not included in this page have also been paid back. Other deals such as B&L are on track to meet their expected payback period. B&L is approximately 30% paid back after less than two years since the closing of the acquisition. Since the time of the acquisition, B&L has delivered approximately 30% of Valeant’s total EBITDA. I would also like to note that B&L, our largest deal prior to Salix, we have improved organic growth from 2% to 9% since acquisition demonstrating our ability to create value under the Valeant business model. One of the more important parts of our internal deal review is looking back at past acquisitions to determine what has contributed to our success and failure. Slides 24 and 25 outline our key learnings from the acquisitions. Now I will turn the call over to Rob.

[Robert Rosiello:]

Mike already described our exceptional Q2 results. Our revenue of $2.7 billion exceeded the midpoint of the guidance we provided during our Q1 earnings call by approximately $200 million, primarily driven by the out performance of our US businesses, including dermatology, contact lenses and dentistry. Our overall cost of goods sold improved to 23% in the second quarter primarily due to the continued growth in dermatology as well as the acquisition of Salix, resulting in improved gross margin of 77%. SG&A remains above historical levels, but improved by one point from last quarter on an overall basis despite increased costs associated with our launch initiatives. In the second quarter, we spent approximately $60 million in DTC advertising supporting [Indiscernible] and Luzu. The overall improvement also demonstrates our rapid synergy capture from the Salix integration. R&D was $81 million in the quarter, an increase of approximately 45% relative to Q1 reflecting our continued investment in legacy value programs and the addition of the Salix programs described earlier. As Mike mentioned, Salix contributed negative $0.04 in cash EPS for the quarter taking into consideration the incremental interest and incremental shares related to the Salix financing. Valeant, excluding Salix, showed an even stronger sequential and year-over-year cash EPS. Legacy Valeant’s top line organic growth and improved product mix more than offset increased investment in our launch brands. Turning to Slide 28, the acquisition of Salix had an even more significant impact on GAAP cash flow and adjusted cash flow. Valeant’s GAAP cash flow, excluding Salix, was substantial at $714 million and there were minimal add-backs to arrive at adjusted cash flow of $770 million. Salix had negative GAAP cash flow of $303 million driven by significant cash charges related to unvested equity awards, restructuring charges primarily severance, and the buildup of accounts receivable and gross to nets of $96 million. In Q2, Salix contributed $3 million to our adjusted cash flow. Starting in Q3, we expect our aggregate cash flow to improve significantly as Salix inventory normalizes and one-time restructuring items are reduced. Cash conversion for both the Valeant standalones and overall business was 86%, reflecting our continued investment in working capital to support the exceptional growth of our business. Given our acquisition of Salix, our goal is to achieve 90% cash conversion by the end of the year. As we have discussed, we plan to reduce inventory levels for Salix to 1.5 months or less ideally one month by year-end. Currently individual wholesalers have varying amounts of inventory for specific Salix products. So while we continue to work down inventory, wholesalers are placing orders for specific products or inventories have been reduced to our targeted levels. For Q3 we expect our reported net sales for Salix to be about the same as Q2 sales or approximately $300 million due to the continued reduction in wholesaler inventory levels. By the end of Q4, we expect to normalize inventories and enter 2016 with sales reflecting actual product demand. On Slide 30, in Q2 we incurred restructuring and integration expenses of $153 million, approximately $122 million of this quarter’s charges relate to Salix. We expect to realize up to an additional $175 million of charges for Salix during the remainder of 2015. We also recorded $18 million of charges related to Dendreon. We expect any additional charges for Dendreon for the remaining of the year to be minimal. Bausch & Lomb restructuring is complete. Restructuring and integration charges for other recent small deals were approximately $13 million this quarter. For the remainder of this year we expect less than $20 million of incremental charges for deals already closed, excluding Salix and Dendreon. This guidance excludes any deals that have not yet closed and any new deals that might occur. In terms of our balance sheet, we ended the quarter with a strong liquidity position through a combination of $1.5 billion undrawn revolver and $958 million of cash on hand. Our net debt to pro forma adjusted EBITDA ratio was approximately 5.5 times. We remain committed to reducing that ratio to below 4 times by the end of 2016. During the quarter, we opportunistically repurchased $50 million in Valeant equity at $223 per share. Our accounts receivable DSOs improved this quarter as compared to the second quarter of 2014 at 65 days. 2015 continues to be a strong year for our company based on the continued out performance of Valeant’s business and the approval of Xifaxan for IBS-D we are increasing our 2015 guidance. Given the Salix inventory situation, we are making an exception to past practices and are providing Q3 and Q4 guidance. Until Salix is fully normalized we feel it is important to provide investors with this information. For 2015 we are increasing our guidance for revenue to $10.7 billion to $11.1 billion from $10.4 billion to $10.6 billion. We had previously guided that Salix revenues would be $1 billion for the year given the approval of the Xifaxan IBS-D indication, and progression of the planned reduction in wholesaler inventories we’re taking our 2015 guidance for Salix revenues up to $1.2 billion. We are also increasing our guidance for cash EPS to $11.50 to $11.80 from $10.90 to $11.20. And our adjusted cash flow from operations guidance to greater than $3.2 billion from greater than $3.1 billion for the year. Our Q3 and Q4 guidance reflects both the expected generic impact from Targretin and Xenazine as well as the Salix inventory drawdown program still under way. We expect our same-store organic growth to be greater than 10% for the second half of the year despite the impact of generic entrance for Targretin in July and the expected generic entrance Xenazine in august. Finally, although I will not go through all of our key assumptions used to build our forecast they are listed on Slide 33 for your reference. Now I would like to turn the call back over to Laurie.

[Laurie Little:]

Thanks Rob. Before we open the call to questions I would like to remind everyone that in order to ensure that we have adequate time to take everyone’s questions we will only take one question per caller. If you would like to ask a follow-up question you are welcome to get back in the queue, and we will try and take as many questions as possible in the time allotted. And with we’ll take our first question.

[Operator:]

Our first question comes from the line of Chris Schott with JPMorgan.

[Chris Schott:]

Thank very much and congratulations on the very strong results here. Mike, can you just elaborate a little bit more on the Xifaxan launching IBS-D just specifically how should we think about the rest of the year in terms of priorities for the organization, when should we think about DTC really starting to rollout and are you comfortable at this point giving us a little bit more color in terms of peak sales opportunity for this particular indication? Thanks very much.

[Mike Pearson:]

Hi Chris, thank you. So, we’ve submitted the marketing materials to the agency and we hope to get those approved sometime in August unfortunate by late August. So, our current expectation is we’ll rollout our DTC program in September. We tie into our very, very heavy spend, the back half of the year, actually much higher than we had for Jublia last year. And again, keeps working like it has Jublia, continue that spend. We’re not going to give our peak sales here, but are going to give the peak sales yet for IBS-D and we’ll pull the whole sales force, all the sales forces and that are – they’ll be selling the IBS-D indication in late August to have a march meet as well. We also recently decided to actually create a fifth specialty sales forces covering GI and doctors to prescribe Xifaxan, so we’ll now have five sleeves rather than four sleeves.

[Laurie Little:]

Next question please?

[Operator:]

Your next question is from the line of Andrew Finkelstein with Susquehanna Financial.

[Andrew Finkelstein:]

Congratulations on the results. Perhaps you could address in a bit more detail what you’re seeing in the global eye care market particularly where are you taking share and one of your competitors had a much more challenging quarter in that area, so maybe you can talk a bit about what differentiates your growth profile there? And then, bigger picture as you think about the spending levels you talked about some of the incremental investments you’re making, but as we look out to next year has the level of SG&A and R&D investment, you’re thinking about changed from what you had previously talked about in for ’16? Thanks.

[Mike Pearson:]

Sure. So, we – it’s a category that has a number of great companies competing at and I think we’ve just been a little lucky in having some great new products that we’ve been able to introduce into the market. So, I talked of the Biotrue ONEday which is doing extremely well, it’s a great contact lens very, very comfortable and I think it certainly are doing extremely well. Ultra, I think it’s going to be a bit of a mix, it’s a great match to the sell. Where the share is having some newer products and I think we’ve also reorganized our business into local teams and so, our decentralized model, I think that’s really helping in terms of – so, where we’re gaining share in contact lenses we’re gaining share I think in the arts parts we’re gaining share, surgical it’s, I mean it’s combination of some great products and are really focused and taunted team. And, we’re not going to give guidance on 2016 yet, in terms of philosophically we’ve not changed our view in terms of what we think sort of R&D and sales of marketing as venture be for the company. Next question?

[Operator:]

Your next question is from the line of Louise Chen with Guggenheim Securities.

[Unidentified Analyst:]

Hi, it’s Brandon on for Louise. We would just like to get your views of whether you’re still interested in animal health and if so why and why not? Thank you.

[Mike Pearson:]

We’re not going to comment on future acquisitions, next question please.

[Operator:]

Your next question is from Annabel Samimy from Stifel.

[Annabel Samimy:]

Thank you for taking my question, congratulations on the quarter. You pretty successfully added some very strong source of organic growth and you have some meaning franchises now and it looks like your M&A activity is going a little bit back to bolt-on, is this what we can expect and from like right now, and how do you see the price environment in the different regions looking and how does that drive your M&A strategy?

[Mike Pearson:]

Sure. I think we’ve always, our M&A strategy will always be a question of sort of the tuck-ins or bolt-on as you referenced and opportunistically larger acquisitions. One can never predict the timing of a larger acquisition, so when those happen those happen, we don’t put them our timeline. But, what you should continue to see a minimum is continued bolt-on acquisitions. In the segments of the deals we did, the deals this quarter, again they’re all none are more competitive, they want processes and I think we don’t – at least the deals we’re doing, we’re not seeing a big change in any kind of price pressure environment or so I guess that answers the question. Next question?

[Operator:]

Your next question is from the line of David Amsellem from Piper Jaffary.

[David Amsellem:]

Thanks. So, with the recent 500% price increase on Glumetza in mind, can you talk about the extent to which you envision more pricing power not just for other products acquired by the Salix transaction, but maybe just your assets broadly speaking in the U.S. How should we think about that? Thank you.

[Mike Pearson:]

So, I think most pharma companies that I’m aware of is a product that is in the last stages of their life like Glumetza, we are going to lose Glumetza more than six months after price increases are taken at the end and so that was just consistent with what most companies do. And our view of pricing across most of our portfolio we do not take price outside the U.S. there is like fuel price, I think David as we get more and more into segments like contact lenses and consumer products and other devices, we are not able to take price. So, we are opportunistic when it comes to price but our base strategy is how do we grow organically through volume which is I think this quarter we once again exhibited our ability to do so. Next question?

[Operator:]

Your next question is from Tim Chiang with BTIG.

[Tim Chiang:]

Thanks. I think in past quarters I have asked you about hammer rate is there any update on hammer rate and is that a part that you consider additional targeting for U.S. sometime what late next year early ’17?

[Mike Pearson:]

Yes, we are still hoping to get that part approved in the U.S. We have a meeting with the FDA coming up and so why don’t we update you on the next quarter on that so hopefully we can agree on the timing in the past with the FDA but before we have that meeting I don't want to – I don't want to guess.

[Tim Chiang:]

Okay. Great. Thanks.

[Operator:]

Your next question is from Greg Gilbert with Deutsche Bank.

[Greg Gilbert:]

Thank you. On the Salix increase guidance is that all IBS or there are some other drivers and can you also share with us with the gross to net is for Xafaxin at this point? Thanks.

[Mike Pearson:]

So, to answer that question but first in terms of the revenue increase in Salix what we modeled in yes is IBS-D, some of the other parts are even little bit better than our forecast Forecast but we wanted to be prudent in terms of rating our original guidance, so we raised the 200 million raise for IBS-D is what's included in the guidance.

[Howard Schiller:]

And our forecast for gross to net is 30%.

[Operator:]

Your next question is from Alex Arfaei with BMO Capital Markets.

[Alex Arfaei:]

Good morning and congratulations on a strong quarter and welcome Rob. Can you provide more details at the profitability of the Amoun business possible synergies and how accretive the deal could be? Thank you.

[Mike Pearson:]

Yes, so Amoun, their operating margins today is sort of mid 30s so 35% is probably a good proxy. So, it should be actually quite accretive. We don't know the exact timing of close, our partners or the private equity company we purchase it from things, things will close in the third quarter but we built in fourth quarter close we need to meet with Amoun in Egypt and the process is not as clear in Egypt as it is in south countries. But it should be quite accretive and we will obviously get some synergies from Asteel as well. So, the synergies may come more on the balance side that the rule side but as we consolidate our northern African business and we do expect to maintain and maybe even accelerate the growth rate of that business. Next question?

[Operator:]

Your next question is from Marc Goodman with UBS.

[Marc Goodman:]

Good morning. Mike, on slide 13 you started to go through some of the organic growth you were seeing in different parts of the world could go into a little more detail just on Russia, China, some of these emerging markets and what you are seeing because clearly the rest of the industries are struggling in these regions? Thanks.

[Mike Pearson:]

So, Russia we had a tougher first quarter as you recall. And part of that was it was like crazy in fourth quarter. So Russia we are very pleased. We have great team over there. We are very pleased to see that organic growth is – we used to be growing there about 15% but some percent we were satisfied with this quarter obviously we like to get back to double-digits and we are very pleased to get that back. China we just have a great team over there. It's just and again we may – you may remember an acquisition of Bascom last year and that was actually inorganic growth. They are probably still pro forma. But, with some new colored contact lenses, but we’ve launched Biotrue Daily in China and it's really taking off and they are just doing a great job. I think a lot of this is driven in China and North Asia but be in our business and again I think we have a set of products that newer products that align us to maintain a growth in gain share. But I would really point to our people as the main reason for doing so well.

[Operator:]

Your next question is from Gary Nachman with Goldman Sachs.

[Gary Nachman:]

Hi guys. Nice quarter. Never you filed on Relistor Oral what is some of the commercial initiatives you are thinking about with those products? How well they be differentiated in their respective markets and how big do you think they could be? Thanks a lot.

[Mike Pearson:]

Yes. So, we haven't done a lot of work yet in the launch product plan for Relistor Oral we just got piles of probably we will get it approved next year. But what's great about this product is its fast acting. And the better products I think act within a couple of days. Our up product will act within three, four hours. And for most people it reacts right away 30 minutes. So since you, if you are super constipated fast acting is good also what we are finding is actually a product that helps sooth the health care system money, if you are in hospital you are not allowed to be discharged until you’ve a bow movement and so it's a product that I think is going to be a premium product based on helping health care economics. All that been said we really haven't laid out our full sales on marketing plan but we will start doing that now that will start.

[Operator:]

Your next question is from the line of Douglas Tsao with Barclays Capital.

[Douglas Tsao:]

Hi, good morning. Thanks for taking the question. So, Mike maybe on Jublia, if you could just elaborate given the sort of transition to the 8ml curious what you are seeing in terms of the gross to net on that product versus the 4ml and then also are you seeing any comparable coverage from managed care or you are seeing any sort of limitations in terms of quantities and refill the patients were able to get? Thank you.

[Mike Pearson:]

Tsao, Ari will take that question, it’s close to.

[Ari Kellen:]

Yes, the uptake on the 8ml is being strong and it's running just under as we said to run 29% and in terms of the gross net we’re in ongoing discussions with managed care and we suspect the gross net will be no worse than probably better than the 4ml.

[Mike Pearson:]

Which is and then also just in terms of the vindications on retails, if any.

[Ari Kellen:]

For the label as you know, requires treatment up to 48 weeks, that is what we are promoting and physicians understand that this product needs to be taken for a duration of therapy to achieve the desired results and that we are tracking, refills are tracking very nicely.

[Mike Pearson:]

Yes. So what we, many people have multiple toes that are affected and so we are working the refill rates on [Indiscernible] out to be quite comparable to the [Indiscernible] is actually you are asking. Next question please.

[Operator:]

Your next question is from David Risinger with Morgan Stanley.

[David Risinger:]

Yes. I guess my first question is, I am wondering if you are trying to suggest for the background noise that you may be onsite doing due diligence on a [duck farming] system. We don’t want you diversifying, we don’t want you diversifying that much. But my real question is, with respect to cash flow, obviously you’ve provided upgraded adjusted cash flow guidance of over $3.2 billion. Could you provide some more color on GAAP cash flow, and how we should think about that in the back half of the year, and then one tit-bit of a question, could you just Mike tell us, in a little bit more detail the timing of when you are assuming Glumetza generics launch? Thank you.

[Mike Pearson:]

I think Glumetza generic, it’s at February?

[Howard Schiller:]

Yes, it is February.

[Mike Pearson:]

February of next year? We will give you a precise date. So, we assume we have it for the rest of this year. In terms of GAAP cash flow, Rob you want to take that?

[Unidentified Company Representative:]

Yes, I mean here what I say, with respect to the 3.2 billion overall, until that inventory situation that we are in is resolved, we are being conservative. What we described on the dis-aggregation, was when you look at the GAAP cash flow for Valeant excluding Salix, it was very, very strong, and as we work through both the inventory on Salix as well as these largely one time item that hit in Q2, you are going to see an acceleration in our overall GAAP cash flow.

[Mike Pearson:]

Yes, in terms of GAAP cash flow, obviously we will converse to our adjusted cash flow overtime, the big components are we take all the expenses for all the severances in this quarter for Salix, it’s largely driven by Salix. And so, there should be a ton, ton more charges I think that next quarter GAAP will also be, probably be a significant difference but by fourth quarter we should be in pretty good place. The only piece that we’ll be lingering is there were some employee, the severance agreement for Salix was some employees paid out over rather than a onetime payment, they were paid out over 12 months or 24 months in some cases. So, there will be some small cash component. We did not accelerate that for obvious reasons, but we probably will offer program where people want to get accelerated at discount were given. But, I think by fourth quarter you should see significant conversions, and I do think this will be the most extreme -- Q2 will be the most extreme quarter. Next question please.

[Operator:]

Your next question is from the line of Corey Davis with Canaccord Genuity.

[Corey Davis:]

Thanks very much. So, if gross margin is going to be running close to 80% by the end of the year without giving formal guidance for 2016 directionally, can you tell us how we should think about that going into 2016?

[Mike Pearson:]

We certainly plan to get to 80% by next year and we’ll see if we get there by the fourth quarter or not. And then, overtime we shouldn’t, again absent any other big deal which could have an impact on it. I think gross margins will continue to improve.

[Corey Davis:]

And one quick follow up on an earlier question on VESNEO. You are still feeling its good on that one as you have in the past and have you developed a commercial plan for that yet?

[Ari Kellen:]

As Mike mentioned we’ve filed VESNEO, we still feel optimistic about the product as we’ve discussed in the past and unique mechanism is action for this mono therapy and then nitric oxide donating piece of it, and we’ve had obviously since the last call many more discussions with KOL, so we remain optimistic about the prospects of this product and its approval expected next year.

[Corey Davis:]

Right, thank you very much.

[Operator:]

Your next question is from the line of Douglas Miehm with RBC Capital. Doug?

[Mike Pearson:]

Next question.

[Operator:]

Your next question is from Glenn Greenberg with Brave Warrior Advisors.

[Glenn Greenberg:]

Quick question. On Salix you said the revenues this year would be about a billion two and it looks like they were 300 million in the last quarter and will be 300 million again in the third quarter. So, does that imply that the fourth quarter revenues would be 600 million and that we could maybe annualize that a little better as we look into its contribution to revenues next year?

[Mike Pearson:]

Yes, we are projecting 600 for the fourth quarter, the one to in the end may prove a little conservative, it depends it just start to know all the inventory to be out there. But, the business is also accelerating, the growth continues to be very strong and certainly by first quarter of next year we should be selling to full demand. So, if you incorporate maybe a slight bit of inventory still in the channel fourth quarter we don’t know that’s what we’re assuming and then you continue to model and the growth that we have experienced across the brands that should give you a pretty good feel for what this thing will look like for next year.

[Glenn Greenberg:]

Okay and one further point, how did you make such improvement on the gross margin now?

[Mike Pearson:]

In which, you mean, overall or?

[Glenn Greenberg:]

Yes, in Salix?

[Mike Pearson:]

In Salix, well a lot we’re again doing a lot of discounting going on.

[Glenn Greenberg:]

Okay.

[Mike Pearson:]

In terms of inventory and channels, so we are obviously just selling to demand.

[Glenn Greenberg:]

Okay, thank you.

[Operator:]

And your next question is from the line of David Steinberg, with Jeffries.

[David Steinberg:]

Thanks. Just wanted a follow up on the Jublia question, you mentioned that the change in the gross to nets, but specially did the number of scripts going to the specialty pharmacy improve, I think it was about 50% last time and secondly given the strength in some of your other derm products, Onexton and Luzu. What percent of those scripts are through the specialty pharmacy channels? Thanks.

[Ari Kellen:]

Yes, the adoption through multiple specialty pharmacies continues, I think last time we said Jublia was around 50% and that trend continues, for derm overall it varies by product but it’s around 40%.

[Laurie Little:]

Next question.

[Operator:]

Your next question is from the line of Alan Ridgeway with Scotia Bank.

[Alan Ridgeway:]

Hi, thanks for taking the question. Mike, you commented in your prepared remarks about the number of commercial lines for contact lenses now plan to be five or six, can you maybe just comment on what you guys are seeing in the market as far as what gives you comfort that you will be able sell at that capacity, I leave it with that? Thanks.

[Mike Pearson:]

Sure. We talked about the two platforms that are really growing. One is Biotrue daily and I think they are increasing by five or six and then the second the Ultra and there we’re increasing by, we’re going up to six. We only have currently one installed. The size of the lines are quite different, Biotrue has much lower capacity than an Ultra line. So that accounts for so many more Biotrue than Ultras. It’s probably close two to one, so it’s probably about the same level of expansion. What gives us comfort is first of all in the case of Ultra, right now running sign in the US, the other markets are clamoring for it, we made, we’re probably going to expand in the next quarter to a few more countries, but we have the whole rest of the world and we can satisfy demand in the US. Biotrue Daily again in the US for example is growing four times the growth rate of the segment and when we sort of model out what we think our final share will be and how quickly we’re growing, where I need is capacity and I think what we have is a reenergized sales forces around the world, and maybe most important for eye care professionals especially in the contact lens area, the P&L is back again and you may want to comment further.

[Ari Kellen:]

Yes, I think that as Mike said both the Biotrue as well as Ultra is demonstrating the impact of the terrific technologies that BNL has been developing that we are fortunate to have received and it really is new technology with better comfort, better oxygenation and better hydration and comfort throughout the day, and eye care practitioners in the end of the day are trying to deliver outstanding products to their patients and we are simply enabling that hence the growth in share in the U.S. for both of those platforms and again as Mike had said earlier, tremendous growth across Asia, China, Korea, Japan, and also in the world with these new technologies.

[Operator:]

And we have no further questions, I’ll turn the call back to you for closing remarks.

[Mike Pearson:]

Great. Well, thanks everyone for your questions and I guess it’s time to get back to work, we will talk to you next quarter.

[Operator:]

This does conclude today’s conference call. You may now disconnect.