Bausch Health Companies Inc.
Q3 2015 Earnings Call Transcript

Published:

  • Operator:
    Good morning. My name is Shawn, and I will be your conference operator today. At this time, I would like to welcome everyone to the Valeant Third Quarter 2015 Earnings 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. Laurie Little, Head of Investor Relations. Please go ahead.
  • Laurie Little:
    Thanks, Shawn. Good morning, everyone, and welcome to Valeant’s Third Quarter Financial Results Conference Call, where we will be discussing our-- both our financial results and other matter. 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; and Anne Whitaker, Company Group Chairman. In addition to a live webcast, the 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 non-GAAP financial measures, please refer to Slide 1. 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. And it is our policy to update or affirm 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 for our third quarter. We once again exceeded both top line and bottom line guidance and realized our fifth consecutive quarter of greater than 10% same store organic growth. This outperformance absorbed the negative foreign exchange impact of $172 million in revenues and $0.13 cash EPS, is primarily driven by the performance of our US businesses, particularly the stellar execution in both dermatology and contact lenses. Our dermatology portfolio is now performing at $1.9 billion annual run rate and our US contact lens business has grown 46% on annual basis since we closed the Bausch + Lomb acquisition in August of 2013. We also realized strong results in several key geographies outside the US, notably China which saw 23% organic growth, South Korea at 15% organic growth and Mexico with over 10% organic growth. We continue to see our Salix integration exceeding expectations following the regulatory approval for the Xifaxan IBS-D indication in May, and we recently launched both our unbranded and branded DTC campaigns. Other brands within the Salix portfolio are also showing strong growth. Finally, Salix inventory levels have been reduced to approximately 8 to 10 weeks. This quarter we also saw continued weakness in both Western Europe and Eastern Europe across all lines of our business. We are taking steps to reignite the growth in these markets in 2016. On the business development front eight deals were signed in Q3 and are closed as of today. We previously announced Amoun, Commonwealth Labs, Eyegate, Humax and Unilens on our Q2 earning call. Since that call we've signed and closed Brodalumab, Sprout and Synergetics. Based on our strong base performance and despite genericization of Targretin and Xenazine, we delivered GAAP cash flow of $737 million with 90% cash conversion. For the quarter, our total revenues were $2.8 billion, an increase of 36% over the prior year, largely driven by the exceptional strong growth in many of our US businesses which offset negative headwinds from FX. Adjusting for the negative FX of $172 million, revenue grew 44% over Q3, 2014. Cash EPS was $2.74, an increase of 30% over the prior year which includes the negative impact of $0.13 from the strengthening US dollar. Adjusted for FX, cash EPS were 36% over Q3, 2014. Our overall same store total company organic growth was 13% for the quarter. The exceptional growth of our US businesses was complimented by many of our Asian and Latin American emerging markets. Our same store sales organic growth for the entire company is 15% year-to-date well above guidance. Our overall pro forma total company organic growth including Salix and other acquisitions is 17% year-to-date. Although we stated last quarter that we will not be reporting separate B+L organic results going forward, I thought it was important to include on today's call given the softness in our US ophthalmology Rx business unit at this quarter. The negative 3% growth for ophthalmology Rx was mainly due to a supply outage of legacy Valeant's Macugen product. Our US B+L ophthalmology business was essentially flat this quarter. Overall Bausch & Lomb organic growth in Q3 was 7% in the US and 10% in Asia, and globally was 5% due to our weakness in Europe. In response to our shareholders we are now expanding our quarterly disclosure to include the Top 30 products in our portfolio. The Top 30 worldwide products represent 54% of total quarter revenue. Our Top 30 products delivered organic same stores growth of 30% for the quarter. A couple of important notes. First Jublia script at a 4 ml equivalent grew 28% sequentially from Q2, 2015 to Q3, 2015 while revenue only grew 4%. This is primarily due to an approximately $10 million reduction at wholesaler inventory due to stocking of 8 ml SKU in Q2, coupled with the shift in Jublia sales from the traditional wholesaler channels towards our specialty network where inventory is held on a consignment basis. We should see revenue growth more closely matching script growth next quarter. Second, 12 of our Top 30 products are global and therefore had depressed sales compared to prior periods due to the negative headwinds from foreign exchange. As a reminder, Glumetza will lose its patent protection of February 2016 and will fall out of the list in 2016. We are pleased with the recent DTC campaign for Xifaxan that was launched in September with unbranded ads is now up in full force with the branded marketing materials. Scripts are up 15% on a sequential quarterly basis and 25% over the prior year. Other products in sales portfolio also saw strong growth with Uceris, up 20%, Relistor script up 36% and Apriso up 7% year-over-year. Ruconest was up 29% on a sequential basis from last quarter. Inventory levels have been reduced to approximately 8 to 10 weeks and we expect to reach our target of 46 weeks by the end of the year. Moving out to Sprout. The team at Sprout has a very exciting last couple of weeks as the field forces trained and Addyi was officially launched this past weekend. We have 148 reps and 8 MSLs in the field. We are launching this in the packaged insert, and will be will be submitting our marketing materials to OPDP shortly. We are not planning on any DTC at this time. We are also excited that Cindy Whitehead has agreed to remain as CEO. Many of you have asked about the performance in our emerging markets specifically China, Russia and Brazil. China continues to do well at 23% year-over-year organic growth which we will discuss on the next slide. Our Russian business has had a difficult first three quarter of the year and was basically flat in constant dollars compared to 2015 over this timeframe. This has been compounded by the sharp drop in the Ruble versus the US Dollar. This is largely attributable to the economic slowdown of the Russian pharmaceutical market. We are cautiously optimistic looking forward as our business has recently returned to grow on a local currency basis. The Brazil and Argentina business has been our most difficult side of businesses in 2015 due to the continuing devaluation of the real and the peso. The FX outlook remains poor. Fortunately these businesses currently generate only $0.03 to $0.04 to our cash EPS on a full year basis. Moving back to China. Many of you have raised questions regarding the health of our business in China given the current -- country's current economic challenges. We continue to see very strong growth in our business in China with 23% organic growth in the quarter. We price our products to appeal to the middle class and the vast majority of our business is consumer cash pay. We have a leading market share position in contact lenses and we continue to gain share. It is interesting to note that 90% of our all products sold in China are manufactured outside of China including at our US plant in Rochester, New York and Greenville, South Carolina. Finally, we are expanding our Chinese portfolio to enter skincare and aesthetic with CeraVe and other products. This will provide another platform for future growth. Before I turn the call over to Rob, I want to provide a quick update on a number of our key milestones. We have recently received the Phase 2 data for FSD trial for rifaximin and it failed. We are currently studying the signals to determine whether or not to pursue a new program at different dosages. Our Phase 3 program IDP-118 for psoriasis is well underway. We expect efficacy and safety trials to readout by Q2 next year and would expect to file Q3, 2016. We expect to submit our NDA filing for broda in November. We also expect to begin the alcohol studies for Addyi later this quarter. Now let me turn the call over to Rob to discuss this quarter's financials.
  • Robert Rosiello:
    Thank you, Mike. Beginning on slide 12, our revenue of $2.8 billion approached the top end of our guidance despite a negative impact of approximately $30 million since the guidance we provided during our Q2 earnings call. This is primarily driven by the outperformance of our US businesses including dermatology and contact lens. Our cost of goods sold improved to 22% in the third quarter primarily due to the continued growth in dermatology as well as the acquisition of Salix and the ramp up and yield improvement in our contact lens manufacturing. This resulted in overall improved gross margins of 78%. We expect our gross margin to approach 80% in the fourth quarter driven by continued growth in our dermatology and Salix businesses, the launch of Addyi and decreased sales of Xenazine. SG&A was in line with the previous year at 24% and improved by one point from last quarter on an overall basis despite increased cost associated with her launch initiatives. In the third quarter we spent approximately $45 million in DTC advertising supporting Jublia, Onexton, Luzu and rifaximin as compared to $60 million in the second quarter. The sequential decrease is due to the seasonality of our DTC campaign and typical reduced spending in the summer months. The overall SG&A improvement was also driven by growth from Salix. R&D was $102 million in the quarter, an increase of approximately 26% relative to Q2 reflecting our continued investment in legacy Valeant program including IDP-118 for psoriasis other late stage derm programs, a range of surgical programs and continued development of new contact lens. Our GAAP cash flow this quarter was $737 million, excluding Q4, 2013 one quarter where we had an investment gain from the Allergan transaction, the third quarter represents the highest GAAP cash flow the Valeant has achieved. We also achieved our target of 90% cash conversion this quarter, a significant improvement from the second quarter. Given the recent acquisitions of Sprout and Amoun as well as historical Q4 working capital trend, we expect Q4 cash conversion to be less than Q3. Net sales from Salix were $461 million in the third quarter, a significant increase from the second quarter reflecting a progress we are making in inventory drawdown as well as the uptick from the FDA approval for IBS-D in May. We began the quarter with total channel inventories of approximately three to three and half months on hand and are now at approximately two and two and half months at the end of the quarter. We remain on track to reduce total channel inventory to one to one and half months by the end of the year. Our estimates of total channel inventories are based on actual data received from the big three wholesaler as well as estimates of remaining inventory at smaller distributors. We expect revenues attributable to Salix will be approximately $600 million in the fourth quarter and approximately $1.35 billion for 2015. We continue to take a conservative approach to our sales expectation until this business is completely normalized. In terms of balance sheet, we ended the quarter with the strong liquidity position through a combination of $1.5 billion undrawn revolver and $1.4 billion of cash on hand. Since quarter end we've closed several acquisitions and used the combination of cash and revolver to fund these transactions. We expect our revolver draw to approach zero by yearend. Our net debt to pro forma adjusted EBITDA ratio was approximately 5.3x and we remain committed to reducing that ratio to below 4x by the end of 2016. We are committed to debt paydowns in excess of mandatory amortization required by our term loans. As we stated in our press release we are increasing our 2015 guidance for the fourth quarter and the full year. Fourth quarter will now be revenues of $3.25 billion to $3.45 billion and cash EPS guidance of $4.00 to $4.20. Full year revenue guidance for 2015 will be $11 to $11.2 billion in revenue and cash EPS guidance will be $11.67 to $11.87. Full year adjusted cash flow from operation is expected to be over $3.35 billion. In April, we provided a 2016 outlook that included a $7.5 billion 2016 EBITDA expectations. We remain very comfortable with that number and expect to exceed it. While we have identified and incorporated some headwind adjustments such as continued FX erosion and new expectations for future pricing environment, we also have completed several new transactions that provide upside in addition to the continued momentum and outperformance of our base business. We expect that organic growth will be approximately 10% in Q4 and we expect double digit organic growth in 2016. We will provide our full 2016 guidance in early January.
  • Mike Pearson:
    Based on recent acquisitions and other external events, many of you have been asking if our strategy is changed. Our mission remains as same as it always has. We will always put patients and physicians first while taking our responsibility for our employees and communities we do business and equally importantly. We also know who our owners are; we listen to you and work hard for you everyday. Our focus also remains the same. We concentrated on high growth markets both therapeutically and geographically. We preferred durable product sold to concentrate specialist populations where physician education matters. We focus on products where consumer pay your commercial reimbursement is significant. And finally, we are committed to remain diversified where no one product or small set of products disproportionately impacts our earnings. What has changed is that our portfolio is shifted over time to newer and higher growth products making pricing a small part of our growth looking forward. Given the evolution of our product mix coupled with the recent events, it is likely that we will pursue fewer, if any, transactions that are focused on these price products. Now let me shift to some modifications to our strategy. First, our neuro/other portfolio which is depended on price will represent approximately 10% of our revenues in 2016 and will continue to shrink as a percentage of the company. We have and are seriously considering splitting off or selling this piece of our business. Second, due to our increasing success in internal R&D especially in the areas of dermatology, contact lens, surgical and OTC products, internal R&D will become more of a focus. Third, if our stock price remains at current levels, share repurchases will be seriously considered. My final note would be that we always believe -- we've always believe that any company's strategy must be agile and flexible in order to navigate in an ever changing world. During my 23 years at McKinsey, we found companies that were successful over long periods of time have one thing in common. They were willing to move in and out of geographic and business areas over time and they have modified to change their strategy as the environment change. We plan to be one of the companies. With the turmoil over the past few weeks from both governmental and media scrutiny and erroneous research reports, we thought it would be useful if we address your questions upfront. You can clearly see the slide, the questions on the slide so I won't read it to one. And let's move on to the answers. Valeant's price volume growth. In the 8-K we furnished a few years ago, we try to layout our various business units and the impact price has had on them. Contrary to what is reflected in the media and certain research reports, our business is not 100% pharmaceuticals. Breaking down the business into ex-US, US devices and consumer, US brand pharmaceuticals and US generics, one gets a much better picture of our business breakdown. For a 2015 year-to-date, you can see that although price did play a part in our branded pharmaceutical units' growth, which accounts for roughly 43% of revenue, revenue has grown almost 20%. The volume has grown almost 20%. And the remaining 57% of our business price does not play much of a role. In the end of the 16% same store organic growth we've realized so far across our entire portfolio this year; our price volume mixture was roughly 50
  • Operator:
    [Operator Instructions] Your first question comes from the line of Shibani Malhotra from Nomura Securities International. Your line is now open.
  • Shibani Malhotra:
    Hi. Thank you for taking my question. I guess my question is on R&D, Mike. You said that R&D is going to become more of a focus for Valeant going forward. Could you expand on that? How are you thinking of internal R&D versus your previous assertions that it's more efficient to license or kind of buy in smaller companies or products? Thank you.
  • Mike Pearson:
    Well, let me start and then I will turn it over to Ari who leads our R&D efforts. I think what we have been able to show at least to ourselves is that our variable cost approach to R&D i.e. avoiding all the big fixed cost has been a hugely productive. We’ve had a large return on our investment in dermatology, more recently in contact lenses and in surgical, and so we do think there is path forward where we can earn a very good return so how we spend the money will be different than the approach of most large pharmaceutical companies. But Ari, maybe you can talk a little bit about some of the programs and what we are doing.
  • Ari Kellen:
    Yes. The fundamental approach to R&D hasn't changed in terms of our controlling the critical points in R&D. For example trial design and so on. We continue to believe that a lot of innovation occurs outside of large pharma in small institution, academic start-ups, physicians' practices, we will continue to source program from there. But as Mike said we through several years of dermatology and [indiscernible] believe we have the capability needed to successfully launch products and our pipeline of Phase 2 and 3 products in dermatology is filling. And those obviously will attract funding and we will continue to create opportunities like IDP-118, some of our novel acne compounds, other compounds in psoriasis and in the future atopic dermatitis. Eye care we now had for two years and we are developing greater competency in the area. Mike alluded earlier to programs that are expanding in contact lens, in surgical and consumer parts of eye care and as we build the competency in house we understand the program, the risk reward profile and we will continue to fund those other time, we expect to develop some of the competencies in GI potentially in areas of oncology. So we will continue to be very prudent with investment. But what we are saying is we are better able now to judge the risk return of late stage de-risked assets.
  • Shibani Malhotra:
    Okay. How should we think about it from a financial perspective? And if you can't answer I'll just step out of the queue.
  • Mike Pearson:
    I am sure, well, I guess R&D exceeds the $100 million for the first time, since I have been here in the quarter. And we haven't put together a full 2016 budget but it's probably going to be between $400 and $500 is my guess for next year.
  • Rob Rosiello:
    $400 million, $500 million
  • Mike Pearson:
    Yes, $400 million. $400 million or $500 million, that's really good.
  • Operator:
    Your next question comes from Gregg Gilbert from Deutsche Bank. Your line is now open.
  • Gregg Gilbert:
    Yes, thanks. My question is not surprisingly about pricing. I wanted to ask you about this new disclosure you made today that you see a new pricing environment going forward. Can you talk about what's behind that and how does that specifically affect, how you model 2016 for example you are talking about the EBITDA floor still being you are very confident in and is that because you are now all of a sudden more confident in volume growth or other factors. Can you talk to that point with some specificity? Thanks.
  • Mike Pearson:
    Sure. Well, just have to read the newspaper that I think it is clear that the pharmaceutical industry has been aggressively sort of attacked for past pricing actions. And that's not just Valeant but I think it is all companies. I do think given that environment the pricing, the pharmaceutical companies will take in the future will be more modest. And that we build that into our forecast for next year. I think we assume no more than 10% realized price for any of our products. But when we made that change to our 2016 but as Rob pointed out and then add the new businesses we’re in, and the outperformance from a growth standpoint, that's what -- it is very comfortable with the 2016, [floor] [ph] beating the 7.5 EBITDA. So those are our base assumptions and our plans. And for 2016 and we will provide specific guidance early in January, January of next year.
  • Operator:
    Your next question comes from Tim Chiang from BTIG. Your line is now open.
  • Tim Chiang:
    Hi, thanks. Mike, I know you talked about de-leveraging. Could you provide a little bit more granularity in terms of how much debt you plan to pay down in 2016? Certainly you generated a lot of cash flow.
  • Mike Pearson:
    Sure. Well, we have mandatory drawdown of about $562 million, so obviously we’ll pay that next year. But we've also made a commitment. We raised the debt during the Salix transaction. We made a commitment to our bond holders and our bank that we would go beyond the mandatory. We haven't precisely come up with the exact number but we have a number of notes that are now callable. And we will generate a lot of cash next year. And so I suspect that in the first half of next year, we will make more than the mandatory reductions in debt.
  • Tim Chiang:
    And Mike just one follow up. You mentioned that you are considering selling the legacy business at the company. Any thoughts on the timing of such a sale?
  • Mike Pearson:
    So we have been debating with our Board for last few years. It's always been a plan of ours to increase the sort of quality of the assets that we own and I think the first major shift was when we bought B+L which is a truly durable great business that is doing really well for us. And then with Salix and another set of products that are quite durable and with a lot of organic growth. So we've been debating but I think given again everything that's happening, everything that's happened and what's happened to our multiple I think that there is a reasonable chance that something happens over the next 12 months or so.
  • Tim Chiang:
    And maybe just one last question. You did mention stock buybacks. I mean are you in a position to do that today or in the near future?
  • Mike Pearson:
    We are in close window today. So but we will have to take a look at our cash, again we want to -- we made a commitment to reduce our debt and it obviously depends on where our share price is, but I think that statement was as we dig through the rest of this year and 2016 [indiscernible], that's the timeframe.
  • Operator:
    Your next question comes from Louise Chen from Guggenheim. Your line is now open.
  • Louise Chen:
    Hi, thanks for taking my question. So my question here is if you don't have the benefit of price increases can you still meet or beat your 2016 EBITDA guidance? I know you addressed some of those earlier. And then secondly just on the 80% gross margin forecast, how much of that is based on price increase and how much of that is manufacturing efficiency scale and volume gains? Thank you.
  • Mike Pearson:
    Our reduction in COGS has to do with efficiency and mix, not on price. So efficiencies and primarily in the contact lens where we’re just gearing up ULTRA and then BioTrue volumes continue to go up significantly that the yields are improving. And our guys in manufacturing are just doing a great job there. From a mix standpoint, sales is becoming a larger piece of our portfolio every quarter and the COGS there are lower than in the legacy business and we will begin to see the impact - we will see the impact there. What's really going to dramatically going forward makes us improve our COGS will be the fact that Xenazine has gone generic and I think we were only realizing, because of the agreement with our partner, Lundbeck, we were only realizing like 50% gross margins. In terms of our EBITDA for 2016, I think we are only going to say today that we feel very comfortable with the $7.5 billion and we expect our guidance next year will exceed that.
  • Operator:
    Your next question comes from the line of Alex Arfaei from BMO Capital Markets.
  • Alex Arfaei:
    Question on the Salix revenue you recognized $460 million versus guidance of $300 million. How much of that difference was discretionary revenue recognition or does it reflect changes in demand since you provided that guidance? And also could you update us on the status of expected cost synergies from Salix? Thank you.
  • Mike Pearson:
    Could you explain to me why it is discretionary revenue?
  • Alex Arfaei:
    Sure. So just trying to figure out I mean you said it was going to about $300 million, you are recognizing $460 million, so I am just trying to figure out what changed since you provided that guidance.
  • Mike Pearson:
    I think a couple of things. One is, we don't know exactly -- we know what the inventory is with the big three, we don't know how much inventory there is on -- in some of the other distributors because there were no agreement in place to tell us, but we are doing is providing any discounts or any incentives for people to buy Salix products. Also the inventory was not sort of -- it wasn't that everyone had like five months of extra inventory of everything. It really vary by product, so there might be a years with one product and four months of another product. So that's why it is taking time. We can't just taking time to reduce those inventories. But I think the sales of - the fact the sales have increased again there is no sales in -- I think it is also growth, the products continue to grow above what we have forecasted in our deal model. And as Rob mentioned we are going to continue to be try to be conservative. We don't want to get ahead of ourselves. And integration cost, the integration cost we have exceeded --
  • Robert Rosiello:
    $550 million was the original target, we've exceeded I think we reported that in the last quarter. Just one another thing on the inventory, we mentioned this on the last call, again we know factually and in detail what are the big three, we don't know what was out there. And I think as we got under it we find out there was more out there and more wholesalers and we are frankly just being conservative.
  • Operator:
    Your next question comes from Marc Goodman from UBS. Your line is now open.
  • Marc Goodman:
    Mike, I'm curious about this in-licensing of brodalumab. This is a different type of R&D risk than you've done before. Why are you doing this deal? Will there be more deals like it? And then if you're going to divest neuro and those types of products, in the past you've bought these types of products that have high NPV but obviously are anchors to the growth of the Company, but obviously create a lot of value. You described it as -- if we were a private company wouldn't you want me to do this because this is adding a lot of value. So, if you're divesting this portfolio, does that mean you are no longer going to pursue that type of strategy? Thanks.
  • Mike Pearson:
    Let me answer the second one first and then let Ari talked about product. We didn't say we will sell, we said it we will sell it or spin it off. And if we spend it off and shareholder would have the opportunity to sort of remain shareholder of that type of company that certainly could create value over time. But given the current environment, I think that probably it doesn't make sense for us to hold on to it, especially given sort of what's happen to our multiple since with result with everything got there in the press. So hopefully we will figure out a way to do it, the shareholders to continue to anticipate in an entity that is maybe not growth curve or could be a big dividend curve, all right.
  • Marc Goodman:
    Hold on one second. Does that mean you wouldn't do a Targretin type of product anymore?
  • Mike Pearson:
    As we mentioned it is unlikely -- it is unlikely we will do it a Targretin type of deal in the foreseeable future.
  • Marc Goodman:
    Okay.
  • Ari Kellen:
    Yes. On the question of brodalumab, I think this is emblematic as Valeant's mission. First of all, moderate to severe psoriasis is debilitating disease, that's an area of significant unmet need and consistent with our mission we are focused on this area. We have IDP-118, we understand the condition the disease and the debilitating illness. Second, our focus on doctors and a big reason we went after this compound was that many of our physicians and KOLs recommended that we do this. They wanted Valeant to pick up this drug and bring it to the market for the sake of the many patients who will benefit. And we listen to our doctors and move forward. Finally, we believe that this will generate good returns for shareholders. We are very comfortable with the safety and efficacy profile. We have a terrific team in R&D and in regulatory we are going to be in discussion with the FDA. We expect to submit in November as Mike has mentioned earlier and we have great team of dermatology marketing and sales people and MSLs who we believe will do a terrific job in the market for our shareholders.
  • Mike Pearson:
    Marc, I just want to return to your question about the types of deals that we do. I will like to note that of approximately 150 deals that we've done since only a third count on one hand the number of deals were we have acquired sort of mispriced assets as part of these facility. Next question?
  • Operator:
    Your next question comes from the line of Irina Koffler from Mizuho. Your line is now open.
  • Irina Koffler:
    Hi, thanks for taking the question. I wanted to see through this pricing controversy. Do you have any dialogue with the pharma lobby or any other industry groups and whether or not there has been any feedback or direction that way? Thanks.
  • Mike Pearson:
    I specially mentioned on the call unfortunately we are not able to expand further on any dealings with the government.
  • Operator:
    Your next question comes from David Amsellem from Piper Jaffary. Your line is now open.
  • David Amsellem:
    Thanks. What's the level of confidence that you'll be able to find a taker for the neuro business, given the environment? And are you essentially conceding that that business is radioactive? And then in terms of R&D, do you have a sense going forward, or maybe give us a sense of R&D as a percentage of sales or how you're thinking about it in terms of either percentage basis or in absolute terms given that it looks like you're recalibrating your thinking as it relates to R&D. Thanks.
  • Mike Pearson:
    Yes, well, so David I think Neuro and other has very good catch first and again we could think of a spin, we could think of taking a private, we think of selling it. So there is many ways of creating value. I think a number of our shareholders have already mentioned to me that they like to be part of this if we were ever to consider doing things like this. They like to have an ownership stake in this business on a going forward basis. But obviously we can't come out with approach to create value for our current shareholders. Then we won't be able to do dispose off it. It is too premature to think about our R&D spend as a percentage of sales but it would certainly continue to be well below those that of most of our competitor to do R&D in the traditional way, there is I think what we have proven to our self is so our non traditional R&D approach is having productive or gain very strong returns on investment. So anywhere that we are earning a disproportion return we are happy to deploying our capital which is what we will be doing. Next question?
  • Operator:
    Your next question comes from the line of Lennox Gibbs with TD Securities. Your line is now open.
  • Lennox Gibbs:
    Good morning, thanks. The Senate subcommittee hearings that Howard Schiller presented to back in late July. What, if any, were your specific concerns coming out of those sessions? What were the key take-aways?
  • Mike Pearson:
    Again, Lennox, I am sorry. We just can't comment on anything that has to do with the government on this call.
  • Operator:
    Your next question comes from Gary Nachman from Goldman Sachs. Your line is open.
  • Gary Nachman:
    Hi, Mike. Could you elaborate on what kind of pricing discussions you are having with some of the hospitals regarding Isuprel and Nitropress? Would you reconsider the current pricing for any of your other products, maybe taking it down in certain cases? And the 15% pricing contribution in US branded, where did most of that come from, new versus legacy products? Thanks.
  • Mike Pearson:
    Maybe get in reverse, most of the pricing came from Neuro and other as we showed. We showed you to the top derm products, which represent a big portion of our sales. We showed you the top ophthalmology so it is primarily in almost solely from the neuro and other segment of our business. In terms of the hospitals, we reached out to the number of hospital more has been done. And what we are discussing is right now we do not use GPOS, we just recently got into the hospital business. So we don't use GPOS so we are talking about directly contracting with the hospitals and if we can do that we can avoid say a proxy distributors which will save us money and we can pass along those savings. And what we are going to try to do is see if we can have individual contracts across all of our products which we think in the end could benefit us. And in terms of taking prices up and down, we've always reviewed our portfolio. We have taken price down this year on some products and price up so we will continue to do that as we move forward.
  • Operator:
    Your next question comes from the line of David Risinger from Morgan Stanley. Your line is now open.
  • David Risinger:
    Thanks very much. Mike, could you just restate or provide a little bit more detail on your 2016 outlook with respect to price, so what your pricing expectations are for the US prescription drug business overall? And then I think you made a comment that you're not going to be raising price any more than 10%. I didn't know if that was for US Rx or global Rx, so any additional color you could provide would be great.
  • Mike Pearson:
    Great. Yes, so for our budget for 2016, I was answering a question about what assumptions we've made that allow us to -- allowed us to reaffirm some 0.5 EBITDA and that budget we did not assume more than a 10% realized price, that's realized price on any of products. So that's how we got to the budget. We are not saying we are never going to take a price increase of more than 10% on our products. As you have seen sometimes you need to take a little bit more in order to actually realize on price increases. But certainly the pricing assumptions we made for a next year on our most recent budget are lower than what we had in our previous budget. But we also have higher growth rates for some of our core businesses because of the performance we are seeing and the growth we are getting. And we have also had a number of new businesses like Sprout, Amoun. And we have a number of new product launches that we believe next year Vesneo and probably been the most significant but also some derm launches and Luminesse. So there are a number of products which will also have on the growth side.
  • David Risinger:
    That's great. And then just separately, you discussed alternate fulfillment, could you just put that in perspective, maybe what percentage of the US brand Rx business alternate fulfillment is and how much of that is Philidor?
  • Mike Pearson:
    Sure. It's really primarily our dermatology brands and then some of our specialty products like Ruconest, Arestin and some of the products that some of the other orphan drugs. For certain products it is quite larger, for Jublia it is probably 50%, for a lot of other dermatology it is much, much less. David, I am sorry I can't-- it's significant but I don't know the precise number but it is certainly of our US portfolio, so 10%, 20% maybe, maybe Tanya's nodding probably closer to 10%.
  • Operator:
    Your next question comes from Annabel Samimy from Stifel. Your line is now open.
  • Annabel Samimy:
    Hi. Thanks for taking my question. You had mentioned that rifaximin SSD program failed. Can you talk about with R&D, where you're going to be continuing to focus the GI R&D, which programs are still ongoing? And how are you approaching GI R&D? Is it any different than what you're doing in derm or the other areas? Thanks.
  • Ari Kellen:
    Well, it is different because it is recent acquisition and we don't want to get too far in front of skis, so we are going to rule number one is as we take the programs we see them through the completion we see what we have. And we inherit them so the SSD program failed doesn't meant we won't pursue a program like that. We are looking with our R&D team or analyzing the signals as Mike said earlier, we are going to see if there might be a possibility to create a program with different dosages. And as we continue to bode our expertise in GI we will find other programs. There are a couple of legacy studies program that are continuing such as the prophylaxis for HE and Ruconest and so on.
  • Operator:
    Your next question comes from Chris Schott from JPMorgan. Your line is now open.
  • Chris Schott:
    Great. Thanks for the question. Just had two here. Maybe just a bigger picture one on the broader M&A environment. Your business increasingly seems focused on durable growth. Could you talk about how large of an opportunity set and how competitive of an environment you're seeing for these types of assets? As we listen to these calls, it seems like many of your competitors are looking to make a similar pivot in their business towards more growth, towards more durable assets. I'm just trying to understand a little bit as you focus what that means. The second question was on emerging market growth. It slowed in several regions. Has the longer-term outlook changed for these markets? I think you mentioned some efforts to reaccelerate growth. Can you maybe just elaborate a little more on that portion of it, specifically on the Latin American business and Russia as well? Thanks so much.
  • Mike Pearson:
    Sure, Chris. Chris, in terms of competition we are seeing in the M&A area. Well, honestly we are still not seeing much in excess to work we pursue it, I have to remember that I think our strategy both in terms of the emerging market piece of it as well as for contact lens, for surgical devices, for ophthalmology, most many of these companies I think you are probably too are in those areas so they won't be competing there. Most of them I don't think are looking at derm marks assets and so probably the area that would probably most competitive is ophthalmology Rx. And prices for those assets are quite high. So I would say that's probably the area where it is going to be most difficult and there is not a ton of pipeline available unlike dermatology and GI. In terms of the emerging markets, we are very, very pleased with Asia. And our team is doing an outstanding job there. I think Latin America, our team is doing great down there, in Mexico despite tough market they are doing extremely well. We just got into Columbia which we think is a good market. And our teams down in Argentina, Brazil are doing a good job which is a tough, tough market. And it's just -- it is almost very small business. We had our problems have recently has been in Europe and that's what I was talking about in Asia we accelerate growth. We have a number of products across many of these countries, new products will be introducing this year. So in a sense we've replenished our pipeline which will help a lot. This year we did have as many product launches and which is my fault, I think we weren't as focused on the pipeline as we should have been in Europe. And then also which is tough environment. We know what's happening in Russia, the price of oil and Russia I think will come back strongly I think with the closing of Amoun were a significant player in the Middle East where the market continues to grow quite nicely. And in Poland, we made a switch in terms of our general manager. That's always been an important strong market for us and our performance there has not been the strong recently. So we made a change in management there which I think will help us well. Next question?
  • Operator:
    Your next question comes from Andrew Finkelstein from Susquehanna. Your line is now open.
  • Andrew Finkelstein:
    Thanks very much for taking the question. You're talking a bit about the emerging markets and the business now is much more heavily weighted to the US than it has been in the past. So, as you look at business development in views of the type of durable assets you want as well as the focus you've always had on where disproportionate returns can be found, how do you think about what the balance of the business should look like as you look out over the medium term?
  • Mike Pearson:
    Well, it is an excellent point that emerging markets in ex-US has become a less large part of our business but it is really hasn't been anything we've done. It's really been the US dollar. Its effect just -- it's third year in a row that's really, really so all companies, all companies are I think seen that piece of their business continue to shrink. I think that if we thought that the US dollar will only continue to shrink then we would not put any capital to work outside of the US but we don't believe that is not just sustainable for the world. So we will continue to look both in the US and outside the US for opportunities. There were some markets which and I mentioned earlier in the call markets like Argentina and Brazil where I think the outlook for their currencies is not great until they work through their issues, so those are markets that we probably want to deploy capital. And someone like the Middle East with the high growth rate and if you look at the population or demographics, you are going to do in terms of healthcare, and if you look at the pricing of drugs which I think in Egypt, the average 30 pack is like $0.77, there I do think economics will over the long term are going to favor.
  • Operator:
    Your next question comes from the line of Douglas Tsao from Barclays. Your line is now open.
  • Douglas Tsao:
    Hi. Good morning. Thanks for taking the questions. Mike, when we step back and think about business development, how are you viewing the landscape today, especially given the dislocation that we've seen in the capital markets for a lot of spec pharma and biotech names? Has that increased your opportunity set or are things looking more attractive right now?
  • Mike Pearson:
    Well certainly lower prices if you believe in us the company has good fundamentals, it certainly makes them more attractive. I think on the other hand we've been hit more than most if not anyone so actually you've seen our equity is no longer an option at all for us, so I think we will continue to look for cash deals. And but again I do want to reemphasize that our commitment to reducing our leverage is first and foremost and so we will make sure we do get under 4x but that's still these lot of cash to meet or do deals or deploy. But I don't think there is any acquisition right now that either return or buying back one Valeant share. So that will also be part of the consideration.
  • Operator:
    Your next question comes from Sumant Kulkarni from Bank of America, Merrill Lynch. Your line is now open.
  • Sumant Kulkarni:
    Good morning. Thanks for taking my question. Mike, this one's for you. With the current asset base that you have, how should we conceptually think about longer term top- and bottom-line growth on an organic basis, that's assuming Valeant doesn't have to do or want to do any more acquisitions at all?
  • Mike Pearson:
    Sure, right. I think that outside the US again I think most of our emerging markets are going to -- the markets are just going to grow in demographics and I do -- we are assuming that at some point the US dollar weakens again so I think those will be strong growth drivers for many, many years ahead. I think the countries like Western Europe, Canada and Australia are the developed markets we are assuming sort of low single digit growth over the longer term, those business compared to more pharmaceutical companies are disproportionately smaller for us and that's not by accident. If I look in the US, again in dermatology I think given our prowess in terms of development, the pipeline that we have we would continue to expect strong growth and may not always be double digit but certainly high single digit. But for the foreseeable future double digit I think in terms of ophthalmology, contact lens, our only constraint to actually gaining share right now is manufacturing capacity. Unfortunately it takes time to get that manufacturing capacity on board. I guess the silver lining is it means that we should be growing in contact lens just bringing out manufacturing and some new products that we have for the next five years plus not only in the US but around the world. So I think that piece of the business has some great growth prospect for a very long time. And if I think surgical the same thing. We still have small shares, we have been gaining share. The cataract surgery market has flat; it is actually strong this year in this country. There are lots speculations why-- speculations why including the recent changes to healthcare reimbursement through the government programs where people have to pay higher piece of cash. So we can only delay cataract surgery for like 9 to 12 months and then after that people needed -- they can't drive any more or whatever. So we do expect the organic growth for the business to flip around, and if you look over the long term that should grow 5% a year. So our job is to just continue to take share and again we have a number of program, products in our pipeline and I think that B+L doing very well in surgical area. And then so we feel good about that. I think Salix seem with the products we have, we have strong growth prospect for five plus years and as already said we will be working to bring new products to market. And ophthalmology Rx, again assuming we get approvals for products like Vesneo and Luminesse, and that should provide some growth drivers but we need to strengthen that pipeline as well. So long way of saying that I think we feel quite good about our growth prospect for the next four five years even if we were to do no more acquisition, but I think the case of us doing no more acquisition is highly unlikely one.
  • Operator:
    Your next question comes from the line of Umer Raffat from Evercore ISI. Your line is now open.
  • Umer Raffat:
    Hi. Thanks for taking my questions. I have a few if I may. First, in 3Q 2015 -- or actually let's do it on a year-to-date basis -- for the year- to-date, US pharma business is up 24% in price, 17% in volume. If you take out the neuro/other, what does that look like for price to volume? That's first. Secondly, what do gross margins for the Company look like if neuro/other were to be divested? Number three, so there's a slide that talks about growth to net disclosures. I really appreciate that. One of the products on there is Atralin, which took a 61% gross price increase but less than 1% net increase. So, my question is why even does that increase? Just want to understand how you think about that. And then, finally, Nitropress was $35 million this quarter versus $60 million last quarter or the quarter before. So I just want to understand the trend there. Thank you.
  • Mike Pearson:
    I am sorry the first question, Umer. I got all, 24%, 17%, what would have been without neuro, second one, what's -- you are asking about gross margins or --
  • Umer Raffat:
    Yes. Gross margin for the company
  • Mike Pearson:
    Okay. So let's go in reverse. Nitropress I think it has in first quarter when we had that large number and I think at that point we were clearly -- try to be clear on the call that, that was disproportionate quarter because the inventories were basically deflated. And in the market so it represented more than quarter's worth of sales. That being said the product is declining. But it is not declining at the rate if you take the first quarter. Atralin, 60%, honestly those volume a mistake and I think we've talked to our team there. I think so we will not do that again to make no sense as you point out Umer so that one is on us. In terms of neuro gross margins, actually they improve, if we didn't have neuro they were improved, number of those products are partnered where we pay high royalties like Xenazine, so in total the gross margins in neuro are that good. So that actually helps and I don't have a calculation in terms of -- but I think terms of the price in derm and ophthalmology is probably 5%. And so it's all really neuro and other that's the big one. So it's probably --and all the growth and volume, if we didn't neuro and other, our volume would certainly be above 20%. So with that neuro and other we probably have 20 -- we would have at least 20% volume and then we probably have about 5% price which would be growing at least 25%. And probably little bit more.
  • Operator:
    Your next question comes from the line of Doug Miehm from RBC Capital Markets. Your line is now open.
  • Doug Miehm:
    Thank you. Couple questions as well. Number one, with respect to patient access and foundations, maybe you could walk us through how many foundations you fund. And of those foundations what proportion of their annual operating budget would you provide to them? The second one just has to do with, if you were to split out the US neuro business, can you give us a sense of what EPS contribution or EBITDA contribution that business would have? And I'll leave it there.
  • Laurie Little:
    Hey guys, why don't you just concentrate just a couple right now. We are trying to get through everybody so why don't we answer the -
  • Mike Pearson:
    Yes, pick your two favorite.
  • Douglas Miehm:
    Just the foundations, just elaborate on that.
  • Mike Pearson:
    Okay. So it is -- I don't have the price number but it's like four or five and so its small number. We make sure as we mentioned that they have other companies are also contributing or other organizations, so these are also contributing, we do not want to be the only one to contribute. Again, we just given the money and they do what they want to with that money. And I don't have -- I don't want to give you a price figure in terms of what percent of our funding, I don't have that and I don't want to guess. Next question?
  • Operator:
    Your next question comes from the Gregg Gilbert from Deutsche Bank. Your line is now open.
  • Gregg Gilbert:
    Yes, thanks. I had a quick comment and then a question. I just wanted to make the point that on slide 28 there's some important context missing in the footnotes, as you compare apples to oranges on the left versus the right. So, wanted to make that point. But my question is about access to capital. And perhaps you could quantify the cost of the access you'd be accessing in this environment. Or is that not a relevant question in that you don't expect to access the market in the short term?
  • Mike Pearson:
    Well, I think in our part if we are going to reduce debt we don't want to increase debt so I don't-- I think we have access to our revolver which will go up and down but we don't plan on issuing debt. If we have to retire some over time than but that's not in the short term. And so I think we are fortunate because the environment is wonderful today that for the next -- basically the next five quarters we are looking to reduce debt not take on any more debt. And Gregg, I am sorry some of the footnotes were not correct. We will correct those. We will talk to you, we will correct them and we will put it up on our website.
  • Operator:
    Your next question comes from the line of Alan Ridgeway from Scotiabank. Your line is now open.
  • Alan Ridgeway:
    Hi, good morning. Just wondering if you could provide an update on contact lens business and the ULTRA manufacturing, and how many lines are online and what the outlook there is. Thanks.
  • Ari Kellen:
    Yes. So we have line one operating already producing spherical ultras and line two we expect to have up and running probably in the April time frame. Now line two is going to produce our toric lens, line one will product a combination of spherical and multi focal and as we've said on previous calls, we've got line 3 and 4 which we expect to be up and running sometime in the second half of next year.
  • Operator:
    Your next question comes from the line of Jason Gerberry from Leerink Partners. Your line is now open.
  • Jason Gerberry:
    Hi. Good morning. Thanks for taking my question. Just a quick question for Mike. Just kind of curious as you think about divesting the neuro business, your thoughts on ability to fetch a tax inversion premium. I know that a number of mid-cap spec pharma players are looking for CNS assets and also looking to tax invert. So, curious your thoughts on the legislative landscape there and if those days are over or if you think that that may be an optimal way to maximize value for that part of the business. Thanks.
  • Mike Pearson:
    I think, I don't think the days are entirely over. I think in mergers of equals I do think that it's still quite possible. And it's an interesting concept that we have thought about of spinning it off and then eventually I think it would be two year timeframe which it could then merge with some other entity. So it's -- again we are just trying to sort through options and bringing what will maximize value for our shareholders but it is an interesting idea.
  • Operator:
    The last question comes from Shibani Malhotra from Nomura Securities International. Your line is now open.
  • Shibani Malhotra:
    Thanks for taking the follow-up. Mike, on your commentary regarding pricing and the change in environment, et cetera, we understand the press and the media has gone after Valeant for some of the price increases you've taken. But in the larger scheme of things, by talking about not doing such deals anymore, et cetera, aren't you just validating the concerns the media has? Can you talk a bit about what was happening in some of these markets where you took the price increases and what would have happened if you didn't buy those assets? We could have seen products just not being manufactured anymore.
  • Mike Pearson:
    Yes. I think that we are pragmatic and in the end we rather focus our time on growing our business and that's what we enjoy doing the most. Again in terms of our acquisitions, as I mentioned earlier only a very few of them were once where we thought that assets were mispriced right. Where they actually were not being priced at the value they deliver to the healthcare system. And I agree with you Shibani if people are not able to price products, it is not good for long term market because then you will not get more competitors in. It's interesting a lot of our price increases that we took were on products where generics are available. And over 60% of our neuro product, so other products, generic equivalents are available and if doctors want to think those generics of the same quality as the branded products they are going to write those. So I think if there is generics on the market I don't know why there should be any new restriction on prices. So I think I agree with your question. I think the prices that we took, they were mispriced assets were appropriate. But the field is very large and we just be pragmatic and want to focus on areas of the business which is going to create a lot of media stir because the intention moves away from I think the strong volume organic growth that we are getting in places like dermatology, ophthalmology, Salix, contact lens, our OTC business which is growing 8% and the focus is moves away from it. So I agree with your point but we are just being pragmatic.
  • Mike Pearson:
    All right. I think that's all the questions. We appreciate the large attendance on this call. And we will look forward to talking to you next quarter.
  • Operator:
    This concludes today's conference. You may now disconnect.