Arthur J. Shannon - Valeant Pharmaceuticals International, Inc.

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

Paul S. Herendeen - Valeant Pharmaceuticals International, Inc.

Umer Raffat - Evercore ISI Gregg Gilbert - Deutsche Bank Securities, Inc. Louise Chen - Cantor Fitzgerald Securities David A.

Amsellem - Piper Jaffray & Co. David R.

Risinger - Morgan Stanley & Co. LLC

Thank you, Chris, and good morning, everyone, and welcome to Valeant Pharmaceuticals third quarter 2017 financial results conference call. Participating on today's call are Chairman and Chief Executive Officer, Joe Papa; and Chief Financial Officer, Paul Herendeen.

In addition to this live webcast, a copy of today's slide presentation and replay of this conference call will be available on our website under the Investor Relations section. Before we begin, we would like to remind you that our presentation today contains forward-looking information.

We would like to – we would ask you to take a moment to read through the forward-looking statement legend at the beginning of our presentation, as it contains important information. The presentation contains non-GAAP financial measures.

For more information about these measures, please refer to slide 2 of the presentation. Non-GAAP reconciliations can be found in the appendix to the presentation posted on our website.

Finally, the financial guidance in this presentation is effective as of today only. It is our policy to generally not update guidance until the following quarter and not to update or affirm guidance other than through broadly disseminated public disclosure.

With that, it's my pleasure to turn the call over to Joe.

Thank you, Art. Before we jump into the quarter, let me first review the topics for today's call.

I'll start with the progress since our last earnings call. I'll then turn the call over to Paul – our CFO, Paul Herendeen, to review our third quarter financial results in detail and go through the update to our 2017 guidance.

Then I'll briefly cover some of the business and pipeline highlights. Starting with slide 5.

This is the checklist we use to measure our progress against the goals for the turnaround. As I've said before, transforming Valeant will not happen overnight.

It will take a multi-year process that requires the hard work of thousands of people taking incremental steps to build the right foundation for the company's future success. Since I joined Valeant 18 months ago, we focused on addressing the key action steps, including new leadership, a renewed focus on quality and innovation, and creating a culture that is aligned with the people who use our healthcare products to improve their lives.

While there is more work to do to complete the turnaround, to be clear, Valeant today is a stronger company than it was a year ago. We've recruited a new management team, introduced new reportable business segments, and stabilized the company.

Now as we're nearing the middle of the turnaround phase, we have taken actions to strengthen our balance sheet, simplify our business, and allocate resources efficiently. 21,000 employees at Valeant are focused on the successful turnaround of Valeant.

In fact, every time an analyst criticizes our company, it further unites our Valeant team. How do I know?

We recently completed a global employee survey. The results are outstanding.

82% of the respondents consider Valeant to be on the right track for growth, an increase from last year. Additionally, 92% of employees would recommend Valeant as a great place to work, which is up 12 percentage points from last year and significantly above the normal for this specific survey question.

These endorsements of our business direction and culture, along with our strong third quarter performance, demonstrates our continued progress in the turnaround of Valeant. Over to slide 6, a quick summary of the quarter.

It was a great quarter with revenues above expectations, with EBITDA above expectation, and with adjusted net income above expectation. This allows us to maintain EBITDA guidance, notwithstanding the completion of additional asset sales.

In terms of execution, once again, our two largest businesses are doing great and are now showing solid organic growth of 6% due to better resource allocation and additional investments. Our largest segment, Bausch + Lomb/International, which represents approximately 57% of our revenues in the quarter, delivered another quarter of solid growth.

The business, which is flat to declining a year ago, grew 6% organically in the third quarter as compared to 3Q 2016. This is the third consecutive quarter of 6% organic revenue growth.

Salix, the largest part of the Branded Rx segment, representing about 20% of the company's revenue, also generated organic revenue of 6%, largely due to the uptake of XIFAXAN that increased revenue growth by 5% and the launch of RELISTOR tablets, which drove prescription growth by 61%. Moving now on to our product pipeline.

We had another active quarter. Last week, the FDA improved VYZULTA, which is great news for patients with open-angle glaucoma.

Our team is busy preparing for the commercial launch. And we expect the product be available in the fourth quarter of 2017.

Also we recently received a June 18, 2018, PDUFA date for IDP-118, a topical lotion for the treatment of plaque psoriasis that we believe has the potential to be a game changer. I'll talk more about IDP later.

Our team introduced Biotrue ONEday for Astigmatism daily disposable contact lenses in 20 countries in Europe. And the Thermage [FLX] System received clearance from the FDA to noninvasively smooth skin on the face, eyes, and body.

There are enormous opportunities for B+L in Asia, where our lens care portfolio has a leading market share and is growing. In September I visited with the team who launched AQUALOX contact lenses in Japan.

They are doing an outstanding job with this launch. And our new ULTRA monthly contact lenses are currently under review in China.

On to slide 7. Let's turn to the progress we have made in our efforts to reduce debt and divest noncore assets.

First, we are pleased to report that we've reduced total debt by approximately $6 billion since the end of the first quarter of 2016. In addition, we have exceeded our commitment to pay down $5 billion of debt from divestiture proceeds and free cash flow by February 2018.

And we've delivered on that commitment earlier than we previously had stated. Moving on to asset sales.

Since the beginning of 2016, we have announced approximately $3.8 billion in total asset sales. In addition, we announced yesterday that we are divesting Sprout Pharmaceuticals.

While we believe ADDYI may represent an opportunity, women's health does not fit within our core business portfolio, which are eye health, GI, and dermatology. By proactively managing our working capital, we have continued to provide positive results in the quarter and year-to-date performance.

From September 30, 2016, to September 30, 2017, we've reduced working capital days by approximately 45 days and inventory on hand by approximately 30 days. We've taken a number of actions that have resulted in greater financial flexibility that can create more opportunities going forward.

Thanks to the hard work of Paul Herendeen, Linda LaGorga, and their teams, we have no debt maturities until 2020 and no mandatory amortization requirements now or in the future. Turning now to slide 8.

For the past several quarters, we've been dealing with three legacy challenges, the Ortho Dermatologics business, supply chain issues, and legacy legal cases. We've made measurable progress in addressing each of these areas, and we have a lot of positive developments to share today.

First, we continue to make progress stabilizing the Dermatology business and advancing the pipeline. The launch of SILIQ in third quarter introduced the lowest-priced injectable biologic for moderate-to-severe plaque psoriasis in the United States.

Just a few months post launch, 75% of dispensed prescriptions are covered by managed care. And we recently presented two-year findings, demonstrating the impressive long-term efficacy profile of SILIQ.

Dermatology pricing is continuing to stabilize. Finally, advancing innovative new products through our pipeline will be the key growth driver of the Dermatology business.

In addition to the filing acceptance for IDP-118, we submitted IDP-121 for acne to the FDA and are preparing to submit IDP-122, another psoriasis product, by the end of the year. Turning now to our manufacturing facilities.

Our focus on and investment in supply chain and quality leadership has made a huge difference. A year ago, Rochester, New York, and the Bridgewater, New Jersey, facilities were operating with warning letters related to quality control manufacturing practices.

Now we resolved the two warning letters. And the FDA has upgraded our Tampa, Florida, facility from an OAI to VAI, or Voluntary Action Indicated, status.

We've also made progress in simplifying our supply chain by reducing the number of manufacturing sites by 25% and discontinuing approximately 1,300 SKUs. Finally, we've been able to deal with some of the legacy legal cases the company has been facing since before I joined in May 2016.

We've achieved dismissals and/or positive outcomes in 21 litigations and investigations relating to historical matters since the end of Q2, including the dismissal of action related to a September 2015 DOG (sic) [DOJ] (9:46) investigation regarding Bausch + Lomb and a settlement and dismissal of the Depomed/GLUMETZA royalty dispute relating to the royalty period starting in October 2013 through December 2015. Christina Ackermann and her legal team have done a great job resolving these matters.

On slide 9, we've presented Q3 revenue and adjusted EBITA for each of the business segments. I want to call out the fact that Bausch + Lomb/International and Salix, which together represent 77% of our revenue this quarter, delivered strong top line performance for the second quarter in a row.

Last quarter, these two businesses represented approximately 73% of revenues. Now they are at 77%.

I'll provide more comments on each of these businesses after Paul reviews our financial results. Now I'll turn it over to Paul.

Thank you, Joe. Before I get started, I do want to remind people what we mean when we talk about organic change.

That means our actual results adjusted for fluctuation in FX rates, what we call constant currency, and further adjusted to remove the impact of divested assets or businesses. Organic change highlights the fundamental growth or decline of our go-forward businesses.

I want to start by providing a little color on the quarter, starting with a walk down of the P&L on slide 10. Total revenues were down 10% versus Q3 of 2016.

Adjusted for FX and divested assets – again, what we refer to as organic change – we posted a 4% decline in revenue. We saw about 90 basis points of growth in realized net prices compared with the prior year quarter.

And importantly, we saw improved net pricing in both the B+L/International segment and the Branded Rx segment. Total volumes declined nearly 5%, with 80% of that decline coming from the expected impact of the LOE asset shown in the appendix to the slides.

Setting aside the LOE assets, the balance of our business was basically flat with the third quarter 2016, as the growth in our B+L/International segment and the Salix business, which as Joe said together accounted for 77% of our revenues, were up 6% organically, offsetting volume declines in our Dermatology business and our Diversified segment. Our gross margin in the quarter declined by some 330 basis points, mainly due to mix, unfavorable FX in our non-U.S.

businesses, and the impact of the $13 million settlement of the royalty audit on Glumetza. As Joe said but it's important, the GLUMETZA settlement covered the period from 2013 through 2015.

And it reduced our gross margin in the quarter by some 60 basis points. The revenue declines in our Diversified segment, driven mainly by the LOE products, fed a roughly 630 basis point decline in gross margins in that segment, and which accounts for the bulk of the company-wide reduced gross margin.

Selling and A&P together increased roughly 1%. You should recall that in 2017, we have chosen to add to our sales forces in the Salix and women's health businesses.

And the cost of those incremental investments more than offset other successful efforts to align our total selling and A&P costs with our current revenue levels. G&A costs decreased by 20%.

In the current year quarter, we had an elevated level of spending for outside services in support of our efforts to prepare assets for divestment and to complete the separation of previously sold assets. Legal expenses also increased year-over-year.

However, we incurred significantly less recruiting and retention costs in the current year quarter, which led to the favorable variance in G&A. In R&D, our investment in the quarter was down some $20 million compared with the prior year quarter – very important.

As we go through the process of divesting assets, we have been terminating R&D projects related to those businesses. The process of redeploying those freed up resources has been slower than we would have liked.

But we want to be deliberate to ensure that the mix in the continuing projects is consistent with our evolving view of priorities amongst our core business units. To be very clear, we're not intentionally reducing our investment in R&D.

We fully expect to spend more in 2018 than we did in 2016. With the impact of 2017 divestitures, we are simply experiencing a time lag as we work to reallocate resources to our list of potential projects.

In the quarter, we posted adjusted EBITDA of $951 million. Before I move on to the segments, I do want to spend a minute addressing how our GAAP net income flipped from a $1.2 billion loss in the prior year quarter to $1.3 billion of net income in the current year quarter.

There's a lot happening in both the prior year quarter and the current quarter, particularly with respect to our intangible assets, goodwill, contingent consideration, and our tax accounts, none of which impact what we believe is our most important performance metric, adjusted EBITDA. It's worth spending a minute or two on how these items impacted our Q3 2017 results.

In this quarter, we reclassified Sprout as an asset held for sale. That triggered the write-down of intangible assets associated with Sprout and a goodwill impairment in our Branded Rx segment.

Additionally, we also had a reversal of the acquisition-related contingent consideration associated with Sprout. These items together significantly reduced our GAAP pre-tax income in the quarter.

More than offsetting those pre-tax charges was the recognition of a significant income tax benefit in the quarter. In the fourth quarter last year, we initiated a restructuring of our global organization with the goals of reducing operating complexity and strengthening our tax structure.

In Q3 of 2017 we completed the restructuring, resulting in the reversal of certain deferred tax assets and liabilities, which resulted in the large tax benefit being recorded in the quarter. I'm sure there will be questions about the impairments of our intangible assets and goodwill and the tax recovery.

I'll point you to the disclosures that will be contained in our 10-Q, which we expect to file shortly. And I'll emphasize again these items do not impact cash or our adjusted EBITDA.

With that behind us, let's turn to the segments beginning on slide 11. The B+L/International segment posted another solid quarter with organic growth of 6% versus Q3 of 2016.

Three of the four B+L businesses delivered organic growth led by Global Vision Care, up 8% organically, driven by 10% – an increase of 10% in volume and a 2% decrease in realized pricing; Global Consumer, which was up 6% organically, all due to volume as prices were flat quarter to quarter; and Global Surgical, which was up 2% organically, up 4% in volume offset by minus 2% in realized pricing. Our Global Ophtho Rx business was down 9% organically, but 7% of that was a volume decline driven by a reduction in U.S.

pipeline inventories relative to Q3 of 2016. The international grouping, containing all of our non-U.S.

pharma businesses, grew 16%, mainly due to two factors. First, we had a favorable comparison versus the prior year quarter, when we absorbed a meaningful contraction of pipeline inventories in Eastern Europe, mainly Poland.

And second, we realized higher realized prices during the quarter, mainly coming out of Egypt, where we were able to get governmental approval to increase prices to help offset the impact of the devaluation of the currency back in 2016. Gross margins in the segment were down from the prior year about 70 basis points with FX being a factor.

Selling and A&P expenses together were slightly unfavorable on a constant currency basis, about 1%. I submit that our expense control across this segment has been quite good.

In a nutshell, a solid quarter for the B+L/International segment. On to the Branded Rx segment on slide 12.

Reported revenues were down 17%. However, the divestitures of Ruconest and Dendreon accounted for 10 percentage points of that decline.

So the organic decline was 7%. Organic growth in Salix of 6% and Dentistry of 10% were more than offset by the 34% year-over-year decline in the Derm business.

The main issue with our Dermatology business continues to be a difficult reimbursement environment for our legacy products. The good news is that pricing in the business has stabilized.

Realized prices across the Dermatology business were flat compared with the third quarter last year. Sequentially, unit volumes improved slightly.

But compared with a year ago, volumes are off more than 32%. Note that the third quarter is typically the strongest seasonal quarter for our Derm portfolio, particularly our acne products.

So keep that in mind when you're thinking about Q4. With realized net pricing stabilizing, we now shift our attention to driving volume increases for our legacy portfolio, having a successful launch of SILIQ, and being well prepared for future launches coming out of our R&D pipeline, such as IDP-118, IDP-121 and IDP-122.

The factor that will change our outlook in Dermatology is innovation. And we're fortunate that we have a panoply of late-stage Derm R&D projects that can put us in a position to return this important business to a growth mode.

The largest component of our Branded Rx segment, Salix, grew 6% organically, up 10% in price and down 5% in volume. The two main drivers in Salix were XIFAXAN and GLUMETZA.

XIFAXAN was up 5% year over year on an 8% increase in realized pricing, offset by a 4% reported decline in volume. The difference between the reported 4% volume decline and the plus 3% year-over-year growth in extended unit TRxs for XIFAXAN is fully explained by a relative contraction in pipeline inventories.

GLUMETZA sales remained strong right until the end of the quarter, at which time we saw demand shift away from our brand to our authorized generic that is in our Diversified segment. Dentistry revenues in the Branded Rx segment were up 10% organically, mainly due to our relaunch of NeutraSal.

Branded Rx selling and A&P expenses together increased by 5% or about $6 million. As I said when looking at our consolidated results, this is mainly due to the increased costs of the Salix and women's health care sales forces, offset in part by successful efforts to rationalize costs in Ortho Dermatologics.

On to the Diversified segment on Slide 13, where the story of the roughly 29% year-over-year decline are two things. First, the LOE assets, which accounted for 18 percentage points of the decline.

And second, our Generics business, where we saw the predictable declines associated with that portfolio. On to slide 14, where we continue to make – which is the balance sheet, where we continue to make progress reducing the quantum of our debt through cash generated by the business and asset sales.

I'd point out that we ended the quarter with a high cash balance with the proceeds from the iNova sale sitting in cash at quarter close. Subsequent to September 30, we used $923 million of the iNova proceeds to repay senior secured term loans.

And last week we used another $125 million of cash to prepay more senior secured term loans. Move to slide 15.

This shows a pro forma snapshot of our debt maturities and mandatory amortization as of today. Key takeaways.

We have no mandatory amortization remaining on our term loans, and our next debt maturity is out in 2020. Managing our debt load requires that we continually look for ways to address our debt stack in 2020 and beyond.

The good work we've completed over the last, say, six quarters has provided us with the time and flexibility to be successful in managing through a challenging situation. Next our cash flow summary, slide 16.

I'm going to repeat a couple things Joe mentioned, because they're important. We generated $490 million of cash from operations in the quarter, and year to date we generated more than $1.7 billion.

An important part of this effort has been a focus on improving our working capital efficiency, and we made excellent progress there. From September 30 of 2016 to 2017, we reduced our working capital by roughly 45 days and our inventory by more than 30 days on hand.

Working capital efficiency is a high priority for us. And we intend to make additional progress on this front to unlock cash from the balance sheet that we can use to reduce debt.

Turning now to our guidance slide, slide 17. Today, we revised our revenue and adjusted EBITDA guidance to reflect the impact of the closed iNova divestiture, the imminent Obagi divestiture, and for a modest improvement in the outlook for the basket of LOE assets detailed in the appendix to our slides.

The balance of our business is tracking slightly ahead of our expectations. And we've narrowed our guidance ranges to $150 million for both revenue and adjusted EBITDA.

Our revised guidance for 2017 is for revenue in the range of $8.65 billion to $8.80 billion and for adjusted EBITDA in the range of $3.60 billion to $3.75 billion. We are pleased that we are able to maintain our guidance for adjusted EBITDA, despite adjusting for the iNova and Obagi divestitures.

We've also updated key assumptions for expense categories, noncash adjustments, and additional cash items, so that you can update your models. Two quick last things before I turn it back to Joe.

In response to feedback we received from many of you, we've changed the format of how we present the impact of the LOE assets on 2017, so that you can see the sales and profits from these products in 2016 and the sales and profits that we expect in 2017, not the change versus 2016. To be clear, there is no change to the underlying LOE data, other than the update to the estimate for the full year 2017.

We've simply changed the form of how we present the information with the intention of making it more straightforward for you to come to points of view about how those revenues and profits may carry forward beyond 2017. We also added a slide in the appendix to show you the amount of revenue and profits associated with assets divested in 2017 that are expected to be included in our reported 2017 results.

This is intended to make it easier for you to isolate those 2017 revenues and profits as you model our go-forward business. With that I turn it back to you, Joe.

Thank you, Paul. The chart on slide 19 has been updated from last quarter to show the progress we've made in closing the previously announced divestitures.

As you can see, we have now closed 11 of the 12 previously announced asset sales, and we are expecting to close Obagi very soon. As we transform Valeant, we continue to focus our resources on core businesses, because we believe these are the areas where we can best drive value for our shareholders, customers, and patients.

On slide 20, third quarter revenues for Bausch + Lomb/International segment were $1.254 billion. The business is growing organically 6%.

To me, the chart on the right of the page 20 says it all for Bausch + Lomb. We've taken a business that was declining to flat a year ago and delivered three consecutive quarters of 6% organic growth.

Bausch + Lomb's presence is also growing on Amazon, with a remarkable 69% growth year over year. This is a strong indicator of the strength of the Bausch + Lomb brand.

Staying with Bausch + Lomb, we provide an update on our Consumer and Vision Care business. To call out a few highlights, first, in the international markets, Bausch + Lomb is the number one Vision Care brand in China.

It is outgrowing the category with a five-year CAGR of 20%. Our OTC eye drop franchise is number two in China, with a strong annual growth rate of 19%.

In the U.S., Consumer revenues are up 9% organically year over year. And the chart in the right shows the third quarter performance for U.S.

Consumer healthcare companies. While the health and beauty category was down 2.8% in the aggregate, B+L is one of the clear leaders in the category, up 2.5%.

On slide 22 we announced last week that VYZULTA had been approved by the FDA. This is the first novel treatment for patients with glaucoma in over 20 years.

VYZULTA is indicative for the reduction of intraocular pressure in patients with open-angle glaucoma. What differentiates VYZULTA is that in the – is the first prostaglandin analog with one of its metabolites being nitric oxide.

The efficacy and safety of VYZULTA was evaluated in two randomized multi-center studies and also in a Phase 2 versus latanoprost. As the chart on the right demonstrates, latanoprost, or Xalatan and its generic equivalents, still account for two-thirds of the market.

So why are we excited about VYZULTA? Because globally, glaucoma is a large market opportunity and expected to grow at a CAGR of 15% over the next four-year period.

As the first novel treatment in two decades, we believe there is a great opportunity for VYZULTA. Moving now to slide 23 for the update on our Salix business, which generated $452 million of revenue, was up 17% from last quarter and 6% year over year, excluding divestitures.

A few highlights on XIFAXAN. Revenues sequentially increased 23% from $233 million to $286 million in the quarter and at 5% versus year ago.

XIFAXAN TRx extended units grew by 3% versus third quarter 2016, driven by the IBS-D in Primary Care. And market shares continue to grow.

It's up 400 basis points from 73% to 77% since the first quarter of 2017. Finally, the expanded salesforce effort we made in Primary Care contributed to strong growth in TRx volume and new Rx share growth.

As you can see from the chart in the upper right, which highlights a 1,300 basis points increase in new Rx share since the addition of the sales force team in Primary Care in February. Moving on to our other GI promoted brands.

RELISTOR prescriptions grew 61% compared to last year. In the lower right-hand corner, you can see how the increased effort from salesforce expansion in pain and Primary Care is driving RELISTOR oral tablet growth.

On to slide 24. The Ortho Dermatologics business generated $148 million of revenue, compared to $130 million last quarter but was down 34% versus a year ago.

Advancing innovative new products through our pipeline will be the key to growing our Dermatology business. And we believe that the products in our pipeline over the next five years can double the size of our Dermatology business.

The U.S. launch of SILIQ in third quarter demonstrates the strength of our strategy and execution.

Early market access is better than expected. And we are continuing to expand and gain additional covered.

Efficacy, durability of efficacy, low induction cost per patient are resonating as key points of differentiation for SILIQ. Since the launch, approximately 75% of the patients have been commercially covered by managed care.

98.7% of physicians that have been detailed have agreed to be REMS certified. And there are 371 physicians who have already completed their certification process in the first two months.

I want to highlight the next potential product in our psoriasis pipeline on slide number 25, IDP-118, an investigational topical treatment for plaque psoriasis. The FDA accepted a New Drug Application for IDP-118 with a PDUFA date of June 18, 2018.

If approved, IDP-118 will be the first and only topical lotion that contains a unique combination of halobetasol propionate and tazarotene. Why is IDP-118 important?

Existing super-high potency steroids have a two-week treatment duration limit. In clinical trials, we dosed IDP-118 for up to one year.

IDP-118 has the potential to be the first high-potency corticosteroid combination for longer term treatment of psoriasis. Moving on to slide 26.

We expect 50 new product launches in 2017, including the launches of RELISTOR, SILIQ, the Bausch + Lomb ULTRA and Biotrue ONEday lenses, and VYZULTA. I'm delighted to mention another approval recently approved for the Retin-A Micro 0.06% pump, which will be an important line extension in our strong acne franchise.

New product launches are expected to generate more than $100 million of annualized revenues in 2017 and importantly, drive sustainable long-term growth. On slide 27, we have an R&D update.

As you know we made significant divestitures over the last six months to eight months. As a result, we are refocusing our R&D efforts on those products and businesses that we have identified as core.

Therefore, R&D investment for the quarter was lower than expected. That said, as we rotate investments back into the core businesses, we are focused on putting capital into the right projects, which will result in long-term growth opportunities.

On the left side of the page, we review a few of our global R&D catalysts that we will launch in the U.S. and then later introduce globally.

On the right, we summarize later-stage R&D pipelines. To call out a few, we have launched five new products across our businesses, two new contact lenses, two surgical vision systems, and an innovative biologic treatment for psoriasis.

The development of new products will drive future growth and enable us to deliver on our mission of improving peoples' lives and delivering total shareholder returns. Turning to the next slide.

One area that has been critically important to me since I joined the company is delivering on the commitments to our stakeholders. We have taken and will continue to take action that drives shareholder value and benefit to all of our stakeholders.

This includes improving operational and commercial excellence, reducing our debt, effectively managing working capital, and launching new products. To-date, we have fulfilled our commitments in each of these areas by organically growing 77% of our business by more than 5% in the past two quarters; by exceeding our commitment to pay down $5 billion of debt sooner than we expected; by reducing inventory on hand, simplifying our supply chain, and discontinuing more than 1,300 SKUs; and finally, by launching new products and advancing promising projects through our pipeline.

In conclusion, our strong third quarter results demonstrate that the actions we are taking to move us forward and our efforts to turn around the company and transform (32:29) several quarters of flat to declining growth. Our largest segment, Bausch + Lomb/International, has been growing 6%.

We've built a Primary Care salesforce that is driving the growth of the Salix business. Ortho Dermalogics (sic) [Dermatologics] (32:41) continues to stabilize, and I am optimistic about the potential pipeline opportunities for acne and psoriasis.

We have taken action to address the quality and efficiency issues at all of our manufacturing sites. We remain committed to investing in innovation as the foundation of our future growth.

And finally, we will continue to hold ourselves accountable for delivering on our promises to better serve our customers, employees, and shareholders. With that, operator, let's open up the line for questions.

Hi, guys. Thanks so much for taking my question.

I wanted to focus on two topics, if I may. First, just on Bausch + Lomb.

I was looking at the organic growth estimates. And one of the questions I had was how much of the year-over-year growth is coming from the channel refill in Eastern Europe?

Just wanted to understand and quantify that, if I may. And just to put it in the context of the 6% year-over-year growth reported for the Bausch segment.

So this is again from the Eastern European and the International channel resale. And the second one is maybe for Paul.

Paul, can you help us understand exactly what the year over year – so if I just take the latest quarter's EBITDA, annualize it, how much of a year over year, like going to 2018, LOE impact would you guide us to? Because I see that slide you guys put up in the appendix.

And I just want to make sure I fully understand what you guys are baking in versus not? Thank you so much.

Hey, Umer, I'll the first part of the question. And then, Paul, I'll turn to you for that second part of the question.

Well, I mean, first of all, if you think about what's happening with Bausch + Lomb, you can see that all of the businesses with the exception of the Ophtho Rx are growing organically. So we have the Global Vision Care at plus 8% organically, there's Global Surgical at plus 2%, the Global Consumer at plus 6%.

Those together account for a fairly large part of the – let's call it more than the 50%, 60% of our total business in the Bausch + Lomb/International segment. So that's clearly the largest part of the business.

There is some significant International revenue growth. And I think as Paul said that the restocking of Poland did help that International business.

But we also got some significant price appreciation in Egypt as a result of the some of the currency devaluation that has occurred previously. So I think it's been a combination of factors.

I don't have the specific impact of the International side. But I would say a large part of that International growth, going from the $327 million to the $344 million, or let's call it the $17 million, a large part of that is a result of some of the restocking but also the Egyptian currency devaluation and the price increases there.

That's really the majority of that portion. But you could really quickly – because of the way we've done it, you can really look at it by each of the individuals.

We've given you exactly the sales numbers and the actual growth rates. So gives you a chance to break it out.

To answer exactly the questions, I just don't want to do the math as I'm sitting here right now.

Yeah. Hey, Umer, it's Paul.

I can do the math, because I have those kind of worksheets in front of me all the time. About 30% of the volume pickup in B+L/International was related to the pipeline activity.

So 70% of the volume pickup in International came from other than the pipeline. Surely, we benefited from it.

That's why I called it out in my remarks. The second question you had was, how do you think about using the revised presentation of the LOE assets?

And what I would say is, now we're showing that that basket of LOE assets, very specific baskets, like the products included in that basket have not changed. We expect to have sales in our 2017 results totaling approximately $524 million.

And the profit, which I don't have that slide right in front of me right now, but the associated profit, it won't go away in its entirety in 2018. We're also not providing guidance today on 2018.

But that certainly a solid portion of that will carry forward into 2018 and potentially beyond. I mean, while they are LOE assets, they won't go to zero.

They may asymptotically approach zero, but they won't go to zero. I hope that answers.

And if it doesn't, I'll hopefully see you at lunch later, where we can talk about it more.

Operator, our next question?

Thank you. Paul, I know you're not looking to give guidance for 2018.

But can you offer any observations as you've considered how people are modeling it and things you'd like to point out now to avoid any confusion as we head into 2018? And maybe could offer some preliminary thoughts on the items in tax reform that you have an eye on that could be issues for Valeant.

Thanks.

Yeah, yeah, sure. I mean let me address first, thinking about 2018 obviously.

As I said, we're not providing guidance for 2018. That said, I mean, in the spirit of transparency and as I said, being responsive to feedback that we got from a number of investors, we've changed the presentation of that LOE slide.

And we've added a slide to show you the estimates of what we expect revenue and profits to be from divested assets included in our actual 2017 results. And so using your own estimate of 2017, you should be able to pull apart and get rid of the divested assets.

And then as Umer was – the road Umer was going down, come to your own points of view about how you think about that basket of the 2017 LOE products. How that $524 million translates into 2018 and as I said, potentially beyond.

So the pieces are all there, but I'll give you one qualitative point, which I'm very comfortable making the statement is, set aside the LOE assets, set aside the divested assets, we are confident that the base business, the business that we manage, the business that we can control and manage and drive fundamentals for, will grow in 2018 v 2017. That's our core businesses.

And so that I hope provides at least a framework for how you might think about 2018. The tax reform thing like, gee, it came out last week.

And wow, there's a lot there and the proposal obviously contains several provisions that could impact on our go-forward tax rate. And before I get into those three areas, I'll just point out none of this is final.

And all companies, including us, are guessing at this stage how it might impact our situations. You've heard me say in the past I think, one of the best features of our global structure is our flexibility.

And it affords us the ability to respond to changing environments. So that's good news.

And we will need that flexibility, depending on how this shakes out. With respect to the proposal, there were three major areas that could impact us.

And I'll list them kind of in order of potential magnitude. The first is the proposal contains a 20% excise tax on payments made by U.S.

entities to related foreign companies. If this is enacted just that way, this is going to be a problem not just for us, but for any multinational companies, U.S.

or otherwise, that do business in the U.S. and have manufacturing and intellectual property located outside the U.S.

That one's going to be one that we're going to need to work on. And by the way that's not – it's not known how that'll sort out.

I think there was a chairman's amendment as recently as yesterday that further modified the proposal. So we're all scrambling to try to understand that as well.

The second thing that I'd point out is it also contains a mechanism for taxing unrepatriated foreign earnings of U.S. entities.

Now while we are a Canadian company, we do have U.S. entities and we do have entities that are below that U.S.

entity, where we do have some repatriation issues. I'll say that ultimately, this is not going to be an enormous amount of – depending on how it plays out, an enormous impact on us.

But it's not zero either. It will result in incremental tax to us, not reported in our GAAP tax rate, but it would be cash that would be paid, not of a great magnitude.

I think the current proposal is that could be paid over eight years, and so not that big a deal. And the last part of the proposal that could impact us would be the limits placed on the deductibility of interest on intercompany debt by U.S.

entities. Again, I'm just going to say it's very, very early days here.

And what the final legislation might look like when it comes out of the House is anybody's guess. But based on what's proposed now, the 20% excise tax would present our biggest challenge.

And I'm certainly glad that we have a flexible structure that will enable us to do the things that we can do to appropriately manage our overall global tax rate.

Thank you.

Thank you.

The only comment I'd add to what Paul said, Gregg, is I think clearly we're not going to provide 2018 guidance. But the key variables for us and for all pharmaceutical and healthcare companies is always going to come back to the new products.

Fortunately, we've got a number of – over 50 launches in 2017 in new products, products including RELISTOR, SILIQ, VYZULTA, the Retin-A Micro 0.06%, Stellaris Elite, Vitesse, the ULTRA toric multifocal. And then go rolling into 2018, we're going to have products like the IDP-118 if approved, PLENVU if approved, a SiHy daily, Luminesse if approved.

So we've got a number of good opportunities for the new product side as we think about 2018. And I think that's going to be an important driver for us.

Operator, our next question?

Hi, thanks for taking my question. So I'm just curious, what gives you confidence that you can enhance equity shareholder value, given the large amount of debt that you have to pay down?

And what are some of the key growth drivers that you feel good about right now? The base business actually has been stabilizing.

And then are you still considering creative ways to lower your leverage ratio? Thanks.

Well, let me start. I mean I think first and foremost, what we've done since I arrived and since Paul have arrived is really focus our attention towards what are the key growth drivers for this business?

Which in the health care is always going to come out to the new products. So we continue to look at these new products, introduce new products, get new products through the pipeline.

As I said we're really excited about a product like VYZULTA. If you look at what it – the market today for glaucoma, it's a large market.

It's a growing market. And the reality is that two-thirds of the market in the U.S.

at least is either a Xalatan or a generic equivalent to Xalatan. We have a dual mechanism of action that includes the latanoprostene but also has the nitric oxide donation.

That dual action is really what we think is going to be important. If you go through – same comment for IDP-118.

The facts are that the current treatment of psoriasis with the topical products with a super-high potency steroid are limited to a two-week duration, because of the potential effects on the thinning or atrophy of the skin. We believe that based on what we've submitted to the FDA, if approved, this could be a game changer with IDP-118, because of the ability to use it for a longer duration.

Those are the types of reasons why we think that we've got a very strong business and good, strong growth opportunities. Clearly, we're seeing the results with XIFAXAN in our incremental promotion efforts.

So we put those forward as ways that we could help drive the bottom line of our business, increase our EBITDA. And as that EBITDA comes forward, reduce our debt.

Final comment I'd say is if you look at what Paul and Linda have done in terms of moving out the debt, we've done a lot to take the debt, push it out further. So there's no debt due between now and 2020.

That gives us the, what I call, freedom to operate to ensure that over the long term, we can drive shareholder value for the future. So to me, that's really the game plan.

Grow the base business, launching new products, and then obviously take the bottom line, look at the improvements we made in working capital, and put that toward debt reduction, which makes us a stronger company for the future.

Thank you.

Operator, next question?

Hi, guys. This is Andrew (46:40) in for Annabel.

So my question is, so SILIQ appears to be getting strong reimbursement and good feedback. But we're still seeing an extremely competitive environment in psoriasis and some competing products, specifically Otezla are seeing rebate pressure.

So when you think about next year, can SILIQ offset the declines in Derm and expected LOEs by next year? Or do we have to wait until 2019 when other products are on board?

And if I could sneak in another one. Your near-term debt goals have been met, and you still have strong cash flow.

So can you be more constructive on capital allocation now that you would focus on – truly focus on operational investment or business development? Or are you still more focused on balance sheet strengthening?

And do you have a plan – do you have another debt pay-down target? Thank you.

Okay. Well, I'll take the first one, and then Paul, you probably take the second one.

Let me start with, we're very pleased with SILIQ. We knew the uptake for SILIQ was going to be slow in the sense that, well, we knew that we had to put physicians – get them through a REMS certification.

We're doing that as we speak. And as I said, we have over 371 physicians already REMS certified.

We think that's an important first step. We are seeing patients.

We – in terms of, as they enroll we're seeing the usage of the product. We think the important comment about SILIQ is that the long-term value of it is really going to be in the rapid onset of efficacy with the product and then the long duration of efficacy.

Because once again, we are the receptor blocker versus the other products that inhibit the enzymatic pathway around the inflammatory factors. We block the receptor.

We think that's what's good for the long term. The only other comment I would say on 2018 is clearly the other area that we are looking for growth in the Dermatology business is the IDP-118, first and foremost, that'll be approved – or has a PDUFA date in June 18 of 2018.

We think that would be potentially a contributor to our long-term growth of the Dermatology business, especially based on the comments I made before in terms of it being a unique product. Potentially with the opportunity to use longer duration of therapy than previous high potency corticosteroids.

And then obviously, we have the Retin-A Micro 0.06% as another way to strengthen our acne. So we think it's the combination of all those activities that are really going to help us to grow the Dermatology business.

And importantly, as I said before, we have enough products in our pipeline over the next five years that we believe double the size of the business, based on where it is today. Paul, you want to talk about the capital allocation?

Sure. And if I might, I might just spend two seconds on the Derm as well.

Because I think that, one, we have the opportunity to deal – we have a very attractive legacy portfolio. We watched it obviously face a very difficult reimbursement environment.

As I said in my prepared remarks, I mean we've seen stabilization of our realized net pricing. And now that becomes – it becomes a volume game, and it becomes a game where over a period of time we would expect to maximize the value of that legacy portfolio.

We're not just turning away from it. I think there's real value there.

And as Joe said, then you lay on top of that in – looking ahead to 2018, again not providing guidance, but stating that you've got SILIQ, you've got IDP-118, you've got RAM 0.06%. I mean we've got a number of new products, which we would expect to help us turn that franchise back to a growth mode.

And we think we have a great opportunity with Ortho Dermatologics. On the balance sheet, you hit it, Andrew (50:17), you hit on a topic that's a very challenging one for us at all times, is our first – if you had a list of five priorities, the first four are generate cash to reduce debt.

That's top of our mind for sure. That said, we do come across some modest – and a emphasis on modest – or even call them small sized opportunities to use capital to acquire rights, to lay things into our R&D pipeline, and all in.

So to the extent that we see those things, we're likely to pursue them if they make sense. And I think that you should be encouraged as either debt or equity investors that as we think about deploying that capital to those sorts of activities, we have a very tight screen.

We have to. We have a priority of reducing our indebtedness.

We're not going to establish a new debt pay-down structure. And kind of responding to both yours and a bit to Louise's question as well, is we feel like a year ago, it was mandatory that we pursue divestitures in order to be able to reduce the quantum of that debt and make progress against reducing the quantum of debt.

Sitting here today, I think we think of our go-forward position on future divestitures for pay-down as being more in the opportunistic category. We don't have to.

However, we do have a well-defined point of view with respect to the value of each and every one of our business units. And in the extent that someone picked up the phone and called us and said, gee, I want to own that asset.

And that we think that asset is worth $100, and they say they're willing to pay $120, we're going to entertain that and probably sell that asset. But it is more opportunistic than I would say a year ago, when it was pretty much mandatory that we pursue the divestiture of a number of assets.

Operator, next call?

So got a couple of XIFAXAN questions. So I realize that the NRx share has grown, based on the chart in slide 23.

But it does look like overall, volumes year over year are kind of stuck in the single digit range. So do you feel that you're getting enough out of the Primary Care salesforce?

And then secondly, what are your expectations for 2018? Do you still think that you can get an uptick in sales?

Or are we looking at more of a maturing type of landscape for XIFAXAN? And then lastly, in terms of gross to nets, maybe give us some color on what you think 2018 might be for the product as well?

Thanks.

Okay, I'll start. And I hope I get all the pieces that you said.

So first and foremost, as I said, we think we're going to get single – we agree with the single digit growth in the business in terms of what we've seen historically. I think what we've tried to do in looking at Primary Care though is really open up for a very large opportunity as it would relate to the IBS-D category.

We're seeing in IBS-D an opportunity to grow, significantly grow our share in that category. And we've not yet saturated that market anything close to it.

We think there's a lot more opportunity there in IBS-D. When we looked at the Primary Care team we put together, it was 200-plus sales professionals.

We looked at it from a return on investment point of view. And we're going to always continue to look at it that way.

We're pleased with the results we're seeing already. Obviously the team has got to continue to develop.

They've only been out there, as of the data we presented, really for about eight months. So we think we're still in the early stages of the success of that.

We think that will continue to accelerate for 2018 and beyond. So that brings me to that part of the question.

Where do we see growth in 2018 and beyond? We think there is an opportunity to have a growth in volume.

We're not going to give guidance specifically on it, but we think the volume will go up. We also think that there is an opportunity to have what I'd call a single digit price increase.

Which in my mind, if I use 8% just for the sake of argument – I'm not saying we're going to increase prices 8% – we'd get about 4% pricing. In other words, we get about half of what we put forward as a gross price as a net realized price is the logic we have.

We're not once again saying what prices will do next year. On the comment on gross to net, yeah, my comment on gross to net is there will always be additional pressure on gross to net.

We're, somewhere in the GI category, somewhere in that 40% gross to net. Do I believe it's somewhere around that next year?

The answer is yeah. It's been relatively consistent at least for the time I've been with the business, 2016, 2017, is approximately that 40% gross to net.

I expect it to be relatively consistent with that going into 2018 and beyond as well.

Thank you.

Any – next question, please?

David?

I've always wanted to be – I don't know if that's French? I've always wanted...

Yeah, that confused me there for a second.

I guess I'm married now. So I don't need to be French.

But anyway in terms of questions. So first, could you just talk about fill rates?

How you're experiencing fill rates in the U.S.? Whether there are any changes?

We're hearing from some other companies that they're experiencing some fill rate pressure? Second, could you just update us on your focus on resolving litigation issues?

And, I don't know, key areas to watch in the near term? And then third, if you could discuss cost cutting opportunities ahead.

I'm not clear on where you are in rationalizing the cost structure. Thank you.

Sure. So I will say on this question of fill rates and what we're seeing in our – the people picking up our prescriptions, we do have the data.

We are looking at – I refer to all that as really compliance and how patients are filling their prescriptions. We check that, especially in all of our chronic medications, a XIFAXAN, for example.

We have put together a number of programs where we think we're trying to put programs in place that improves the patients' compliance. Those types of programs that, especially as you do them with specialty pharmacies like we do with SILIQ, are all designed to try to help patients and make sure that we improve that.

But it is something we're keeping our mind on. We're not seeing a lot of challenges there.

But it is something we're keeping a look on all the time, David. On the question of resolving litigation, what can – I don't know if I can say much more than what we've done in the presentation.

Christina Ackermann and her legal team have just done an outstanding job. If you think about from the second quarter earnings call to now, resolving 21 litigation or legal matters, we think is an outstanding achievement.

And very much credit to the team that's done that as we've worked our way through it. The issues that we've identified – I mean each one of them are in the slides – I think are all very important matters for us.

I mean if you think about the – we had a GLUMETZA case that got identified. We have been working with them.

For some reason, they filed a lawsuit. We did solve that though very quickly, got it behind us.

And that's really the important way that we're approaching it. Where we can get these resolved, we're going to get them resolved, move forward with all of our litigations.

But obviously defending our cases rigorously where we believe we have the right answers. And we're going to do that.

And that's whether it's any kind of litigation or intellectual property. On the last part of your question, cost cutting, we've done a lot.

We've taken out of operating expense nearly $100 million from 2016-2017. As we look at the divested assets that we have in 2017, we're going to continue to look at where can we reduce the operating expense in the company to make sure that we put it towards what I've referred to before, the core business.

Places where we think we have the best return on investment for our growth is really where we're going to focus on for our cost cutting. Obviously, as you divest a product like ADDYI, there is – which was a negative EBITDA, that will be a positive or certainly neutral for 2018, as we no longer have that asset.

So those are some of the things that I would say on – are cost cutting relative. I think that's probably about as far as I can go on.

Can't say too much more about 2018.

Got it. Thank you.

Operator, we have probably time for maybe one more question.

Morning. This is Chris (59:55) on for Chris.

Thanks for the question. First one's on Salix.

Recently you had an adverse District Court ruling on the patent for Uceris. Could you just talk about the impact of that for Salix?

And maybe the timing and overall expectation for a competitive product launch? And then secondly, on Ortho Dermatologics.

Could you maybe talk about IDP-121 and -122 and how you see those fitting into the marketplace over time? And then also bigger picture, how are you thinking about peer (1:00:28) access and pricing, given current pressures in the Derm market?

Thanks so much.

Okay. Well, I'm going to do my best to catch all three of them.

So let me start with the Uceris question. As you know, there was some intellectual property challenges on the Uceris.

The judge issued his opinion in late October. We have looked at that opinion.

We certainly plan to appeal that ruling on the opinion of the judge. However, I think it's important to say that in any product case where certainly there's intellectual property, the other important aspect of that is whether or not a company or one of the generic companies has an approval.

To our knowledge, according to FDA publications, no company currently has an FDA approval to market a generic version of Uceris. We think that's a probably as important part of this question, as we think about whether or not somebody can come to the marketplace.

So we are looking at the intellectual property. We will defend our intellectual property.

But the other important comment certainly is the lack of any regulatory approvals at this time, relative to a generic ability to market a generic version of Uceris. On the question of the Ortho Dermatologics business, once again, we're excited.

We think -121 and -122 in addition to -118 are all very good opportunities for us. We have -121.

It has – as I mentioned in my public comments, we've had a chance to file that one for acne. We do think it has a very good opportunity to continue to expand our Retin-A portfolio with a new formulation.

And then -122 as a product is a – once again, it's the high dose or high potency corticosteroid in a very unique formulation that's got very good results. You can see some of the results of – as I presented -118, -122 is a component of the -118.

So we think that's the other reason why we have a high potency corticosteroid opportunity that has a very unique formulation that we think is going to help for those patients with psoriasis. And the final question was on pricing.

I'm sorry. Repeat the last part of the pricing question?

Yeah. So I guess for the topical launches that you have in Dermatology, how are you thinking about peer (1:02:56) access and pricing, just given current dynamics in the Derm market?

Sure. Thank you.

Sorry, just with the three questions, I got the first two. I knew it was pricing.

On the question on pricing, we haven't set any pricing to be clear. But think of it this way, and I'm going to start with IDP-118, because I think it's probably the easiest way to start.

Unfortunately, patients with psoriasis need long term chronic treatment. Many patients go onto biologics.

If we with IDP-118 can offer patients either a delayed start to the biologic and/or for that patient who's on a biologic but, unfortunately, still has a breakthrough, and let's call it on their elbow just for sake of argument, and they can treat that breakthrough in that area by the use of the IDP-118, that's we think a very significant opportunity for the patient to get the potentially 100% clearance of the skin. Obviously, with our drug SILIQ, we do think we have good efficacy and a PASI 100.

But in some of the drugs there, they don't have the PASI 100 results. Therefore, we think we can supplement the biologic with our product, potentially depending on FDA approval, and allow the patient to get that better clearance of their skin.

So relative to pricing, we haven't set any specific prices. But we do think there's opportunities there, especially to make our products very cost effective versus the alternative for patients who have psoriasis.

That's probably about as far as I can say right now on pricing. We'll have a lot more to say as we bring out these new products.

But let me conclude with thanks to everybody. Thank you very much for joining us today.

We're really excited about the opportunities in front of it. I think you could hear the excitement from myself and from Paul.

We want to thank all of the employees of the Valeant organization for what they've done to help continue to build the strength of this business and turn around the Valeant company. We'll conclude the call right now.

Thank you. Thank you very much for joining us today.

Have a great day, everyone.