Good morning, and welcome to the Bausch Health Third Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Art Shannon, Senior Vice President, Head of Investor Relations and Corporate Communications. Please go ahead..

Thank you, Andrew. Good morning, everyone, and welcome to our third quarter 2019 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 a replay of this conference call will be available on our website under the Investor Relations section. Before we begin, we would like to remind you that our presentation today contains forward-looking information.

We would ask that you take a moment to read the forward-looking statement legend at the beginning of our presentation as it contains important information. This presentation contains non-GAAP financial measures. For more information about these measures, please refer to slide two of the presentation.

Non-GAAP reconciliations can be found in the appendix to the presentation posted on our website. Finally, the financial guidance in this presentation is effective as of today only.

It is our policy to generally not update guidance until the following quarter and not to update or affirm guidance other than through broadly disseminated public disclosure. With that, it is my pleasure to turn the call over to Joe..

Thank you, Art, and thank you everyone for joining us today. I’ll begin with the third quarter highlights before turning the call over to Paul Herendeen, our CFO, to review the financial results in detail and update our 2019 guidance. We’ll then review the segment highlights and open the line for questions.

Beginning with Slide 4, we had another strong quarter of sustained performance that demonstrates that our team is continuing to gain traction with our plan to pivot to offense. Total company organic revenue grew by 4% compared to the third quarter of 2018 and represented the seventh consecutive quarter of total company organic revenue growth.

P&L is leading our turnaround with a 12th consecutive quarter of organic revenue growth. Key drivers were a strong LUMIFY launch, strong international prescription results, and the performance of our Global Vision Care business. Salix reported more than $500 million in total quarterly revenue, driven by XIFAXAN's 24% growth.

Additionally, we generated $515 million of cash from operations and increased R&D investment by 15%, during the third quarter.

As of September 30, we have utilized approximately $900 million to repay approximately $700 million of debt and approximately $200 million to complete the acquisition of TRULANCE and enter into a license agreement for amiselimod. And in October, we acquired rights to XIPERE. I'll talk more about that later. Moving over to the right of Slide 4.

Our new products are also producing results. The Thermage brand is now a top 10 Bausch Health franchise, following the successful launch of Thermage FLX in the Asia Pacific region. LUMIFY generated $21 million of revenue in the third quarter and has achieved a weekly market share of approximately 43%.

TRULANCE generated $37 million of revenue since our synergy acquisition and continues to track the full year guidance of $55 million. DUOBRII is off to a strong start, at four months post launch with weekly TRx tracking right around the 2,300 level.

Thanks to a great team effort and the continued engagement of over 21,000 employees of Bausch Health, we have delivered another strong quarter. We remain focused on launching new products, improving operations, and delivering on the commitments we outlined at the beginning of the year. With that, I'll turn it over to Paul..

Yeah. Thanks, Joe. And I'll start with a quick walk down the Q3 P&L, which is on slide 5. First some housekeeping, when we talk about organic growth, we mean on a constant currency basis and adjusted to remove the impact of acquisitions and divestitures, so top line organic revenue growth of 4% in the quarter.

As Joe said, the seventh consecutive quarter of organic revenue growth, pretty good considering we absorbed a growth drag of $85 million from LOE assets versus Q3 of 2018. Revenue in our B&L International segment grew 5% organically in the quarter.

Four of the five sub-segments within B&L posted growth led by the Global Consumer business, up 7% organically in large part on the continued ramp of LUMIFY followed by our International Rx business, up 7% organically on strength in Canada, Russia, and the Middle East. Next, our Global Vision Care business was up 10% in the U.S.

and 4% outside the United States, plus 6% overall on strength in our Biotrue ONEday lens family, our ULTRA monthly silicone hydrogel lenses, and the ramp of AQUALOX our daily silicone hydrogel lenses in Japan. Next, Global Surgical was up 5% organically on strength from our Stellaris Elite system and related consumables.

And finally to wrap-up the B&L segment from a revenue perspective, Global OpthoRx declined 6% organically, mainly due to the greater erosion of our branded LOTEMAX business in the U.S., including revenue lost to our own authorized generic of LOTEMAX suspension that shows up in our generics business in our Diversified segment.

So overall, a solid quarter for the B&L International segment. Salix delivered another terrific quarter, up 18% organically, which excludes the $14 million of TRULANCE revenue in the quarter. The star again was XIFAXAN as Joe said, up 24% versus Q3 of 2018.

But I want to break down the components of that 24% as it's important in how you think about growth rates for XIFAXAN in Q4 and into 2020.

So the 24% growth versus Q3 2018 came 8% from volume, meaning more units sold, 6% from the net impact of the price increase that we took for XIFAXAN back in January and the balance of the plus 10% came as a result of successful initiatives that we implemented as part of our Project CORE to improve gross to nets with XIFAXAN.

Reminder, CORE stands for cost optimization and revenue enhancement. This clearly falls into the revenue enhancement category.

From a growth perspective roughly half of the Project CORE driven growth in XIFAXAN in 2019 is durable and will continue on in future XIFAXAN results, so think of it as a step function increase in realized net selling prices for XIFAXAN.

While the other half is more transitory, very real value driven by reductions in process gross to net items in 2019 results, but not repeating in 2020. I'll repeat, what I've said in a number of public forms when thinking about XIFAXAN's growth prospects in 2020.

Growth will be driven by a combination of volume, which is selling more units and perhaps a couple 100 basis points of net selling price increase if we raise the gross selling price.

So, important safety tip, while I would and you should expect XIFAXAN to deliver net sales growth at an attractive rate in 2020 versus 2019, that growth will not be at the levels you're seeing in 2019.

While I'm on the subject, I mentioned on our Q2 call that we expected about one more quarter that's this quarter of strong performance from GLUMETZA before that brand sees more pronounced losses of revenue due to an accelerated shift in channel mix resulting in substantial deterioration in net selling prices.

So, as you think about GLUMETZA, the Q4 run rate for the brand may be half of what we've seen in the first three quarters of 2019. On more positive notes, RELISTOR and PLENVU delivered TRx growth in the quarter and TRULANCE accounted for $14 million of revenue and remains on track to deliver $55 million of revenue we guided to for 2019.

In the Ortho Derm segment, total segment revenue was down 16% organically as growth in Solta could not overcome declines in our medical derm business. Global Solta delivered organic growth of 62% on continued strong demand for our Thermage FLX systems, which in turn feeds demand for the consumable FLX tips.

Solta has been delivering robust growth, mainly in Asia Pac. And as we look ahead to 2020, we will be allocating more resources to Tom Hart and his team to enable Solta to pursue similar opportunities in other regions, particularly Western Europe.

Our Medical Derm business was down $47 million versus Q3 of 2018, militated by the $43 million impact of LOEs -- for ELIDEL, ZOVIRAX, SOLODYN, and ACANYA.

With the bulk of the impact of the LOEs for Medical Derm now reflected in our quarter results, I want to call out that our Medical Derm business will be rebased in Q4, 2019 at roughly $85 million to $90 million of net sales per quarter and be poised to return to growth with a portfolio of promoted brands, including DUOBRII, BRYHALI, SILIQ, ALTRENO and JUBLIA, plus tail brands including TARGRETIN, RETIN-A MICRO, ELIDEL, ONEXTON, CLINDAGEL, and others.

Finally, our Diversified segment declined 5% organically, considering that LOE assets were an approximately 900 basis point drag versus Q3 of 2018, that’s a pretty good quarter for Barb Purcell and her team. I want to call out a few highlights.

Our Buproprion franchise in the neuro business including Wellbutrin XL and Aplenzin grew 12% versus Q3 of 2018 as a result of targeted and effective promotion in collaboration with our market access team led by Bob Spurr.

Our generics unit has been the beneficiary of the LOEs of many of our branded products launching and selling authorized generic versions of those brands. Generic revenues were up 7% versus Q3 of 2018. Now, I've said this before, but here it comes again.

We manage the diversified group to maximize the long-term cash flows from a basket of assets that are expected to decline over time. Our objective is to slow that decline and thereby maximize the cash flow and our team is doing a great job there.

Down at the gross margin line, with a -- excuse me blended gross margin of 73.6% in the quarter, we were plus 80 basis points versus Q3 of 2018. Our core initiatives within the supply chain drove the majority of the 50 basis point positive variance in the B&L International segment and roughly half the 350 basis point improvement in Salix.

Mix, improved gross margins in Salix, decreased gross margins in the Ortho Derm segment with Solto making a greater percentage of total sales and decreased gross margin than diversified where generics made up a greater percentage of segment revenues.

Note that we are guiding to a roughly 73% gross margin for the full year 2019, our year-to-date gross margin was 73.2%. Selling, advertising and promotion expenses increased by $32 million compared with Q3 of 2018 unfavorable by 7% reported and 8% constant currency.

Half of that unfavorable movement came from B&L International and was due to our deploying additional promotional resources to drive revenue growth mainly in the Global Vision Care and the International Surgical businesses.

The $13 million increase in selling and advertising and promotion in Salix was mainly due to the addition of roughly 100 sales territories associated with the acquisition of TRULANCE. Company-wide G&A spending was up 5%, mainly due to increased investment building out our IT infrastructure.

Our investment in our R&D increased $16 million compared with Q3 of 2018 as we continue the process of building the R&D organization and adding to our portfolio of development projects to enable us to sustain long-term organic growth for our businesses.

Our adjusted EBITDA of $942 million in the quarter was up 3% on a reported and 2% on a constant currency basis compared with Q3 of 2018. Good quarter. So Slides 6, 7, 8 and 9 show additional details for the segments, I'm not going to dwell on them as I've covered the main items of note on each. So turn to slide 10 cash flow summary.

In the quarter, we generated $515 million of cash from operating activities. The amount while down slightly from the amount in the prior year quarter keeps us well aligned to deliver between $1.5 million and $1.6 billion of cash from operations in 2019. Year-to-date our cash provided by operating activities is up $85 million from the prior year.

If you flip to slide 11 the balance sheet summary. During the quarter, we repaid $303 million of our term loan debt and paid $150 million to reduce our revolving credit borrowings to zero at September 30, 2019. Year-to-date to September 30, we've repaid $631 million of long-term debt and reduced revolving credit borrowings by $75 million.

I want to note that we could have repaid more long-term debt year-to-date but elected to allocate roughly $200 million of cash flow to what we view as high-value business development activity mainly in this case the acquisition of TRULANCE. On to slide 12 in our revised guidance.

Today, we raised and tightened our full year 2019 guidance for revenue increasing the low-end of the range by $75 million and the top end by $25 million. The new range is $8.475 billion to $8.625 billion. The midpoint of our current revenue guidance is up $50 million from our August guidance from the midpoint of the August guidance.

As you'll see on the guidance bridge on slide 13, the raise was in part driven by $40 million increase in the revenue expectations for our LOE assets with the most significant change moving the anticipated LOE date for peso to 1H 2020 and $20 million increase in revenue for our base business.

Offset in part by unfavorable movements in FX since August, which reduced our forecast by about $10 million. We also raised and tightened our guidance for adjusted EBITDA to $3.5 to $3.6 billion. The midpoint of our current guidance is up $50 million from our August guidance.

$35 million came -- of that came from greater revenue expectations for the LOE assets $5 million from FX plus -- that's plus $5 billion from FX, minus $25 million for the higher-than-expected investment in R&D and plus $35 million from a combination of the increased base business revenue improved, gross margins and other items.

Last thing before I turn it back to Joe. I think it's worth looking back at how we now expect to end 2019 compared with our guidance from back in February. At the midpoint of our initial guidance range, we expected revenue of $8.4 billion for 2019. Midpoint of our current guidance revenue was $8.55 billion, so plus $150 million.

$85 million of the increase in revenue comes from roughly $60 million more expected revenue from the LOE assets, $55 million from the acquisition of TRULANCE and offset by $30 million of unfavorable movements in FX. So that explains the first $85 million.

The remaining $65 million increase comes from both better performance in our base businesses and better gross to nets in some businesses driven by Project Core than we originally forecast.

The point of the story is that our original guidance for revenue on a constant currency basis and excluding the date uncertain LOEs was quite tight to how we expect to end up 2019. We're proud of the degree to which we've improved our forecast accuracy. That's back to you Joe. .

Thank you Paul. Let's go through some of the highlights in our B+L/International segment, the important takeaway from slide number 14. This segment delivered its 12th consecutive quarter of organic growth up 5% versus last year as you can see on the chart. Turning now to slide 15.

Global Vision Care had a great quarter up 6% organically driven by the performance across Biotrue ONEday up 22% and ULTRA up 25% as well as the AQUALOX launch. We launched the ULTRA multifocal lenses for astigmatism in the U.S. in mid-June. These lenses offer consumers seamless transitions between distances from near to far and in between.

And it served by patients using ULTRA multifocal lenses 92% agree that they are comfortable throughout the day and four out of five patients surveyed preferred Bausch + Lomb ULTRA multifocal over their previous method of vision correction.

On slide 16, LUMIFY continues to outpace expectations having achieved a weekly market share of approximately 43% as you can see from the chart on the right. Third quarter reported revenue of $21 million grew by 91% compared to the second quarter.

LUMIFY is now the number one eye care UPC in the United States and the number one physician recommended product in the redness reliever category. E-commerce continues to be an important channel for our Global Consumer products as the third quarter Amazon data demonstrates with 65% growth compared to the third quarter of 2018.

Turning now to slide 17 for an update on Salix. Organic revenue grew by 18% compared with the third quarter of 2018 and revenue exceeded $500 million for the second consecutive quarter driven by the TRx growth in XIFAXAN as well as other promoted brands including RELISTOR and PLENVU.

Since our Salix acquisition in 2015, revenues are tracking greater than 12% as we've shown in the chart on the left.

Since 2017 we've been making investments in Salix to drive this growth, including hiring 200 primary care sales reps to expand the commercial field force for XIFAXAN, increasing the focus on next-generation XIFAXAN formulations, acquiring TRULANCE and dolcanatide earlier this year and entered into license agreements to develop and commercialize novel compounds to treat GI conditions.

Turning now to slide 18. We've shown the overall quarterly trend since we've added the primary care team at the beginning of 2017 in the chart on the left. With respect to IBS-D specifically, TRXs grew by 14% compared to the prior year quarter and to-date. XIFAXAN accounts though for less than 10% of the IBS-D prescriptions.

So we believe there is a great opportunity to help more IBS-D patients. Moving on to TRULANCE on the right. TRULANCE has generated reported revenue of $37 million since the acquisition and remains on track towards full year guidance of $55 million. TRx grew by 25% compared to the prior year quarter and by 10% versus the second quarter sequentially.

Since the TRULANCE acquisition in the first quarter of 2019, our team has done a great job improving the market access position for greater than 37 million lives. We've also increased reach and frequency of TRULANCE's promotion to healthcare providers by more than 90%. Overall, we are pleased with TRULANCE progress in the IBS-D category.

And as we focus on reestablishing momentum for TRULANCE, we've prioritized our Salix portfolio and as a result, we mutually agree with U.S. World Med to terminate our arrangement [Indiscernible] effective September 30th.

Moving on to Ortho Derm on Slide 19, while we reported a total segment organic revenue decline in the third quarter, the performance of Global Solta, our aesthetics business, has been outstanding, up 62% organically compared to the prior year quarter, driven by the strong launch of Thermage FLX in the Asia-Pacific region.

We've shown the quarterly growth on the chart on the right. Additional highlights include a strong DUOBRII launch, which I'll talk about in the next slide, SILIQ TRx growth of 65% compared to the third quarter of 2018.

BRYHALI scripts also grew nicely up 20% from second quarter and we expanded our Dermatology cash-pay prescription program dermatology.com to more than 9,000 Walgreens U.S. retail pharmacies, which offer patients convenient access to our products at a predictable price. Finally, we continue to move new treatments through our pipeline.

We filed an NDA for ARAZLO, an acne treatment and have a PDUFA date of December 22nd. On to Slide 20, since the June launch, DUOBRII TRxs are tracking above the plan. Strong adoption by doctors, patients, and managed care is driving weekly TRx growth.

The chart on the left shows weekly TRxs compared to other dermatology launches and as you can see from the data, the DUOBRII launch has been very strong in its first four months on the market, tracking right around 2,300 weekly TRxs.

While the early launch has been supported by our couponing strategy, managed care is recognizing DUOBRII's potential and DUOBRII is quickly gaining commercial access. With the addition of DUOBRII CVS Caremark formula at the beginning of November, we are now at approximately 57% commercial access as you can see in the chart on the right.

We continue to believe there is an enormous opportunity for DUOBRII based on early data and remain very optimistic about DUOBRII's potential to improve the lives of patients with psoriasis.

As we've shown on Slide 21, revenue of $525 million from new products accounts for approximately 10% of our core business revenue year-to-date as compared to only 2% and in 2017. We expect this number to continue growing as we launch new products.

On to Slide 22, at the current run rate, 2019 revenue from our Significant Seven products is up 65% versus last year and tracking at approximately $265 million, down from our previous estimate of approximately $300 million.

Even though DUOBRII scripts have been better than expected, the expected approval and launch was delayed we have been couponing to support the long-term DUOBRII opportunity. As you saw with the launch of XIFAXAN IBS-D, early couponing is an effective way to initiate patient trials.

As patients adopt DUOBRII, we expect couponing to fade and the realized selling price to improve. We continue to expect the Significant Seven annualized peak total revenues of over $1 billion by the end of 2022. Turning now to Slide 23, we show the progress of our late-stage new product pipeline in each of our three core business segments.

In eye health we have a lot of hype on activity. First, we're expecting to launch SiHy daily lenses in the United States in late 2020. We are working on line extensions for LUMIFY with further clinical studies planned for 2020.

Our Surgical business also has a number of late stage pipeline products including new Ophthalmic Viscosurgical Device and enVista Trifocal Intraocular Lens. Late last month, we announced an exclusive license for the commercialization of XIPERE in the U.S. and Canada. XIPERE is being developed as a treatment for macular edema associated with uveitis.

And if approved by the FDA, XIPERE would be the first treatment for this condition. We expect the NDA to be resubmitted in the first quarter of 2020 and believe that FDA will review it within six months of resubmission. Moving on to Salix. We're expecting readout for the cardiovascular Holter study, amiselimod around year-end.

In addition, we are developing a number of new formulations and indications for rifaximin that we've listed on the slide. Interim analysis for the over hepatic encephalopathy study is expected in the first quarter of 2020.

In Ortho Derm, I mentioned the NDA submission for ARAZLO earlier and we have a strong pipeline of other acne and atopic dermatitis treatments in Phase 3. To wrap up on slide 24. We continue to grow our existing business and invest in future growth drivers. We have a durable business, approximately 60%, which is not exposed to U.S.

branded prescription pricing. The third quarter was our seventh consecutive quarter of total company organic growth led by B+L International and Salix, and we expect a strong growth outlook for the next three years.

We're continuing to invest in sustainable growth drivers, we are increasing R&D investment and continue to deliver new products while also pursuing value creating acquisition, partnerships and licensing opportunities. And we've leveraged our investment for the XIFAXAN primary care sales force to now also promote TRULANCE.

Finally, we are consistently improving our balance sheet, having reduced debt as of September 30 by $8.5 billion since the first quarter of 2016. We have also successfully managed the maturity profile of our outstanding debt and produced strong cash flow from operations.

For these reasons, we believe that our third quarter results demonstrate that Bausch Health is well-positioned for long-term growth. With that, operator let's open up the line for questions..

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Chris Schott of JPMorgan. Please go ahead..

Great. Congrats on the quarter, and thanks for the questions. I guess, my first was on DUOBRII.

Can you just talk a little bit more about how we should be thinking about gross to net dynamics for this product in the near term? So how long will this couponing strategy continue, as well as any color in terms of where you see gross to net stabilizing longer term as we try to translate this very healthy volume trend we're seeing, what that means from a revenue perspective? My second question was on gross margin upside.

We've seen that throughout 2019, just a little more color in terms of what's driving that and how sustainable the upside is? So, what I’m basically trying to get to is, is the 73% a good number going forward? Does that go up or down? Or just any pushes and pulls we should be thinking about that going forward? Thanks so much..

Chris, thank you for the question. I'll start with DUOBRII. Yes, we are really excited about what we see for the launch of DUOBRII in both the acceptance by physicians, patients, and really how we're really making a difference in these lives of patients.

Relative to the question, yeah, our couponing strategy is such that we want to encourage the opportunity for patients to give it a try.

But if you look at what we've been able to do on our slide and looking at the overall market access acceptance, when we were talking last quarter, the acceptance or – I'm sorry, I should say, the market access was about 30% coverage and then by September, it moved up to 38%, now it's up to 43%.

And right now, we're at the beginning of November, we're at about 57% commercial coverage. We think that's going to be a big help to us as improving the gross to net.

The summation question or comment I would say is that, I would say that we expect to be more of a steady state gross to net somewhere around 12 months as we at that point approach what we think will be approximately 70%, 75% market access coverage.

So it takes about 12 months, I believe, as a general comment for products in the pharmaceutical industry, but it always depends on market access coverage.

The second question, I think, you have is relative to gross margin, Paul, why don't you take that one?.

Yeah, sure. Yeah. First, I'm not going to guide the gross margin percentage for 2020, but just let's comment on how we've done in 2019 because I think it's pretty impressive. It's really a combination of three things.

One is, Project COREe, which is – as I've talked about quite a bit already, Dennis Asharin and our supply chain team have been engaged in a supply chain efficiency initiative since 2016. And, boy, are we getting results there and it is helping for sure drive our aggregate gross margin percentage in the right direction. The second thing is mix.

We do have a mix of businesses. Those businesses have different margins. And so, that certainly comes into play. I actually called out in my prepared remarks where mix was a helper, and mix was working against us in our Q3 results. And so, that plays a big role in how you forecast into 2020 and beyond.

And the last piece I want to mention is the wildcard of FX. We are a global company. We have manufacturing facilities around the world. We produce in currencies and then often we'll sell those products in other markets where the – they are denominated in a different currency. So, it's a bit of a wildcard.

I – you saw that we – our year-to-date 73.2% and we're guiding to circa 73 for this year. It bounces around a little bit. I mean, I'm not going to guide you for next year. I'll just say we've made great progress doing the fundamental things right that we're supposed to do to keep that percentage as high as it can be. Mix and FX are very big factors..

Thank you..

Operator, next question please. Q - The next question comes from Umer Raffat of Evercore. Please go ahead..

Hi. Thanks so much for taking my questions. Joe, there's been a lot of commentary on the Street on setting DUOBRII expectations possibly as high as $2 billion plus. And I noticed your slide 20 today in the deck is also doing some of those same non-apples-to-apples comparison in my opinion comparing DUOBRII versus novel biologics like Dupi.

So my questions are; number one, A, Joe are you comfortable with setting expectations at those types of numbers? And two, if you take the DUOBRII TRx this quarter, which is 24,000 and you multiply it by a net price of even $500, you get to something like $10 million in sales.

Now granted there's a lot of free drug, but that should still at least be $5 million in sales or so. The fact that it was less than $4 million, I'm just curious how much free drug is in those TRx that people are comparing versus Dupi? And then finally, just curious why TRULANCE declined quarter-over-quarter.

And it sounds like based on your guidance, 4Q might also not be much higher than the 2Q levels? Thank you..

Okay. So, first I'm not going to make any comments specifically on the long-term guidance of DUOBRII, specifically to numbers other than to say we're really excited by what we're seeing.

Because for the very first time, we have a product that you can treat patients who have psoriasis topically and you can treat them to clearance, whereas previously you had a limited duration of treatment.

So, we think it's really exciting what we see, obviously the prescription in the first four months we think have been very strong in terms of growth rate. We clearly just wanted to look at some of the other products that have been dermatology-specific and compared the uptake of our product versus them.

We're not trying to put numbers out specifically for the future other than to say we think it's going to be an important part of our future Dermatology business and help us with the turnaround of the Dermatology business.

On the question of the gross to net, we absolutely acknowledge that initial first nine months, 12 months will be a lower growth to net than what we would normally see and what we'll see at the, call it steady state, but the reality is it really depends a lot on how successfully we are gaining commercial access.

We think the uptake in commercial access, market access has been very good, and we'll look to continue to do that going forward. So, that's really all I can say on the DUOBRII side relative to – we're not going to put a specific number out in the plan for future. On the question of TRULANCE, yes, the TRULANCE quarter two revenue was higher.

That was, if you recall, we acquired the product out of a bankruptcy situation, and there was some stocking in the quarter two. But if you look at really the measure of growth, prescriptions for TRULANCE, quarter three versus quarter two was up 10%. So we clearly think that's one important metric. There was some noise on the stocking side.

And then, of course, as you think about quarter three, this year versus quarter three 2018, we were up 25%. So every metric we look at with TRULANCE gives us a lot of optimism for the future and certainly in line with what we said with our full year guidance on the $55 million.

So pleased with TRULANCE, and especially now that we've moved from 100 reps promoting it to 200 reps, now up to 500 reps.

We think there's a great opportunity as we brought together the XIFAXAN and TRULANCE, IBS opportunity to have, what we believe is a best-in-class product in IBS-D with XIFAXAN, and we believe a best-in-class label with the TRULANCE product for IBS-D, a long way to go in terms of the performance there, but we think it's a great opportunity for us.

Operator, next question?.

The next question comes from Akash Tewari of Wolfe Research. Please go ahead..

Thanks so much. So consensus has the Derm segment kind of growing at a steady clip. If you include Solta, you go from like around $560 million to close to $900 million by 2025.

Can you give us a sense of how you expect this segment to grow internally? And would it be fair to say that consensus isn't really modeling uptake for your IDP pipeline products.

So of IDP 120, 123, 126, which one of these products, are you guys kind of internally most bullish about? And why? And then a bit maybe on XIFAXAN and the patent case, what is your – you've talked about your willingness potentially to sell with Novartis.

How do you feel their case is different as at all with Teva's? And with that in mind, would we – would it be unreasonable to expect a settlement or anything sooner than the 2028 that Teva had settled for previously? Thanks..

Okay. You asked quite a few questions there. I'm going to try to get them all, but if I miss any please do remind me. First, starting out with Dermatology, we are really excited about our Dermatology business as most evidenced by my comments relative to DUOBRII.

We think DUOBRII is a game changer relative to the ability to treat these patients topically, and which is what most psoriasis patients are looking for is to treat their product treat topically.

We also believe it's a game changer because of the ability for patients to delay the need for biologics and as you know that, we did a study that for every patient that you delay the need for a biologic, the use of a biologic you can save a planned significant amount of dollars.

My recollection is for the plan with one million lives it's something in the order of $3 million to $5 million of savings for that plan on an annual basis. So clearly that is the first comment in terms of the overall DUOBRII in Derm.

I'm not going to make any comments about the outlook for – specifically for our commentary other than to say that we do believe the Dermatology business has a significant upside from where we are today. We had to work our way through the LOEs. We believe most of that is behind us as Paul mentioned.

Now as we look we have the growth opportunity, especially with DUOBRII, BRYHALI, SILIQ in the category. On the question of other products certainly on the one IDP-120 that's a dual product for acne 123 is the ARAZL that we also talked about for – that we filed and have a December PDUFA date.

So, clearly that's something that we think also could be an exciting opportunity for us once again in acne. And then 126 is a triple combination we have. So, a lot of good opportunities for us for the future, we think that's what's going to build our Dermatology business going forward. I think the last question you had was on XIFAXAN IP.

We think we have a very strong position. We did file suit against Sandoz on September 30. We believe that the 22 patents that we were originally had that was supplemented with one additional patent that we announced. We now have 23 patents. We believe we have a very strong position. There's important commentary on intellectual property.

We know that the poly more patents are very important to us and the FDA has come out with guidance on how one would need to be shown to be bioequivalent.

We think that, the differences in the absorption of the polymers is a very important consideration and one that gives us based on our information a very strong position to defend it, and we see nothing in the Sandoz filing that would give us reason to move off with that 2020, 28 date. So we feel very good about it.

And obviously we'll continue to try to work through with Sandoz but we feel very strong about our 2020, 28 date. I think I got them all. Operator next question please..

The next question comes from Greg Gilbert of SunTrust. Please go ahead..

Thanks, gentlemen. First, Paul I know you're not in the mood to give a lot of specifics about 2020, but hoping you could just at least highlight some of the pushes and pulls as you see them in 2020 and as part of that more of a qualitative question about just maybe a little bit quantitative.

But how much flexibility do you expect to have next year to – to consider extra curricular activities in BD as you continue to emphasize deleveraging sort of 2020 versus how it has felt in 2019 and previously? And then secondly on XIFAXAN there's a competitive launch coming in travelers diarrhea. I know, it's a tiny revenue contributor for XIFAXAN.

But Joe, maybe you could talk about whether you're seeing or expect to see any signs in the contracting environment that that is relevant even though it's not a head-to-head sort of comparison to where the business lies? Thanks..

Joe, you take the first one. I’ll take the second..

Yes. Sure. Thanks for the questions Greg. Let me start, again, don't want to provide guidance for 2020, but there are some things that you should be able to take away from our commentary earlier today that help you start thinking about at least how we view 2020. I mean I'll start with the B&L International segment.

We are continuing to deliver solid kind of mid-single-digit organic revenue growth in that P&L International segment and we talked in the past how this business over time is kind of a mid maybe even a little better than mid single-digit performer or could expect to be. That is the majority of our revenue.

So, as you're thinking about it, that piece there's one growth driver. Second, I called out XIFAXAN, obviously our largest individual asset and was pretty clear.

I mean, you can come up with your own volume expectation growth for volume in XIFAXAN for 2020 versus 2019 and we've said we get a couple of hundred basis points of we think of a pickup in price there. So you've got your largest franchise which you're expecting to grow at an attractive rate into 2020 versus 2019.

I called out the Derm, as we rebase it here in Q4, we expect the medical derm part of our business to return to a growth profile that's on the strength of the products that we've launched and are launching in the Medical Derm business. Part of that Ortho Derm segment Solta has been growing very, very strong growth here in 2019 versus 2018.

Do I expect it to grow at that same rate going forward that will be hard to achieve, but I expect it to be kind of a strong grower. So there's a majority of our business which you'd expect could be growing into 2020 versus 2019. The flip side the things that could be headwinds to headwinds for us there. I called out GLUMETZA.

GLUMETZA was -- has been a great product for us. But as we had called out, I want to say we started talking about it at the end of Q1 giving people a heads up, keep an eye on. And it's been really good for us.

But as that volume shifts into what I'll call far less profitable channels for us that is going to be a year-over-year decline and it's kind of a material MD&A item. The other thing I'd call out is, we will -- when we provide our guidance for 2020, we'll of course update our LOE schedule.

The next LOE of significance is something that I did speak about in talking about guidance which is APRISO. We've moved that out to 1H '20. That comes January 1. It's different than if it comes June 29. So, those are the things I'd be looking at when thinking about 2020 from a revenue perspective versus 2019. I hope that help..

And on XIFAXAN, the competitive launch in traveler's diarrhea, we take every competitor very seriously. Having said that, the rifaximin product was approved approximately one year ago, and to-date we really haven't seen anything of consequence there yet.

The only point I would add to that is that for us, the traveler's diarrhea is less than 2% of our TRx, so a very small portion of our business. And for the most part, managed care doesn't usually cover that.

So I think it would be somewhat difficult to get too much contracting with that, particular indication, but we'll obviously take it serious and see what happens in the marketplace relative to the traveler's diarrhea indication..

Greg, I'm sorry it's Paul again. I realized I skipped over your question regarding our flexibility to allocate free cash flow for business development opportunity. This year, I think early in the year, we were fortunate to be able to acquire the assets of synergy and get the TRULANCE and drop it into the Salix business.

As I want to say, we would do that deal 100 out of 100 times. It was circa $190 million. And yes I wish we could do one of those every quarter, but those sorts of transactions are not always available. As we look ahead to 2020 and beyond, we will continue to prioritize the use of our free cash flow to reduce our debt.

I think we have reduced the quantum of our debt and we are improving our leverage, but we continue to be a very highly levered company. And one that needs to work to bring our capital structure to something that is more reasonable for our company is comprised the assets that we're comprised of. So we'll prioritize that.

Now that said, if there are opportunities out there that fit dead center on top of our core areas of focus that would be eye care, GI and medical derm.

And we would certainly consider those things and you should expect us to try to find -- trying to find opportunities where we could deploy capital in business development opportunities that would be value generative. Operator next question please..

The next question comes from David Amsellem of Piper Jaffray. Please go ahead..

Thanks. Just a couple. So first on DUOBRII I wanted to come back to the topic of access. So you said 57% covered commercial lives. So I wanted to get a sense of how much of that is hassle free or maybe another way of asking the question is what do the step throughs look like in terms of the covered lives? That's number one.

And then on TRULANCE, I don't know if you're willing to cover this. Can you just talk about how we should envision steady state gross to net from that product? It seems like you've made some gains on contracting and reducing restrictions.

So how does that affect gross-nets and once steady state that it looks like longer term? And then lastly real quick on dolcanatide. Do you have anything new to say about that? And where you may go in terms of the developing on the asset? Thanks..

Yes, I'm going to try to get all of them, but let me start with DUOBRII. The question of what the step throughs look like for access. I think we've been very fortunate as I said, we've continued to improve our access with DUOBRII moving from as I said when we're on this call last quarter was 30%. Now we're up to 57%.

A majority of that has improved specifically in the unrestricted for DUOBRII. We expect to have about 44% unrestricted and about 13% has been prior ups and step throughs.

But you can see the majority of the 57% is specifically an unrestricted access which we think makes a lot of sense, because as I said before, it's the first time a patient could use a topical and treat the clearance versus what previously was limited on duration and because of the ability for us to potentially delay the need for biologics.

On the second part of the question, TRULANCE, how do we envision the steady state of the product going forward? I think, when we acquired it, we made the comment about what we were trying to accomplish. And I think we stayed to that comment. First thing, we said, we have to improve reach and frequency.

And as I made comment on the call, we improved re-frequency by 90% additional promotion behind our XIFAXAN primary care effort as well as what we have in gastroenterologist, since we acquired it. So clearly we're doing re-frequency. On the second part of what we said, we needed to improve the market access position and we've done that.

What specifically we've done is improve the availability of this product for about 37 million lives and by improving it either we got additional formulary additions or we made it easier to use the product more moving it more towards the unrestricted side of the equation. So those are the things we've done with TRULANCE.

And as we sit here today our overall TRULANCE availability unrestricted and restricted is about 88%. So we -- you can see, we've made some really good progress there. And the third question you had with dolcanatide, we are continuing to evaluate dolcanatide.

We do think it has some significant opportunities for us relative to us doing some additional preclinical work with molecules. At the very least, we clearly think it has a life cycle for us relative to improving TRULANCE, but we're going to look at other gastroenterology indications as well, as I said through preclinical models.

I think I got all your questions David. Operator, next question..

The next question comes from Gary Nachman of BMO Capital Markets. Please go ahead..

Hi. Good morning. First in B+L on the contact lens market.

Just talk about how you've been able to gain share particularly in the U.S.? And when will the daily SiHy be ready to launch in the U.S.? And how much share could that potentially take? How will it be differentiated in the market? And then is VYZULTA still a major focus for the B+L team is Medicare where it needs to be? And when should we see this product accelerate? And then Joe on the cash pay model for legacy Derm products, have those products gain traction yet? And how much should the expansion help in Walgreens that you talked about? Thank you..

Okay. You got a lot there. I'm going to try to get them all in terms of but if I missed anything, but please remind me. On the contact lens side really it's been the new innovation that we brought out, the new ULTRA, the Biotrue, the ULTRA multifocal, the ULTRA toric that's been really the primary way because I mentioned to you.

Biotrue was up 22%, ULTRA was up 25% quarter versus a year ago. So it really shows I think great performance by the team. I most -- certainly want to also recognize the team Joe Gordon and his team have done an outstanding.

John Ferris as they've taken over this responsibility, and then Yang Yang [ph] on our international side has also done a great job on our business.

So a lot of good efforts by the team has really focusing on our new innovation and the opportunity for people to have better optics, more comfort in the ability to have access to new innovations such as our multifocal for astigmatism. On the question of the SiHy daily, we said it's the second half of 2020. To-date in the United States, the U.S.

SiHy percentage of market is about 12%, 13% of market, but it is growing significantly.

And we believe we have an opportunity once again to bring some innovation into this marketplace with a new SiHy that we think is going to be very desirable for patients relative to the current existing SiHy products out in the market, which will help us with the growth of that product. VYZULTA, is it still a focus? The answer is absolutely yes.

If you look at our performance, the performance in the third quarter of 2019 was up 140% and versus the third quarter of 2018. So, I think you can clearly tell by that. The team is doing a good job with it and continuing to move that product forward for us as a company.

Last comment was the dermatology.com, how much will the cash-pay program help us? We've been working very diligently.

Bill Humphries and his team has been working very diligently to ensure that as we got greater access, what we felt the problems that we can solve with dermatology.com is to make sure that the doctors get the brand with the predictable access they get the product that they want and the formulation they want.

And then of course for patients that the patients have access in a network that means that they're going to get the products that doctor wanted. They're going to get the results that the doctor is expecting, in the formulation that they're expecting at a very predictable price point.

So, that's what we expect is going to help us and having an additional 9,300 or so stores from Walgreens only makes it -- the model work even better. I think I got all your questions. Operator, next question..

The next question comes from Louise Chen of Cantor. Please go ahead..

Hi, thanks for taking my questions.

First question I had for you is if you could comment more on the gross to net for the third quarter of 2019? And the second question I wanted to ask you was as you move through this growth phase between 2019 and 2020, how do you plan to achieve the sales and EBITDA growth that you've forecasted as a CAGR over the next couple of years? And the last question I had was just how should we think about R&D spend as we enter 2020 and beyond? Thank you..

Hey Paul, why don't you take that first -- the growth 2019 question?.

Yes sure. And the gross to net is a -- it's kind of a I'll call it a complicated thing. But if you look the gross debt pickup that we observed in the quarter and frankly have observed year-to-date, there's been a theme for us over the last couple of years. And it's not something that just kind of happened in a vacuum.

It's been the result of a lot of management focus. We implemented some improved processes and I'll use product returns as an example if I might. I think it's worth spending a second on this. Year-to-date through September the amount of product returns that we actually processed were $77 million less than we had in the same period in the prior year.

That's a 30% reduction. So, for the avoidance of doubt, our process return results in a credit against accounts receivable meaning we're talking about total hard cash here. So, I'll repeat $77 million favorable year-to-date versus 2018.

So, then why did process returns go down so much? It's because beginning back in the latter part of 2016 and continuing even as we speak, we've more actively monitored and managed the channel inventories of our products and what we're talking about here is mainly our brand and Rx businesses.

I think we're talking about in the U.S., now Salix, Neuro, Derm, and Optho Rx, we tightened up our policies, we successfully challenged channel partners that may have been gaming us in the past, we've worked our channel inventories down, which is in and of itself helpful.

And significantly we've changed our pricing policy such as a large infrequent price increases are not part of our business model.

So, we're working our way through the situation we started with and we made great progress and that really resulted in measurable declines in the level of the process returns that you saw beginning in say 2018, and you're going to see this -- or you've seen it already in our 10-K and our 10-Q, yeah, you look at the revenue recognition footnote you can find information there.

But as we've developed sufficient data to support an assumption that our future returns be less than we previously estimated and accrued, we changed both the amount, by which we reduced gross sales for returns during that period and we true-up the returns accrual to reflect a lower amount of returns that we now expect to process against previously sold product.

So that first part, that reduction in the deduction amount continues on it as an increase in the average selling price for our impacted products. I'd call that out a little bit when I talked about XIFAXAN. And then the true-up of the accrual that's helper revenue in the current period but does not repeat.

And as such it becomes a little bit more of a challenge when we're comparing this period from here forward. So I'll stop there. I'll say it's not just returns by the way; it's a whole host of things.

I mean, it's rebates, it's how we manage our co-pay assistance cards and the overall trend of our gross net has been getting better some – from 2017 to 2018, dollar now year-to-date to 2019 and that's something that's been a real helper for us so far.

And I think as we go forward, what it is as it results in higher realized average net selling prices for those branded Rx products. That was a long walk, but I hope it helps..

Absolutely..

So, the second part of your question, Louise is about I think our three-year growth rates and CAGRs and what we're thinking about there. First and foremost, I'll remind everyone that we're looking at revenue CAGR of 4% to 6% on a three-year basis, and on EBITDA 5% to 8% CAGR. So that's the mindset we have.

Relative to how we will do it? I mean, I think it comes down to just -- first just look at what we've done and then importantly we move forward. If you look at what we've done, the B+L and the Salix business together have done very well for us. They now account for about 77% of our business, so clearly that 7% to 8% of our business.

So it's clearly a large part of our business. But by definition, the derm business has not been there yet.

We now think that we have the derm business at a point where with the success of a DUOBRII launch, BRYHALI launch, continuing to grow SILIQ, and then launching these new products, we think that turnaround is also going to help us with the future growth drivers.

So, yes, it's been so far fueled by the Salix and B+L, but we do think the derm business is also now as Paul mentioned in his comments at a point where you can significantly contribute to our growth. So that part is clearly, the derm business is important.

The second part of it is just new products across all of our business that on the slide we showed on page 21. New products in fiscal year 2017 account for a bout 2% of our sales. Today that's up to be about 10% of our revenue. So clearly that's the second part, new products.

And we expect to see that to continue to accelerate as we launch these opportunities.

And then the final thing, I'll just pick up on where Paul said, it's all about that Project Core in terms of making us more efficient and that's just a cost optimization revenue enhancement project that has yielded very good returns for us and we expect to see that continue going into the future and that helps us both on the revenue side, but also on the EBITDA side.

So those are the primary ways that we're going to work through this. The final comment you have was about R&D spend. We did make significant investments in research and development in 2017, 2018 and now 2019. I would look, as we go forward.

I'm not going to guide to it, but certainly we think we'll continue to invest in R&D at slightly above our revenue growth rates, as we think about the future of where we are going with the product. That concludes my comments there. Operator, I think I have time for one last question please..

And that question will come from David Risinger of Morgan Stanley. Please go ahead..

Thanks very much. So, three questions please. The first is, are there any formulary positioning changes of note for January for VYZULTA or SILIQ that could help their sales potential. Second, consensus isn't quite at the $1 billion level for the Significant Seven by the end of 2022.

Are there any products you think consensus may be under appreciating besides to DUOBRII. And then third, could you talk a little bit more on a bigger picture level about aesthetics market digital opportunities. It seems like consumers are increasingly receptive to purchasing products online and paying up for higher value products.

And this seems like it could fit with your Ortho Derm direct-to-consumer initiative. But it's still not quite clear to me, whether you're really there yet in terms of maximizing that potential for your Derm business. Thanks so much..

Okay. A lot of good questions. Maybe I'll try to think of one at a time here, VYZULTA and SILIQ relative to their formulary positions and where are we today and how we've continued to improve on that. We're very pleased with the success we've had with VYZULTA.

VYZULTA right now is up to about 74% access, commercial access and about somewhere around 30% on the Part D side. We know we are going to continue to work on that.

I don't have anything specific to say about January contract, but I can simply say that our market access team has been doing a great job for all of our products, and will continue to look to renegotiate, some of the positions we have with VYZULTA, both on the commercial side and on the Part D coverage side.

And the question of SILIQ, SILIQ is also right around the 78% on commercial coverage, less so on Part D but it's much less of a Part D marketplace, so SILIQ has – as I said 78% covered. We will continue to look to get better coverage there, but we think we've got pretty close to what we're looking for in terms of what's going on.

On the question – second part of your question was on Significant Seven. We do think there are some significant upsides. We mentioned DUOBRII clearly as one of the products that we think is a very significant opportunity for us beyond that.

The other products, we think are performing better than people expect is LUMIFY, RELISTOR and we clearly think the SiHy Daily is a good opportunity. So those would be the ones that – I don't want to comment specifically on any consensus model, but ones that we feel have a good opportunity for the future. On the aesthetics market opportunity.

Clearly, ours – what we're doing there is exactly what we commented before about dermatology.com in the Solta business, as we put those two businesses together. We think we've got the right prescription for the future.

Some patients, especially with the treatment of acne are just looking to get a cash pay option, where the cash pay option is not that much different than what they pay on a copays. So that's clearly one side. On the aesthetics business, you know, I think the results are Solta and Tom Hart and what he's done there to speak for themselves, being up 62%.

Clearly, they have done just an outstanding job and our expectations is that we have a great opportunity for the future, because yes, it's doing really well in Asia. Yes, it's doing well here in United States but there's a European opportunity that, as Paul mentioned, we're investing in for the future.

So we feel very good about the opportunities we see with aesthetics and specifically both on the Solta side but also what we're doing on cash-pay, as we solve problems for patients that are looking for predictable access and a predictable price point, we think our cash-pay model will do exactly that.

Operator, that concludes what we wanted to cover today. I thank everyone for joining us, and look forward to having more conversations in the future. Thank you. Have a great day everyone..

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