Valeant Pharmaceuticals International (VRX) Q4 2016 Results - Earnings Call Transcript

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Valeant Pharmaceuticals International, Inc. (NYSE:VRX) Q4 2016 Earnings Call February 28, 2017 8:00 AM ET

Executives

Elif McDonald - Valeant Pharmaceuticals International, Inc.

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

Paul S. Herendeen - Valeant Pharmaceuticals International, Inc.

Analysts

Gregg Gilbert - Deutsche Bank Securities, Inc.

Louise Chen - Guggenheim Securities LLC

Christopher Schott - JPMorgan Securities LLC

Umer Raffat - Evercore ISI

David R. Risinger - Morgan Stanley & Co. LLC

Annabel Samimy - Stifel, Nicolaus & Co., Inc.

Gary Nachman - BMO Capital Markets (United States)

Douglas Tsao - Barclays Capital, Inc.

David A. Amsellem - Piper Jaffray & Co.

Timothy Chiang - BTIG LLC

Operator

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

Thank you. Elif McDonald, Director of Investor Relations for Valeant Pharmaceuticals, you may begin your conference.

Elif McDonald - Valeant Pharmaceuticals International, Inc.

Thank you, Chris. Good morning, everyone, and welcome to Valeant Pharmaceuticals Fourth Quarter and Full-Year 2016 Financial Results Conference Call. Participating on today's call are Chairman and Chief Executive Officer, Mr. Joe Papa; and Chief Financial Officer, Mr. Paul Herendeen.

In addition to this live webcast, a copy of today's slide presentation and a replay of this conference call will be available on our website under the Investor Relations section. Before we begin, we would like to remind you that our presentation today contains forward-looking information. We would ask that you take a moment to read the forward-looking statement legend at the beginning of our presentation as it contains important information.

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

Finally, financial guidance in this presentation is effective as of today only. It is our policy not to update or affirm guidance except as required by law.

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

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

Thank you, Elif. Good morning, everyone, and thank you for joining us today. Let me take a minute just to run through the topics we'll cover this morning. I'm going to kick off the call with some brief remarks about the progress we made in 2016 to create the new Valeant, focusing on performance updates since our third quarter call in November 2016. I will then hand it off to Paul Herendeen to review our fourth quarter and the full-year 2016 financial results, both for the company as a whole and for each of our three reportable business segments. He'll also talk us through the guidance for 2017. Then, I'll share my perspective on our business, our new product pipeline, and what you can expect for the remainder of 2017.

So, let's get started with slide 4, I'm not going to talk through each of these points in detail, but you can see from this list that there were numerous positive developments in the last quarter of the year and the first quarter of 2017 is off to a good start.

First, Paul will walk through the Q4 2016 in greater detail, but importantly, our Q4 revenues and adjusted EBITDA were in line with the revised guidance and we have delivered on our Q4 commitments.

In terms of divestitures and debt reduction, we've been able to reduce the complexity of the portfolio by agreeing to divest CeraVe, AcneFree, and AMBI to L'Oreal for $1.3 billion; and Dendreon to Sanpower Group for $819.9 million.

We are also in the process of divesting certain businesses in several non-core geographies including Vietnam, Indonesia, and Brazil. Finally, we closed on the sale of Ruconest, and realized additional milestones for our OEM business.

The proceeds from these divestitures will enable us to deliver on our commitment of paying down debt. In 2016, we paid down approximately $1.84 billion of permanent debt, which included $519 million since the third quarter. And during 2016, we have made all of the amortization payments due in 2017.

Also, as we announced yesterday, we have recruited and launched a new primary care sales force for Xifaxan. We also remediated the issues that arose at our Tampa manufacturing facility, and we believe that our Tampa manufacturing quality process in that location are on track now.

We've hired new leadership for our dermatology business which is recovering from past disruption. And importantly, we entered into an agreement in principle to settle the legacy 2014 Salix securities litigation for $210 million. The proposed settlement agreement remains subject to court approval, and the amount has been fully accrued for the company's consolidated financial statements as of December 31, 2016.

And finally, with respect to our pipeline, we have achieved several very important milestones. First, earlier this month, we received FDA approval for Siliq or brodalumab. We refiled with latanoprostene bunod, Vyzulta, an innovative new treatment for glaucoma. We completed two successful Phase 3 studies of IDP-118, a topical psoriasis treatment. We also licensed EGP-437 from EyeGate Pharmaceuticals for a new eye care indication. We announced last week, we are partnering with Nextcell to expand our Obagi franchise. We are launching incremental Bausch + Lomb Ultra lenses, and we assigned a binding letter of intent to evaluate Relistor in an oncology indication.

So, from a new product pipeline perspective, we are improving the probability of future success. That said, we also experienced some recent challenges that have impacted our business and will likely have an effect on 2017 results. In the first quarter of 2017, we saw increased sales force turnover owing to some voluntary and involuntary changes. I'll discuss sales force turnover in more detail later on, but we feel that we have addressed the issues and generally stabilized that turnover in our sales force.

Moving onto products, as we expected and announced in November 2016, a competitor to Nitropress entered the market in December 2016. In general, loss of exclusivity will impact the 2017 results.

And finally, from my process perspective, fourth quarter realized pricing was down 3% year-over-year. We also experienced a significant devaluation in Egyptian currency, and a continued decline in dermatology Rx that negatively impacted fourth quarter results. But even with those headwinds, from my perspective, the team has accomplished a great amount since May 2016, and I'm proud of the efforts of this leadership team to create the new Valeant to create good solutions for our patients, and importantly, to create long-term value for our shareholders.

On that note, I'm going to turn the call over to Paul to go through the fourth quarter and full-year 2016 financial results.

Paul S. Herendeen - Valeant Pharmaceuticals International, Inc.

Yeah, thanks, Joe. Before I start, let me point out that when I talk about adjusted numbers, those are non-GAAP measures, and we provided reconciliations of all adjusted amounts to the related GAAP measures in the appendix to the slides on our website.

Next, as I stated last quarter, from here forward, we intend to focus on revenue and adjusted EBITDA as our primary performance and evaluation metrics.

And first, the headlines. Revenue for the year came in at $9.674 billion, slightly above the high end of our revised guidance range which we provided in early November. Our adjusted EBITDA is right in the middle of the guidance range, and our adjusted net income per share of $5.47 was in the upper portion of the range. The team here is working hard every day to improve our ability to forecast our various businesses. It was an important step for us to meet the expectations that we set for the quarter.

So, okay, let's start. Top level, look at our results for the fourth quarter. In the quarter, we posted revenue of $2.403 billion, roughly a 13% decline when compared with Q4 of 2015. The B+L/International segment revenue was roughly flat, down 1% on a reported basis but adjusted for currency, which was a headwind of roughly 360 basis points, was up 2.6%. On a constant currency basis, pricing across the B+L and International segment increased revenue by 1.7%, and volume was up contributing about 0.5% of growth. Note that in Q4, we continued to reduce the level of pipeline inventories in our Eastern European cluster, mainly in Poland, and that had the effect of reducing our performance compared with the prior-year quarter.

The Branded Rx segment in the quarter declined 17%, with roughly half of the decline coming from our GI business and half from our derm business. The GI business was down 17% compared with the prior-year quarter with the decline almost all on volume, as net pricing was about the same. The decline in the GI business compared with Q4 of 2015 is mainly due to the loss of exclusivity with Glumetza and Zegerid, and the transfer of the Zegerid authorized generic out of the GI business and into our generics business, which is in our Diversified segment.

Together, Glumetza, Zegerid and the transfer of Zegerid – of the Zegerid AG reduced our GI unit revenue by some $128 million. The balance of our promoted GI brands, Xifaxan, Uceris, and Apriso, were up 13% compared with Q4 of 2015. Pipeline inventories in the GI business increased roughly one-tenth of a month in the fourth quarter; and relative to the prior-year quarter, the net expansion on pipeline inventories was roughly two-tenths of a month. So, a portion of that 13% growth in the promoted brands was due to the relative pipeline expansion. Year-end pipeline inventories in GI stood at 1.57 months compared with 1.8 months at the end of 2015.

Our derm business was down 28% compared with Q4 of 2015. A reduction in realized prices reduce revenue by about 6% compared with Q4 2015, as we transitioned in late 2015 and early 2016 away from a specialty pharmacy model to our current model that features our unique relationship with Walgreens, supported by increased contracting with managed care to provide patients with access to our products, and finally, co-pay assistance programs to help bridge potential affordability gaps for patients. Volume in the derm business was down 24%, as we saw a dramatic decrease in the refill rates for our prescriptions under the new model as compared with the old. In the latter part of 2016, the derm team was able to get new prescription volumes back to near last year's levels.

Pipeline inventories in the derm business decreased by roughly 0.36 months in the fourth quarter, but relative to the prior-year quarter, pipeline inventories expanded by just more than one-tenth of a month. Year-end pipeline inventories in derm stood at 1.34 months compared with roughly one month at the end of 2015.

Revenues in the Diversified segment were down roughly 30%, with most of that decline coming from the neurology business which decreased 35%. Decreases in realized prices across the neuro portfolio reduced revenue approximately 15%, and the remaining roughly 20% decline came from decreased volumes. Our neuro portfolio had a number of LOEs that impacted Q4 of 2016 versus Q4 of 2015, including Xenazine, Mestinon, Ammonul, and Sodium Edecrin. Pricing in the neuro business declined due to increased managed care rebates, lower price appreciation credits relative to the prior year, and higher group purchasing discounts provided for products including Isuprel and Nitropress.

Our generics business was also off, declining roughly 19% compared with the prior-year quarter. And the main reason was the relative change in pipeline inventories. In Q4 of 2016, pipeline inventories for generics decreased 0.16 months on hand. And in Q4 of 2015, we saw a pipeline expansion of 0.41 months. So, the relative impact of the pipeline inventories was almost six-tenths of a month, which accounts for a good portion of the decrease in Q4 of 2016 versus Q4 of 2015. Year-end pipeline inventories in our generics business went from 1.46 months at year-end 2015 to 1.01 months at the end of 2016.

Adjusted gross margin in the fourth quarter decreased by some 330 basis points compared with Q4 of 2015, with about (13:02) half of that due to the change in mix of revenues with our two higher gross margin businesses, Branded Rx and Diversified, declining and B+L's International holding relatively steady. About 10% of the decreased margin was due to the degradation of our gross to net in our Branded Rx segment, and 40% from FX in our B+L/International segment.

Our adjusted operating expenses were favorable over the prior-year quarter with SG&A expenses down 3.5%, or $24 million, compared with the prior year. This was mainly due to decreased A&P spending in our derm and GI businesses, which were offset by higher selling expenses and G&A – offset in part. Adjusted R&D expense was down slightly compared with Q4 2015.

I wanted to point out that this was simply how our R&D expenses fell for the quarter, was not due to us cutting or delaying R&D programs. We're committed to our investment in R&D, and expect to invest more in 2017 than in 2016.

So, the quarter in a nutshell. The 13% drop in revenue in Q4 versus Q4 of 2015, combined with the gross margin decrease, resulted in gross profit declining $343 million, or 17%, and was offset a bit by roughly $27 million in reduced operating expenses, resulting in adjusted EBITDA declining some 24% compared with the prior-year quarter, to $1.046 billion. Adjusted net income per share fell 19%, not as much as adjusted EBITDA, as taxes were favorable compared with the prior-year quarter. Our effective tax rate on adjusted pre-tax earnings in Q4 of 2016 was 15.8%, versus 39.5% in the prior-year quarter.

Important safety tip. Effective tax rates in any one quarter can be volatile. And in the fourth quarter of 2015, we had catch-up of our full-year provision to what ended up being a 22.8% effective tax rate on an adjusted pre-tax earnings for the full year. Our adjusted tax rate for the full year of 2016 was 15.5%, and that's favorable to the 22.8% that we saw in 2015. That's based on the shift in jurisdictional mix of income, with several of our more profitable U.S. business units seeing meaningful year-over-year declines in revenue, and therefore, taxable income.

A portion of the favorable tax variance was offset by an increase in interest expense of $34 million, primarily driven by an increase in interest expense due to the two amendments to our credit facility in 2016, an increase in our revolver borrowings, and rising rates, and that was partially offset by the reduction in debt.

Moving on to the full year of 2016 as compared with 2015. High level, revenue decreased $773 million, or 7%. Excluding the favorable impacts of the Salix and Amoun acquisitions, our revenue decreased some 13%. B+L revenue was flat, aided by the impact of the Amoun acquisition, and held back by unfavorable movements in FX rates that reduced 2016 revenues by some $125 million relative to 2015.

In Branded Rx, the $434 million, or 12% decline, was a result of dermatology pricing and volume falling dramatically, and overwhelming the $339 million favorable impact from the acquisition of Salix which was acquired on April 1, 2015. And so it's not in 2015 for a full year.

Degradation in our gross to net, that's managed care rebates, coupon cards, et cetera, in both GI and derm, but mainly derm, resulted in our realized net pricing falling and reducing revenue by some $430 million compared with the prior year.

Revenue in our Diversified segment fell some $342 million, or 15%, mainly driven by a 20% drop in volume from the impact of LOEs in our neuro portfolio. We saw growth in our generics business coming from increased volume, mainly from the addition of the Zegerid authorized generic to the portfolio, which more than offset downward pricing pressure in the generics business.

A little more detail for each of the segments for the full year. The B+L/International segment was flat compared with the prior year. The changes in FX rates reduced 2016 revenue relative to 2015 by some 280 basis points, or $125 million. Acquisitions net of divestitures, mainly Amoun, added some $203 million to revenue. So, excluding acquisitions and adjusting for FX, the underlying business declined some 1.6% year-over-year. We saw a price erosion in the segment which decreased revenue, and on an FX neutral basis, by some 215 basis points, or $98 million. This was driven mainly by the U.S. ophthalmology Rx business due to increased managed care rebating needed to maintain patient access for our products.

The International portion of the B+L segment, on an FX neutral basis, actually saw pricing gains in 2016 versus 2015, mainly in Latin America and the Asia Pac regions. Adjusted for FX, overall segment volume improved slightly in the increasing of revenue by some 65 basis points, or $31 million, and that was U.S. consumer and China doing quite well, but offset in part by weakness in South Asia and Eastern Europe, where we took hits to reduce the level of pipeline inventories of our products held by our customers.

Selling expenses in the segment were $65 million higher due to the acquisition of Amoun, and hit the selling expense for our U.S. ophthalmology Rx business from the Walgreens agreement, as the per Rx charge paid to Walgreens is classified as a selling expense.

In the Branded Rx segment, which declined $343 million, or 12% compared with 2015, a reduction in realized pricing reduced revenue by some $431 million, with roughly three-quarters of that, $323 million, in our derm business and most of the balance, about $120 million, in our GI business.

In the shift from the specialty pharmacy model, we contracted with managed care and provided patient access through our derm products and offered substantial rebates. We also saw a degradation of our dermatology gross to net from the implementation of the Walgreens agreement, as we iterated to a reasonable net selling prices for our derm products later in the year, but realized very low net pricing on our derm products early on.

In GI, early in Q1 of 2016, we elected to contract with managed care to ensure that patients with the IBS-D indication for Xifaxan would have access to the product. Of course, that impacted the average selling price of all the Xifaxan franchise in 2016 relative to 2015. On the volume side, the 25% volume decline in derm, roughly $370 million, overwhelmed the modest gains in GI, where volume was up 3%, excluding the acquisition impact.

Note that the impact of acquisitions, net of some small divestitures, added roughly $362 million year-over-year growth for the segment, and that was mainly from the acquisition of Salix in April of 2015.

Selling expense in the Branded Rx business in 2016 compared with 2015 was negatively impacted by the Walgreens agreement in the derm business, a full year of Salix selling expenses, costs to begin building the Xifaxan primary care sales force later in the year, and it was partially offset by expense discipline in 2016. A&P was favorable by $88 million, mainly lesser A&P spending for DTC advertising in the derm and GI businesses relative to 2015.

In the Diversified segment, total revenue declined $342 million. Excluding the impact from acquired assets and net of divestitures, the decline was $421 million, with $122 million from reductions in realized pricing and $299 million from volume declines. Pricing in the neuro business declined due to increased managed care rebates, lower price appreciation credits relative to the prior-year quarter, and higher group purchasing discounts provided for products, including Isuprel and Nitropress. As in the quarter, LOEs were a big factor in the volume decline for the year, including Xenazine, Mestinon, Ammonul, and Sodium Edecrin. Compared with 2015, Nitropress declined $89 million, Xenazine $66 million, Isuprel $46 million, Wellbutrin $27 million, and the balance of the portfolio was down $266 million. The declines were partially offset by the growth of Migranal, which was plus $20 million, the Zegerid AG, which added $98 million of growth relative to 2015, and Cuprimine, up $34 million.

Adjusted gross margin for the full year decreased by some 340 basis points. Same basic story as with the fourth quarter, about half of the decrease in the average margins is due to the change in mix of revenues with the two higher gross margin businesses, Branded Rx and Diversified declining, and B+L holding relatively steady. The degradation of gross to net accounted for about 25% of decline, and FX accounted for about 25% of the decline in gross margin compared with 2015.

Total adjusted SG&A expenses for the year were $89 million, unfavorable to 2015. We had lesser advertising and promotion expenses in our derm and GI business, offset by some increases in selling expense, while our full-year adjusted G&A expenses were unfavorable compared with 2015 by some $106 million.

In adjusted G&A, we incurred significant costs for outside services for a number of special projects, including the restatement of our financial statements, the material weakness remediation, and the cost of consultants brought in to assist with our zero-based budgeting initiative and a supply chain rationalization project.

We also incurred a number of employee-related costs in 2016, mainly severance, retention, and sign-on bonuses. None of these items are excludable from operating expense under our policies for determining adjusted EBITDA, so they reduced our adjusted EBITDA in 2016 relative to 2015. We increased our investment in adjusted R&D by some $72 million compared with 2015, and we remain committed to increasing the level of funding for R&D as we go forward.

So, in summary for the year, the $775 million or 7% reduction in revenue, combined with the 340-basis-point decrease in adjusted gross margins, result in adjusted gross profit declining faster than revenue and was down 11.5%, a $924-million drop. Total operating expenses were unfavorable by some $161 million with 45% of that increase coming from our re-increased investment in R&D. Adjusted EBITDA fell by 20% to $4.304 billion.

Below the operating line, we had roughly $269 million more interest expense in 2016 than in 2015, as a result of the full-year impact of the debt used to fund acquisitions, mainly the Salix acquisition.

Our effective tax rate on adjusted pre-tax earnings declined from 22.8% for 2015 to 15.5% for the full-year 2016, mainly due to jurisdictional mix of pre-tax earnings, as I discussed a moment ago, with respect to the fourth quarter. Adjusted net income per share fell 33% to $5.47 per share.

Before I turn to the balance sheet and liquidity, let me update you on our progress in our efforts to simplify our portfolio and reduce debt through asset sales. To-date, we have divested or agreed to divest 10 businesses for a total gross proceeds of up to $2.7 billion. Our most significant divestitures are the sale of our skincare assets to L'Oreal which is expected to close in the first quarter of 2017, and the sale of Dendreon to Sanpower which is expected to close midyear.

Turning to our balance sheet and liquidity. We generated just under $2.1 billion of net cash from operating activities in calendar 2016, and reduced total debt by roughly $1.2 billion. We ended the year with $30.1 billion in principal amount of funded debt outstanding and cash on hand of $542 million. We currently have $875 million drawn on our $1.5 billion revolver. In 2016, we satisfied all of our mandatory debt repayments for 2017.

And we'll continually monitor the capital markets and will look for opportunities to increase our operating flexibility and extend the maturity profile of our debt. Now, what I'm sure lots are waiting for, turning to our guidance for 2017.

Now, first, we're providing guidance for revenue and adjusted EBITDA. We believe these are the most appropriate performance and evaluation metrics for our company. However, we're also providing information a model would want and need to forecast some form of adjusted net income and adjusted net income per share, as well as to forecast cash flows and our balance sheet.

I want to point out that our definition of adjusted EBITDA is intended to be right in the middle of the fairway. And we store it with GAAP EBIT, and we add back to that, amortization, depreciation, non-cash share-based comp, restructuring costs, legal settlements, impairments of goodwill or other intangibles, acquisition-related contingent consideration, IPR&D, milestone payments, and legal or other professional fees that are related to legacy Valeant matters.

Our goal is to have these items be easy to find in our GAAP financial statements, footnotes, and related disclosures. We'll keep you updated on our expectations with respect to the items below the operating earnings line, that's mainly interest expense and our effective tax rate on adjusted earnings.

With this information, it should be relatively straightforward for parties to model our business down to their own definition of net income and net income per share.

Our guidance is based on current FX rates and does not assume that either the potential sale of the skincare assets to L'Oreal or the potential sale of Dendreon to Sanpower close. So, our guidance for 2017 is for revenue in the range of $8.9 billion to $9.1 billion, and adjusted EBITDA in the range of $3.55 billion to $3.70 billion.

Let me call your attention to a few of the other pieces of information that are shown on the guidance slide. The expected interest for 2017 of approximately $1.85 billion includes roughly $100 million of amortization of deferred financing costs. Said another way, our cash interest cost in 2017 is expected be roughly $1.75 billion. Importantly, when looking at interest coverage, cash interest is the important number.

If you want to model our company by segment and you want to allocate R&D, take a look at our segment report in the CD R&D that's directly allocated to the segments. And then, there's a balance that ends up in Corporate. That could be allocated roughly 50-50 between the B+L/International segment and the Branded Rx segment.

The item contingent consideration and milestones, which is roughly $230 million for 2017, includes the $130 million due to AstraZeneca upon the approval that – became due upon the approval of brodalumab. The $290 million to $330 million of restructuring and other includes the agreed upon amount to settle the Salix securities litigation, that's $210 million, but does not include possible recovery of some of that amount from insurance. There are also other assumptions shown on the slide that are meant to be helpful in your modeling.

Okay, as I mentioned on the last call and subsequently at a number of investor conferences, a number of our products, particularly in our neurology business, face date uncertain (29:07) losses of exclusivity over the next year. Ordinarily, I'd say that LOEs are simply a part of our business and that we should model them and talk about them in MD&A and move on. However, the magnitude of the LOEs that began to hit us in 2016 and are continuing into 2017, in my opinion, mask the underlying near-term performance of our more enduring franchises.

For these reasons, we believe it's worth looking at our 2017 guidance adjusted for the impact of the LOE assets. We've included a slide identifying the assets that either went generic or were divested in 2016, and those that we currently expect to face generic competition in 2017. It's a fairly detailed slide, I think the information is there that you need to draw your own conclusions.

We've shown both the actual 2016 revenue and gross profit for these assets by segment and our current estimates of the revenue and profit for 2017, that's what's included in our guidance.

Starting with – so now, if you flip it at the slide that shows the bridge to revenue guidance, start with 2016 actual revenue. If you adjust for the impact of the LOE products and adjust to current FX rates, you can see the expected growth rate of the remaining business at 2% to 4%. Our core segments, the B+L/International segment, adjusted for the LOE products and FX, is projected to grow at 5% to 7%, and the Branded Rx segment at 2% to 5%.

The non-LOE portion of the Diversified segment is expected to decline in the range of 7% to 10% in 2017 versus 2016.

First, let's look at the B+L/International segment. The B+L/International growth in 2017, again adjusted for LOE products and FX of 5% to 7%, is aided a bit by the pipeline inventory reductions that occurred in Eastern Europe, mainly Poland and Russia in 2016. Longer term, we would expect the segment to be a solid mid-single-digit grower. The 2% to 5% adjusted growth of the Branded Rx business is below its near-term and longer-term potential, as we expect the dermatology business to be rebased in 2017, declining an additional 8% to 10% from its 2016 levels before returning to growth in 2018 and beyond.

The outlook for our derm business in 2018 and beyond is quite good with our upcoming launch of Siliq around midyear, and hopefully, the addition of IDP-118 into our portfolio in late 2018.

We have a number of upcoming LOEs in the derm portfolio including Solodyn, Acanya, and Elidel in 2018 followed by Zyclara in 2019. But we are expecting to be able to overcome the declines to those assets, and grow our dermatology revenues through our new product launches.

Second, our GI business is projected to grow only modestly in 2017, and again (32:09), it's on the adjusted basis, roughly 3% in 2017 as we lost some momentum in the fourth quarter, in part because of the disruption surrounding the possible sale of the unit. We expect to regain our footing in GI in the latter part of 2017, especially as the primary care sales force ramps up its productivity. We're also anticipating lower prices in the GI business. We're looking for low single-digit growth in GI business in 2017 before moving to high single-digit growth in 2018 and beyond.

The diversified segment, projected to decline 7% to 10% in 2017 versus 2016, will still face above average declines in 2018 as the full impact of the bolis (32:55) of 2016, 2017 LOEs flows through the segment. If the 2017 LOEs play out, as assumed at this time, the diversified segment would face another 15% to 20% decline in 2018 before seeing its decline rate moderate to the high to mid single-digits from here forward.

That should give you a lot to think about with respect to our revenue. We have provided a chart showing a range of compound annual growth rate assumptions for our three segments. But I thought it was quite important to provide some additional color regarding 2017 and 2018. Important note, we will update our assumptions with respect to the LOE assets throughout the year. But to be clear, even if we are fortunate enough to maintain exclusivity a bit longer, the LOEs are going to happen. It's just a question of when.

The next slide, which is the bridge to adjusted EBITDA, uses the same methodology to show the growth of adjusted EBITDA suggested by our guidance off of 2016. It's adjusted for the FX and for the LOE assets. It suggests our underlying business will grow adjusted EBITDA in the low single-digits. I want to point out that in 2017, we're making a number of investments that are incremental to our OpEx relative to the prior year and will not produce meaningful returns in 2017. And those include building the primary care sales force of Xifaxan, investing incremental dollars in R&D, launching Siliq, relaunching Addyi and building out our market access managed care team to support our current model. Again, these investments have the effect of reducing our near-term profitability by some $150 million in 2017 which reduces underlying adjusted EBITDA growth off of the adjusted – for the LOEs and the FX by some 420 basis points.

So, to repeat, our current guidance does not reflect the impact of any asset sales transactions that have not yet closed. When those transactions close, we'll update our guidance accordingly. We expect the sale of the consumer assets to L'Oreal to close in the near term and target midyear for the closing of the Dendreon transaction. Next and very important, we expect to remain in compliance with the maintenance covenants contained in our credit agreement, both senior secured leverage and interest coverage throughout 2017. Finally, we provide guidance for the full year. We do not and will not guide to quarters. However, we know we live in a quarterly world so let me talk about the phasing of our revenue and earnings.

First, in 2016, our revenue and adjusted EBITDA were both skewed 49% to the first half and 51% to the second half. The first quarter is generally weaker for our pharma businesses as patients are less likely to fill Rxs until they satisfy their deductibles. And it's also the quarter when managed care rebates and other programs that affect (35:59) gross-to-net rise, triggering increased accruals at the end of the quarter that are disproportionate to the increase in the rebates.

Our first quarter of 2016 was our lightest revenue and adjusted EBITDA quarter. In 2017, we expect revenue to skew to the second half again with roughly 48% to 49% in the first half. And that's the inverse being 51% to 52% in the second half for revenue. Adjusted EBITDA will be slightly more skewed than revenue as we are investment spending on a number of initiatives, the PCB sales force, relaunching Addyi, launching Siliq that are expected to begin to drive revenue in the second half but impact our EBITDA in the early part of the year.

In 2017, we expect adjusted EBITDA to start low and end higher. That was a mouthful, but I hope the guidance information that we're providing is helpful to you as you think about our prospects for 2017 and well beyond.

Let me turn it back to Joe.

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

Thank you, Paul, for a comprehensive review. Turning to slide 15. Our dermatology business has a new leader, Bill Humphries, who joined us at the beginning of the year. Bill and the team have been working very hard to continue to build our reputation with dermatologists, podiatrists, payers and patients and to stabilize the dermatology market for us. Onexton TRx growth is accelerating, and Jublia, our refill prescription growth is recovering. But we continue to expect volume pressure from higher co-pays and gross-to-net rebates in 2017.

One of our goals for 2017 is to leverage our relationship with Walgreens. We are pleased with the recent progress with Walgreens during the past six months, and we expect to launch a brand for a generic pilot program with Walgreens later this year.

Moving to slide 16, our GI business. We are encouraged by the prescription trends we are seeing in total. Xifaxan scripts were up 18% in 2016. Uceris was up 6%. Apriso was up 4%. Since we launched oral Relistor at the end of the year, TRxs were up 13% in the fourth quarter. And we expect this positive trend to continue. In addition, Relistor has greater than 80% of lives covered by commercial insurance.

Looking ahead to 2017. We are investing in a primary care sales force expansion, launch of a nurse educator program and expansion of the pain sales force that we expect to further drive results in the GI business. We're also looking at new GI product development opportunities. For Xifaxan, we will initiate a next-generation formulation and evaluate a potential oncology indication for Relistor.

Moving to slide 17. This slide shows the progress we have made in retaining our sales force over the last four quarters. As you can see from the chart, early in 2016 our retention numbers were not where we wanted them to be. The turnover has stabilized over the past three quarters. And at the end of the fourth quarter, our sales force retention rate was approximately 94%. To be clear, there was some sales force turnover in quarter one 2017, but this turnover is expected to launch over new year and a new incentive time period. To be clear, I want to anticipate your questions, overall sales professionals promoting the GI business in Q1 2017 are up by 40%.

On to slide 18, with this, the important investments we are making to drive growth across our businesses. First, let me provide additional details on our new primary care sales force for Salix. As we announced in the press release yesterday, we have hired approximately 250 highly trained and experienced sales representatives and managers to bolster, create and sustain deep relationships with primary care physicians who are key potential prescribers for Xifaxan and for oral Relistor. Approximately 70% of the IBS-D patients initially present with symptoms to a primary care physician and we believe our efforts will enable us to reach physicians that account for nearly 75% of the primary care market opportunity. We've also expanded a number of dedicated pain sales representatives we have in the OIC market and established a nurse educator team to educate clinical staff.

In dermatology, we are increasing our market access team to support Walgreens in the independent retailer model. At Bausch + Lomb, we are investing in contact lens manufacturing capabilities to yield improved capacity and cost per lens. We're also investing in research and development and increasing the investment in the pipeline by approximately 150 basis points over 2015. This is an important part of creating the new Valeant. We also evaluated the broader portfolio and identified several, what I would refer to as, hidden gems in the diversified product segment. These include Migranal, Diastat and Zelapar. We're launching sales efforts to promote these underappreciated assets and position them for future growth and success.

Finally, in women's health, we are relaunching Addyi. We have recently collaborated with the American Sexual Health Association on an educational awareness campaign about female sexual difficulties called Find My Spark.

Turning now to the late stage pipeline on slide 19. As we've migrated to the new Valeant, we are investing more in research and development, quality and new product launches. R&D spend has also increased by 21% year-over-year. The increased spending has been productive. We are prepared to launch more than 50 new products in 2017 which we expect to drive approximately $100 million in annualized revenues. In the U.S., these products will include Bausch + Lomb Ultra for presbyopia, Zen's scleral contact lenses and Addyi. We're also preparing for product launches in EMENA and Asia Pacific regions.

Slide 20 lays out our expected R&D catalyst in 2017. I think this slide does a good job of showing that we have active and productive R&D organization that is working to create innovative new solutions for patients and customers who rely on our products. First, we have a number of late phase projects. The group includes a new Xifaxan formulation expected in the second half of 2017 and this may represent a more patient friendly formulation and bring additional intellectual property protection.

Another area we are focused on, submissions that we made in 2017 are important catalysts for sales our opportunities in 2018 and beyond. We anticipate a submission for Luminesse, our eye brightener product, very soon. And IDP-118, a psoriasis product in the second half of 2017, we will plan to submit along with an acne lotion and another product for psoriasis, IDP-122.

As I briefly mentioned at the onset of the call, we are preparing for a number of product launches in the coming year including Stellaris in our surgical business, Vyzulta for glaucoma in the second half of the year, Bausch + Lomb Ultra contacts for astigmatism and Siliq in the third quarter.

Slide 21 provides an update on Siliq or brodalumab, a treatment for psoriasis that was approved by the FDA on February 15, 2017. We are very pleased with this approval as psoriasis is a large and growing market, just the U.S. alone is estimated at approximately $7 billion in 2018. We expect to be in position to launch later this year. The reason we believe this product is an important advance in treating psoriasis is how it works. It's a receptor blocker. So, if you look at the diagram on slide 24, the other biologic products on the market operate higher up in the pathway. But when you actually can block the receptor, you may get a longer duration and a higher – or a high percentage of efficacy.

Now I will point out the label includes a risk for suicide and suicide ideation, and there is a REMS for – I believe this product represents a real opportunity to help patients with a rapid and durable efficacy.

Moving on to slide 22. Also, in the treatment of psoriasis, we are working on a unique topical product that we are calling IDP-118. It's a combination of a steroid and a retinoid that may allow patients to use topicals for a longer time period. We've got positive results in the second Phase III trial, and we're excited about the prospect of bringing this product to the market for patients to utilize topicals for the treatment of psoriasis.

On slide 23, I want to briefly mention latanoprostene bunod or Vyzulta, a novel monotherapy for the reduction of intraocular pressure in glaucoma, a disease that affects approximately 3 million Americans and represents a $3 billion market opportunity. We've got a complete response there late last year and refiled on Friday, February 24, with an opportunity for an approval later this year. We are working to get ourselves ready and prepared for a commercial launch later this year.

In summary, let's turn to slide number 24. This slide is how we are thinking about the Valeant turnaround, and the last of the steps we've taken to stabilize the business by delivering on our commitments. The middle column represents where we are now, beginning the turnaround phase, which means executing on our plans. We'll do this by strengthening our balance sheet, focusing on specialty driven markets, markets that we believe have above average growth rates, and our leadership position and pipeline. By allocating resources efficiently across this, we think we can maximize the opportunities in front of us.

Executing on these plans will be our focus over the next 2017 to 2018 time period, and we believe our team is well positioned to execute in the year ahead. Looking to 2018 and beyond, our focus will be transforming the company by innovating for the future, leading in our categories, launching more new products, and balancing organic growth with inorganic growth as appropriate.

With that, operator, let's open up the line for questions. Operator?

Question-and-Answer Session

Operator

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

Gregg Gilbert - Deutsche Bank Securities, Inc.

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

Paul S. Herendeen - Valeant Pharmaceuticals International, Inc.

Sure. Let me start with the debt question. I think I said in my prepared remarks, we look at the capital markets all the time for opportunities to improve both our financial and operating flexibility, and also to extend maturities. I can assure everyone on the line, this is something that myself and my Treasurer, Linda LaGorga and her team, we think about it every day. And we look out at 2018 and the maturities in 2018, look out at 2020. Certainly, there are (47:40) maturities in 2019 as well, and those are things that need to be addressed. And I can't get specific, more and more specific with respect to timing or what we intend to do. But I can assure you that keeping an eye on the capital markets and moving quickly to address some of these issues is very high, very high on our list.

With respect to your question regarding 2018 versus 2017, I tried, during my talk there with respect to guidance, to frame some of the things that you needed to think about in 2018 that are different from what you see on the slide that shows the longer-term 2017 to 2020 CAGR rates for each one of our segments. For example, I called out the diversified segment specifically and said, based on the timing of the LOEs as we currently expect them in 2017, that segment will decline again, higher than normal, or higher than average, by some 15% to 20% in 2017 versus 2016, before it moderates. And I think you can do the math with respect to that slide that shows the longer-term CAGR to get an idea. And that was the point of calling that out, and I apologize that I rambled through a lot of information in a short period of time there. It'll be on the transcript and it'll be public and therefore, something that we can help people with as we go forward here.

The other area I called out specifically was within the Branded Rx, but that segment is dominated by the gastro business and by the dermatology business. And called out that we expect that the derm business continues to need to reset it, be reset in 2017, as we've completely shift to this new model, which features Walgreens and managed care and co-pay assistance cards and the like. As that completes, we will return that franchise to a growth mode, but it won't be in 2017. So that was the point of bringing that up. And then with respect to GI, indicated low single-digit growth in 2017, but higher single-digit growth thereafter. That should help you – those are the major, major elements. We continue to believe that the B+L business is a solid single-digit grower over time, if we care for it in the right way.

I think that gives you enough to be able to model – last thing on B+L. I also called out that the 2017 versus 2016 growth in B+L is a little bit inflated because of the pipeline reductions that we saw in Eastern Europe during 2016.

Gregg Gilbert - Deutsche Bank Securities, Inc.

Thank you.

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

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

Gregg Gilbert - Deutsche Bank Securities, Inc.

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

Paul S. Herendeen - Valeant Pharmaceuticals International, Inc.

It's 2017.

Gregg Gilbert - Deutsche Bank Securities, Inc.

Okay. Thanks.

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

Operator, next question.

Operator

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

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

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

Operator

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

Louise Chen - Guggenheim Securities LLC

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

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

Well, certainly, Louise, it's an absolute comment about how we are viewing the new Valeant, as one can look at what we're investing in research and development. If you just look at historical numbers, you can see that, 2016 versus 2015, we were up, (52:21) recollection is about 21% incremental expenditures in research and development. So we've had a good chance to look at the portfolio. Tage [Ramakrishna] and our party leader has done a great job in working through a lot of the projects and looking at where we could go forward with new products that look at unmet medical needs.

I mean, certainly, IDP-118 is just a simple example that previously, it's been more difficult for people to use a dermatology topical product for extended duration. Tage has (52:55) come forward with a unique formulation that has the ability to put together a retinoid plus a high dose corticosteroid product, gives an opportunity potentially, if approved by the FDA, to use a product for a longer duration going forward.

So that's just one example, and as we think about 2017, we're going to increase our expenditures one more time, continue to raise the incremental R&D expenditures to that $420 million to $435 million that Paul referenced in his comments. So, yes, absolutely spending more behind it. Spending behind products that we think will make a big difference in patients' lives and ultimately generate great returns for our shareholders. So absolutely different approach.

Paul S. Herendeen - Valeant Pharmaceuticals International, Inc.

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

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

Operator, next question?

Operator

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

Christopher Schott - JPMorgan Securities LLC

All right. Great. Thanks very much for the questions. Just two here. First, can you just help us understand the 8% to 10% Branded Rx growth as we think about the 2017 through 2020 in terms of pipeline versus core products? As I think about your business, you're still transitioning this year. I think, as you mentioned, you have some LOEs on the derm side that you're facing in that timeframe, so just elaborate a little bit, again, as we think about the core growth versus how much you're looking for some of these pipeline opportunities in those longer-term targets.

And the second question is on Siliq. I don't know if I'm pronouncing that one right. But now that you have the approval and label, can you just help us understand a little bit how you see differentiating this product from the two other IL-17s in the market? I realize it's a large opportunity for the category as a whole. But when we think about the REMS and the black box you have, how do you see dealing with that relative to your competitors? Thanks very much.

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

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

We also obviously are very excited about bringing in the primary care capability for Xifaxan and for Relistor. We think that's going to accelerate our ability to reach the physicians for the IBS. So I think that's probably the two major points I'll talk about in terms of the launches and the incremental investment that Paul referenced in his comments. (57:36)

Christopher Schott - JPMorgan Securities LLC

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

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

We think that the total business is going to grow as we said of course. There is some loss of exclusivity that we expect in that business in 2018. For example, there are some products like an Elidel that we may we may see some generic activity on. But absent that, we think we'll start to turn it around. We've got a lot of confidence in our new – Bill Humphries, our new leader in the business, and that's really I think probably the primary area I'd talk about.

Let me talk about Siliq and I'll turn it to Paul. I think Siliq, first and foremost, what we are most excited about with Siliq is it represents a significant opportunity based on the efficacy data we have. As you know, these patients with psoriasis do have unmet clinical need for efficacy. We have, based on the clinical trials, significantly improved efficacy against – in the clinical trials, we tested it against the Stelara product. So we believe that increased clinical efficacy that we saw certainly versus Stelara is one core part of the question. I'd also point out to you though that, in the treatment of psoriasis, we know that there are other risks – some of the other products have other risks.

There's a risk of cancer with some of the products. So there are other risks that other products have, and our view is that, for the appropriate patient, we believe that Siliq could represent a very important advance based on the efficacy. And the primary reason we believe that we're seeing the efficacy result is that we are a receptor blocker and the use of pharmacologic agents, when you can actually block the receptor, you tend to get a better, a quicker response and also a response that is more durable because of the fact that you're actually blockading the receptor versus products that inhibit the pathways above the generation of the interleukin product, body can sometimes compensate for that.

So we always believe, we always see, as an example, treatment of hypertension in the androgen's receptor blocker had a much more profound impact on hypertension as a simple example. We think that receptor blocker is the reason why we may have some very – be able to help patients with psoriasis. Paul, you got...

Paul S. Herendeen - Valeant Pharmaceuticals International, Inc.

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

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

Operator, next question?

Christopher Schott - JPMorgan Securities LLC

Thank you.

Operator

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

Umer Raffat - Evercore ISI

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

Paul S. Herendeen - Valeant Pharmaceuticals International, Inc.

Yeah, let me start with the impact of the divestitures. This is based on if we close the consumer asset sale to L'Oreal here, call it end of this month or shortly, the impact on EBITDA will be about $70 million. And if you close Dendreon midyear, it's about $65 million. That's on 2017. So I think that answers your question. With respect to the definition of adjusted EBITDA, as I said, we're trending towards a, I'll call it, middle of the fairway. I think that the items that we add back, and I did tick them off, are the ones that are most often used by companies in arriving at a definition of adjusted EBITDA. It is perhaps a little bit shrunk down from what we might have seen based on our prior definitions, but it's not hugely different.

I think what's really important, at least for us internally, is that we've implemented policies and procedures to ensure that any item that is going to be an add back, to arrive at adjusted EBITDA, is subject to a lot of scrutiny, and importantly, control. Not to say that it wasn't before, but it is to say we put in place procedures that Joe's used to, I'm used to, Sam Eldessouky, who is our Chief Accounting Officer, are used to, to maintain control over those items. The revised definition brings you very close to the definition that you would find in our credit agreement. Very close.

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

Maybe just a final area that I think Paul said everything (1:03:25), I agree with that. The only thing I'd say is, you asked a question about our management compensation. Well, I can't give you out exact numbers, but I think it's very similar to the numbers that we are guiding to on revenue, very similar to the number we're guiding to on EBITDA, and then of course, one thing we've added this year, we'll tell you more about it, is a return on capital metric for the long-term programs. So those are the major areas in which management compensation would be based, return on tangible capital, return on capital that we will add.

Umer Raffat - Evercore ISI

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

Paul S. Herendeen - Valeant Pharmaceuticals International, Inc.

Well, I think what I said was our revised definition – yeah, I wouldn't call it a material change to our EBITDA – definition of adjusted EBITDA in account of (1:04:28) adjusted EBITDA. Yeah, the number there, as I said – if anything, the number that you see is a closer representation of what you might be able to calculate for the credit agreement. And with respect to those divestitures, when those occur, (1:04:47) first and foremost, the L'Oreal – or the potential transaction with L'Oreal is certainly delevering, and the transaction with Sanpower for Dendreon is what I'd call, from a fixed charge or interest coverage perspective, broadly neutral but also helpful to us with respect to the maintenance test (1:05:11) on senior secured leverage.

Umer Raffat - Evercore ISI

Got it.

Paul S. Herendeen - Valeant Pharmaceuticals International, Inc.

I mean, Umer, let me restate the – what I think was the important point in my prepared remarks. Based on sour plan, we expect to be in compliance with the terms of our credit agreement throughout 2017. I mean, I think we (1:05:34) and I know that it's not possible for external parties to have access to all of the data that we have access to nor is it easy for you to calculate even if you have the credit agreement in hand the exact numbers, but we obviously do that work. And what we're saying is, based on our plan, we expect to be in compliance with the maintenance covenants contained in our credit agreement throughout 2017.

One last thing as long as I've got the floor, (1:06:03) and you're focused on debt. When people look at interest – and I did call out for you the guidance for 2017 interest and broke it apart into cash (1:06:18) cash interest and the amortization of deferred finance cost. That's an important number for looking at coverage. (1:06:27) What's also not as obvious is that the terms of our credit agreement, when we prepay debt or repay debt, we adjust the TTM interest costs – cash interest costs to reflect the payment of that debt.

So, they are not obvious to a third-party or easily calculable benefits associated with our – using our free cash flow to retire debt associated with us making divestitures even though (1:07:00) relatively modest assets that improve our credit position. So, I'll stop there.

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

Operator, next question?

Operator

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

David R. Risinger - Morgan Stanley & Co. LLC

Yes. Thanks very much. So, I have a couple of questions. First, with respect to the franchises (1:07:27) that are going generic in 2017 or facing significant decline, it seems like you're giving guidance that's too low, Paul, because Nitropress only has one generic competitor and Isuprel has none and it seems like the collapse that you're forecasting is actually too severe for 2017. So, I just wanted to get some more color on whether you think that is the right guidance to be that low given the lack of competition to some of these products currently.

And then, second, with respect to Vyzulta, could you just update us on the launch timing? I thought that last year that you had suggested it might be in the second quarter, but I'm not sure when you're thinking about being able to launch that this year. And just confirm (1:08:23) that that's going to be recorded as revenue in the Branded Rx, not the Bausch segment, even though the Bausch sales force will be selling it.

And then, finally, if you could just update us on the Xifaxan patent litigation developments to watch ahead. Thanks so much.

Paul S. Herendeen - Valeant Pharmaceuticals International, Inc.

Yeah, sure. Let me start – it's Paul. Let me start with a discussion on (1:08:51) what I will call the LOE assets, and you can refer to the detailed chart that we posted on our website. You bring up a couple of good points, David, I believe. But let me be clear that we believe that, in 2017, we will face loss of exclusivity for the products on that list that aren't already generic. We have made assumptions with respect to the timing, with respect to the number of entrants and with respect to the way that market plays out in the wake of the entrance of either one or more parties to compete with the assets.

I want to be super clear here. We hope, because it would be more cash to us, that we are being overly conservative here. I don't believe we're being overly conservative, but we are being conservative here with respect to the impact on 2017 from that basket of assets. When providing guidance – and I say this a lot. We think of guidance as a commitment. When providing guidance, us assuming good things with respect to that portfolio would feel better at the time of the provision of guidance, but would be not well received if it turned out that it played out in a more conservative or in a more deleterious manner with respect to our products.

So, is it conservative? Yes, it's skewed toward the conservative side. We provided everybody with the information (1:10:26) where you can sit down and look and say, based on our assumed date of entry, if you have information or you believe you have information that's better than our market intel or different than our market intel, everybody can come to a point of view. But here comes the important point. That bucket or basket of LOE assets is viewed by us as a potential basket of future cash flows. We hope it's as big as it can possibly be. But from an earnings perspective, if our earnings from that LOE bucket turn out to be better in 2017, that will be great because of the cash it will generate, which we'll use to reduce debt.

But from a go-forward earnings basis, this is a bucket that is only going to do one thing, and that is decline, (1:11:17) whether that's per the schedule that we've included in our guidance or whether that is at some lesser decline rate. If it's lesser, what it's going to do is going to create a growth hole, if you will, for 2018 versus 2017 because those assets will be in our earnings.

So quite long-winded there, but I think a very important point the way we think about that basket of assets. But we're not going to bet on it. We're certainly not going to use a more aggressive forecast in providing guidance to the street. Joe?

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

I think maybe – I agree with everything Paul said. I think what we're trying to do is be as transparent as possible, and we put our assumptions there. And if you have a different view, we understand it. But certainly, we wanted to just try to provide the transparency, as Paul said, just to be as conservative so that we – as we think, going forward, we don't have any negative surprises.

On the question of the Vyzulta, once again, I'll say that's a name that we are provisionally using. We are awaiting the final approval on that, but we do think that that's an opportunity for us to launch. We think right now the best time we should say is a third quarter 2016 – 2017 launch – a third quarter 2017 launch is the best assumption there based on the status with the FDA in re-inspecting our facility.

I think you asked one last question on the Xifaxan and the ANDA that was filed against it in 2016. We don't want to comment on any ongoing litigations, but we do expect a – the only thing I'll say is that we do expect a trial in 2018 on that. Obviously, we think we've got very strong intellectual property on the product. I think our patents run through 2029. So, we feel very good about the number of patents I have – we have relative to the intellectual property associated with the product.

David R. Risinger - Morgan Stanley & Co. LLC

Great. Thanks so much.

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

Operator, any next question?

Operator

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

Annabel Samimy - Stifel, Nicolaus & Co., Inc.

Hi. Thanks for taking my question, and thanks for all the information you've given us to figure out the cash flow. But I just want to see if we can be a little bit more simple about this. If you take the EBITDA number that you've given us and strip out the $135 million EBITDA impact you expect to have from divestitures and you go through the calculations, I guess, the question comes to a very simple question. How much debt have you already paid down to achieve the $5 billion target that you have? How much cash flow will you have, and how much more divestitures do you need to do to be able meet that $5 billion target? That's my first question because we're drowning in a lot of these numbers, but I think it's a very simple answer that we're looking for.

And then, going back to brodalumab or the Siliq differentiation, there is another IL-17A receptor out there. The efficacy seems somewhat comparable to Siliq. And I just want to know how you're going to differentiate it when it has its own suicidality black box warning on it. Is the certification process too onerous for physicians to adopt it? Can you just talk to us about how you think this is going to play out with regard to the competitive products out there that are similar mechanisms? Thanks.

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

Let me just start with the big picture on the cash flow and the debt repayment. And then, Paul, you can please add color to (1:15:12) that...

Paul S. Herendeen - Valeant Pharmaceuticals International, Inc.

Sure.

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

And then, I'll address the brodalumab competitor question. On the question of the cash flow and what we pay down – what we haven't paid down. Just to be 100% clear, the numbers we paid down in permanent debt in 2016 was the $1.84 billion, which was ahead of our permanent debt payment that we committed to $1.7 billion, we did $1.84 billion. When it comes to the actual total debt repayment that occurred in 2016, it was approximately $1.2 billion. So, there was some increase in short-term debt. So, $1.2 billion, I think, is what Paul referenced.

On the question of the incremental amount of major asset sales that we have, we have not closed. As Paul said, the CeraVe transaction or the skincare transaction, that was $1.3 billion of proceeds, and we have obviously not closed the Dendreon transaction, which we expect Dendreon to close some time in the – I think we said the second half of 2017. Now, those together generate proceeds of approximately $2.1 billion, $2.19 billion, to be clear. So, that's approximately the numbers that we will have available.

There are some transaction expenses, taxes, et cetera, but those are not going to be a major component that comes off of that. So, that $2.1 billion, if I could just round that, will be the basis for the ability for us to pay down debt in 2017.

Paul, is there anything you wanted to add to try to answer the rest of Annabel's question? And then I'll come back on the brodalumab.

Paul S. Herendeen - Valeant Pharmaceuticals International, Inc.

Yeah, sure. On the progress against the $5 billion target – and Joe covered this, but I'll give it as simply as I can. Before the two remaining assets – excuse me, asset sales are on the table, Dendreon and the consumer products to L'Oreal, we paid off about $1 billion of debt. Those two – the proceeds from those will actually be a little bit less than $1.3 billion plus $0.8 billion. We have to withhold some taxes – or, I should say, pay some taxes. We'll get them back, but not right away at closing. So, we expect to have proceeds from those two transactions over the course of the next, call it, six months, of about $1.9 billion, and the six months is to get to Dendreon, we expect to close the L'Oreal transaction shortly. And so, in the aggregate, it's about $2.9 billion towards the $3 billion goal.

We obviously continue to use free cash flow from our business to reduce debt, and we would expect to continue to look at additional asset sales, particularly of non-core businesses, in order to be able to meet that $5 billion number by Q1 of 2018.

And then, on your question of Siliq and our positioning, we recognize our label includes a suicide ideation warning, and we will have (1:18:33) you're absolutely right. But we also recognize that we have great efficacy. And one of the things that, if you talk to patients, which we've done a lot of lately, we think the positioning opportunity is really going to be on the efficacy side of the equation, and how this product can make a difference.

Unfortunately, psoriasis patients don't all respond to the same products, so we think just bringing forth a new product will be an opportunity to help some patients that are not getting relief now. As I said, the only other thing I will comment is, by having a receptor blocker ,because you're actually blocking the receptor, it does have the potential for a long duration and rapid onset of efficacy, because of the way the mechanism works with the receptor blocker versus any – a product that inhibits the pathway for the interleukin factor. So to me, it's – the receptor blocker is really the primary potential differentiation, and what it potentially means for both the duration of activity and the rapid onset of activity.

Annabel Samimy - Stifel, Nicolaus & Co., Inc.

Okay. Thank you.

Paul S. Herendeen - Valeant Pharmaceuticals International, Inc.

Can I – before you click off, Annabel, you made the comment, drowning in numbers. I hope we have not provided too much information that somehow makes us difficult to follow. I think the intention was certainly to provide transparency, to provide lots of information and context for people to develop models. We understand that it was a lot that we put out here this morning. And I would expect that, as people look through that information, particularly folks on the sell side, but buy side as well, will have questions with respect to that information.

By putting all this information out there under Reg FD, it enables Joe, myself, Scott and others to have discussions about the information we provided. So, again, the intention was not to just throw a lot of information out at the market. The intention was to provide you with information that improves your ability to measure how we're doing.

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

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

Operator, next question?

Annabel Samimy - Stifel, Nicolaus & Co., Inc.

Thank you.

Operator

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

Gary Nachman - BMO Capital Markets (United States)

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

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

All right. Let me start with the first question. First of all, where are we with the processes? We do have additional processes underway. So, yes, there are some additional processes underway. We do have a very active process for a number of the assets. Relative to the first part of your question also was, what's core, what's non-core. We have not changed our definition.

Core for us still is the – what we refer to as three potential core areas. Number one is the Bausch + Lomb business and how that represents the eye care growth opportunity. Number two, it is the GI business. And number three is just our dermatology business. We've also supplemented core versus non-core by looking at geography. There – the U.S. and Canada are strong geographies for us and represent a very important core. There are some geographies in the world that are not core.

For example, that's why, one of the things we did was divest the business in Vietnam and Indonesia. It just wasn't a core for us that we felt, by reducing complexity, we helped simplify the business model and get the focus on really where we can really grow for the business for the future.

On the next part of your question...

Gary Nachman - BMO Capital Markets (United States)

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

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

Yeah. I think what we originally said is that – a couple comments we said. Number one, we said that we would expect to pay down $5 billion of debt, both from asset sales as well as our operational results, and we stand by that one. The other thing we talked about is that we identified what we referred to as $2 billion of revenue for what I would refer to as non-core. We think that those can generate somewhere in the $8 billion of proceeds. But I think really, we're not trying to suggest every one of those is going to get sold. We're just really trying to use that as an illustrative opportunity to identify non-core asset sales that we think are going to help us to pay down and reach this $5 billion of debt repayment.

I don't see major changes just from – as a general comment, in how we're looking at potential asset sales. If you think about what we've sold so far, I think the range has been anywhere from – for the larger ones, anywhere from about 7-plus to 20-plus (1:24:05) EBITDA range as we – if you think about what we sold so far.

There was another question on the pricing. Paul, do you want to take that one?

Paul S. Herendeen - Valeant Pharmaceuticals International, Inc.

Yeah, sure. I think embedded in the 2017 guidance and 2018 and beyond in those CAGRs is an expectation that we can get low- to mid-single digit price increases. Those are net across our portfolio, as we go out. Now, is it – it's not always the same. I use (1:24:38) as the example 2017 versus 2016, the impact of price, the fundamental improvement in our business, excluding the LOEs, you're getting maybe 100 basis points of lift on the overall portfolio. But we expect, in latter years, we will be able to get a little bit better than that.

Gary Nachman - BMO Capital Markets (United States)

Okay. Thank you.

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

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

Operator, next question?

Operator

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

Douglas Tsao - Barclays Capital, Inc.

Hi. Good morning. Thanks for taking the questions. Just a couple quick ones. First of all, Paul, maybe you could provide some commentary in terms of the progress that you saw from the Walgreens business in terms of ASPs. I think you said there was some further improvement. I know there was pretty sharp improvement in the third quarter versus the first half of the year. How much more room do you think there is? Or should we sort of then optimized? (1:26:11)

And then, second, in terms of the impact of the LOEs, maybe I missed it. But I think you sort of talked about in the slides a $715 million impact in 2017. But obviously, there's some contribution in the year, I think, of around $235 million. So, should we think about, like, the full year run rate impact as $945 million? Is that the right way to think about it?

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

Let me address the first – the Walgreens question, and then I'll give it to Paul for the second part of that question. On the Walgreens question, in terms of performance, (1:26:44) I continue to say we made great progress working with Walgreens. We've had a lot of discussions back and forth. We put together prior authorization processes. We've also looked at the co-pays. And I think, collectively together, those have helped us to increase the ASP in the fourth quarter above the third quarter.

But the real problem was in the second quarter, as you know, when we had some very significant issues there. We've now corrected those problems, and the third quarter was up. I believe I said it was up about 40% versus the second quarter. The fourth quarter is up versus the third quarter. But I think we've hit approximately the plateau in terms of where we expect those prices for the Walgreens' average sales price to go.

Paul, do you want to take...

Paul S. Herendeen - Valeant Pharmaceuticals International, Inc.

Yeah. Doug, if I get this wrong, if it's not responsive to your question, I'll try again. But let me start. If you look at that key product LOE divestiture impact, what we put there is, I'd tell you, the impact that you'll see on revenue, meaning the growth drag on revenue in 2017 versus 2016 is $785 million.

Now, I think the nature of your question is the remainder, which is the $260 million of this basket of products. How should you think about that? And that was – that's what led me to – in my discussion around guidance, to talk about the prospects for the diversified segment in 2018 versus 2017 in saying we'd still face some above-average declines in that business. I said 15% to 20% in 2018 versus 2017. And in part, that is due to the balance of those LOE products when they go from $1.043 billion in 2016 to circa $260 million. In our forecast in our guidance in 2017, that $260 million doesn't stabilize. That $260 million, based on the timing, it goes away. It goes away – I shouldn't say entirely, but it drops pretty dramatically into 2018.

So, I think, both from a revenue and profitability standpoint, you got to look at the impact on 2017 and then think about what happens to the remainder of that basket in 2018. And then, as it normalize, as I said, that business will continue to decline but not nearly as precipitously as you've seen in 2016 versus 2015 or expected 2017 versus 2016. (1:29:19) responsive, Doug?

Douglas Tsao - Barclays Capital, Inc.

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

Paul S. Herendeen - Valeant Pharmaceuticals International, Inc.

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

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

Okay. Operator, next question, please?

Operator

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

David A. Amsellem - Piper Jaffray & Co.

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

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

Sure. This is Joe. The important question for us as we thought about Xifaxan is we believe that many of the patients that are presenting with the IBS-D indication are going to the primary care physician first. Ultimately, we also – many of them will see a gastroenterologist, but many of them are seeing the primary care first. We had limited numbers of sales resources in primary care. It was approximately 100 individual sales reps available in primary care, and there were many of these primary care physicians we just could not reach with those 100 sales representatives.

We felt that, given the longevity of the product, given the opportunity to help improve these patients, we would get out there with an incremental primary care capability. As we mentioned, we hired over 250 individual sales professionals to help join us in delivering the message to primary care. I believe that the actual ability to reach primary care will now be approximately 75% of the prescriptions from primary care for IBS-D, we will be able to reach those physicians. So, that's an important part of what we're going to do, but we're going to do more that.

We're going to do things with the nursing clinical educators, we're going to continue to talk about a very strong clinical program for Xifaxan that will allow us to really show how this product makes a difference. I know you didn't specifically ask about it, but I will make the mention specifically about Xifaxan in hepatic encephalopathy. We've got very strong data that shows it will reduce hospitalizations, which will, by definition, reducing hospitalizations will reduce the overall total cost of healthcare which is so important to the managed care programs and why we believe we will be very successful with Xifaxan for the future.

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

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

Operator

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

Timothy Chiang - BTIG LLC

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

Paul S. Herendeen - Valeant Pharmaceuticals International, Inc.

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

Timothy Chiang - BTIG LLC

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

Paul S. Herendeen - Valeant Pharmaceuticals International, Inc.

Well, yeah, I think, in my prepared remarks, what I said is we look at the situation in the financial markets, in the debt markets every day and with great urgency. I mean, if you focused on the 18s. (1:35:11) I look at all the towers of our debt and say it's something that we need to do to – is to focus on the 18s. Focus on the 20s. (1:35:18) We need to access the capital markets at appropriate times to address in advance those maturities. You said we're confident that we can do that. But obviously, we have not announced anything on that yet.

Timothy Chiang - BTIG LLC

Okay. Great. Thanks.

Paul S. Herendeen - Valeant Pharmaceuticals International, Inc.

Thank you.

Joseph C. Papa - Valeant Pharmaceuticals International, Inc.

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

Operator

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

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