Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Valeant second quarter 2016 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. Ms. Laurie Little, you may begin your conference.

Thank you, Lisa. Good morning, everyone, and welcome to Valeant's Investor Relations conference call where we will be discussing our second quarter 2016 financial results. Participating on today's call are: Joe Papa, Chief Executive Officer; Rob Rosiello, Chief Financial Officer; Dr. Ari Kellen, Company Group Chairman; Anne Whitaker, Company Group Chairman; and Linda LaGorga, our Treasurer. In addition to a live webcast, a copy of today's slide presentation can be found on our website under the Investor Relations section. Before we begin, our presentation today contains forward-looking information. We would ask that you take a moment to read the forward-looking statement legend at the beginning of our presentation, as it contains important information. In addition, this presentation contains non-GAAP financial measures. For more information about these measures, please refer to slide two. Non-GAAP reconciliations can be found in the appendix to the presentation posted earlier today and posted on our website. Finally, the financial guidance in this presentation is effective only as of today. It is our policy to update or affirm guidance only through a broadly disseminated public disclosure. And with that, I will turn the call over to Joe.

Thank you, Laurie. Good morning, everyone, and thank you for joining us. Today we'd like to cover the following topics. First, we are reaffirming our 2016 full-year guidance. Next, Rob will cover second quarter 2016 financial results. I will then cover the progress we have made since the quarter one call in June. And then lastly, we will unveil our plans for the new Valeant. To begin, on slide five, we are reaffirming our 2016 full-year guidance of total revenue of $9.9 billion to $10.1 billion and adjusted non-GAAP EPS of $6.60 to $7.00. We continue to expect an adjusted EBITDA number from $4.8 billion to $4.95 billion for 2016. We have made significant progress in the last 60 days in identifying our challenges and have begun executing on our plans to accelerate growth and profitability in the second half of 2016. We will talk more about this later. I'd like to turn the call over now to Rob to review the second quarter 2016 financial results.

Thank you, Joe. Before I begin, I want to point out that our GAAP and non-GAAP financial summaries can be found in the appendix of this presentation and in our press release issued earlier today. For the second quarter of 2016, our total revenue was $2.42 billion, an improvement from the first quarter of 2016. When combined with the first quarter, this represents approximately 48% of the midpoint of 2016 full-year guidance. Adjusted COGS was $630 million in Q2, or 26% of sales. This was slightly higher than the first quarter due to unfavorable product mix. Adjusted SG&A spend of $662 million improved on a sequential basis and represented 27% of revenue for the quarter. In Q2, adjusted SG&A excluded $10.2 million in legal and other professional fees associated with legal and governmental proceedings or investigations related to our distribution, pricing, and related matters, including our former relationship with Philidor. As a comparison, in Q1 this number was $29 million. We do not add back legal expenditures for ordinary course of business, but these represent extraordinary costs. Our non-GAAP operating margin improved from 39% in the first quarter of 2016 to 42% in the second quarter. GAAP EPS was a loss of $0.88 and adjusted non-GAAP EPS was $1.40, which when combined with the first quarter results accounted for approximately 39% of the midpoint of our full-year 2016 guidance. As we stated on the Q1 call, we expected a 40:60 earnings split between first half and second half 2016. Cash flow from operations was $448 million. Q2 adjusted EBITDA was $1.09 billion, which when combined with Q1 of $1.01 billion accounted for approximately 43% of the midpoint of 2016 guidance. On slide seven, we compare our Q2 2016 financial results to current consensus. We believe the variance is attributable to…

Thank you, Rob. We've been actively addressing the identified challenges in our dermatology portfolio and have made significant progress on these issues since our last call. Most importantly, we have restored net profitability to new dermatology prescriptions starting on August 5. This will improve the overall derm selling price. We launched a new prior authorization process with our partner on August 4, which should improve the adjudication experience. On June 27, we rolled out our program for independent pharmacies, which has positively impacted our prescription volumes. Enhanced training and education for pharmacists is also expected to contribute to the improvement in volumes and profitability. We've also been reaching out to the physician community to restore their trust in Valeant's commitment to dermatology and have hosted meetings with more than 50 key opinion leaders and prescribers to elicit their feedback. I will speak more about brodalumab later, but have said on numerous occasions that the pipeline is the key to the new Valeant. We were very pleased with the successful outcome of the brodalumab FDA panel on July 19 and look forward to progressing with this important drug through the approval process. Finally, we continue to improve our managed care position and are happy to see that we maintain key product access on the ESI and Caremark exclusion lists. We've made significant progress in accelerating the growth of the Salix portfolio. On slide 11, you see that Xifaxan monthly TRx's grew 28% year over year, and we see an increase in the refill rate for the hepatic encephalopathy [HE] indication. The chart on slide 11 shows the current script trends as compared to past years. Our new GM, Mark McKenna, and his team have done a great job engaging with our sales force. And we've seen a reduction in the sales…

On slide 19, our durable growth segment will include global eye care, global consumer, and our international markets. These are franchises with durable product characteristics. We expect 2017 and 2018 revenue growth in the range of 6% to 8% and EBITDA growth in the 8% to 12% range. We expect our R&D spend in this area will be between 3% and 6%, as we invest in future growth. Finally, non-GAAP EBITDA margin is expected to be in the 32% to 36% range for this segment. Our branded Rx portfolio represents our growth franchises, specifically GI, dermatology, Dendreon, dentistry, and Canada. We expect 2017 and 2018 revenue growth in the 5% to 10% range and EBITDA growth in the 7% to 10% range. We expect our R&D spend in this area will between 7% and 9%. The EBITDA margin profile for our growth segment is expected to be in the 50% to 55% range. Our final segment represents portfolios that are declining assets that will be optimized for cash return. This includes our neuro and other portfolio, generics, and several other smaller businesses. While growth rates in this segment reflect the impact of near-term LOEs, we expect the longer-term growth rate to be more moderate. This segment is expected to have EBITDA margins in the 65% to 75% range. Now I'd like to turn the call over to Joe.

Slide 22 illustrates our growth path from our 2016 guidance to 2018 adjusted EBITDA. While we will provide specific 2017 guidance at another time, we want to illustrate the important drivers for 2016 to 2018. For example, we will face negative headwind from loss of exclusivity, but which will be more than offset by four factors, base business growth, derm and Salix growth, new product launches, and annualized cost efficiencies. As we work to stabilize Valeant, we have already seen the success from our R&D team with a unanimous FDA AdComm vote for brodalumab on July 19. As you can see on slide number 23, the panel voted 18 to zero in favor of this approval. This is a drug that many did not believe would receive a favorable panel recommendation, but the facts supported the unanimous vote, and our R&D team did a great job in the preparation and presentation of the material. This drug showed statistical superiority versus Stelara, which Stelara had worldwide sales of over $2.7 billion in 2015. Brodalumab also demonstrated impressive clearance rates and has a rapid onset of action. We'll be working with the FDA as they continue the review process towards the PDUFA date on November of 2016. As with all R&D programs, approvals can sometimes be delayed, and this occurred with latanoprostene bunod when we received a Complete Response Letter on July 21. The concerns mentioned in the CRL pertained to the CGMP at our facility in Tampa, Florida following a February 2016 FDA inspection. We've been working with the FDA to resolve the open issues, and we hope to complete activity required for an FDA reinspection within six months. Importantly, the CRL did not identify any efficacy or safety concerns for latanoprostene bunod. Additionally, I wanted to be clear that this…

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

Great, thanks very much and, Joe, thanks for all of the commentary and color. My question relates to what's assumed in second half guidance, so I guess this is for Rob. In your second half guidance, do you have any list price increases assumed? And also, is there launch spending that is reflected in second half guidance, or if you launch new drugs, would the SG&A cost go above your current guidance? Thank you.

So, Rob, why don't you address this, and I think it would probably be best to take him back to the slide on the path to adjusted EPS guidance in terms of the beginning part of this question.

I'd say two things. Firstly, the SG&A, we plan to meet the original guidance of 26%. We were 31% last quarter, 27%, and we've done the calculation and have our plans to hit that number. In terms of pricing, there is both a reflection of the discount as well as potential modest price increases that we might take for the rest of the year. And the launch costs are embedded in our budgets. What is driving this, just to go through it, is the tailwinds, which are about half derm and Salix, the new product launches. The emerging markets, which have continued to grow, was I think 10% growth again this quarter, and the typical seasonality which we've always had. But the efficiencies provide an important path, and again, they are in the context of duplication and other costs, which we think we can easily address.

Thank you.

We're sticking with our 26%. And as Rob said, we're going to finance the incremental expenses for any new product launches through that efficiencies column that Rob is referring to. Operator, next question?

Our next question comes from the line of David Maris from Wells Fargo. Your line is open.

Good morning, Joe. I want to raise three different issues and then see if you can reconcile them. So Valeant had testified in a Senate hearing that it was going to do business differently. And at the same hearing, you were criticized by a Wilson's disease patient and senators given Cuprimine's high 330% price increase. And yesterday you had a press release mentioning you're donating $100,000 to the Wilson Disease Association. And you quoted Mary Graper, who I spoke with last night. And what she said is she thought that Valeant, what they did by raising price would be criminal and that the donation was just a drop in the bucket and that if you wanted to make a real difference you should lower the price. Separately, you also mentioned in a press release yesterday that you reintroduced an otic product, but missing in that was that according to Price Rx you also raised the price of that product in July by 31%. And then third, Valeant confirmed that during the last month or so, one of your very prominent board members held a dinner where selected Valeant owners could hear a discussion about Valeant's plans, including – and again, I heard it secondhand, I wasn't there, that something you raised for the first time, changing the debt covenants, was mentioned. So based on these three things and your prior statement in the call that business is changing, you're ushering in a new period, to me it sounds like these are all symptoms of the same old Valeant. Maybe, if you could, address each of these, but also the bigger picture item of – are things really changing, or is it just new paint on the same old shed?

David, thank you for your questions and your three different comments. Let me try to address them one at a time. First and foremost, let me say that I am absolutely confident that we are making changes at Valeant today. I think first and foremost, I'll illustrate what we've done with the management team in terms of taking new roles, bringing on new people into the company. We've brought on a brand-new Board of Directors to the company. I think at this point we're at 12 board members, 10 of which are new individuals. So I think there's clearly a new direction with the company, as I think mentioned by both the management team as well as what we're doing with our Board of Directors, and importantly the programs that we'll take. You did point out one product that we reintroduced, ofloxacin otic, but I don't think I heard you mention the fact that other than the product prices that occurred in January, I do not believe there's been really any pricing to note at all since the time period of early in the year. So I think we've made – that by itself is certainly one evidence of some of the changes that have happened with the Valeant organization. Number two, we've reached out to the Wilson's Disease Association. We've realized that some of the pricing that was taken was a mistake, and we've acknowledged that mistake. We're working very closely to try to make a difference in patient's lives, and that's exactly what we think our effort with the Wilson's Disease Association is meant to do. By working with the Wilson's Disease Association, we're working very closely with Mary and her team and her organization to make a difference in patients' lives. We'll do it through investment in research and development, and we'll also do it through helping the patients with patient data, patient awareness information, patient ability to get even apps and be able to follow their disease more closely. So we think that is an important message. We have characterized that very closely in our slides today if I really think about what we are doing to try to improve patients' lives. And then finally, I don't think I have anything to add to the comment about any of our board members. I don't know the specifics, so I think what I'm saying would be just speculation, and I don't want to add to that. Operator, next question?

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

Hi, guys. Thanks for taking my question. Joe, so can you help us through where exactly you stand with the $8 billion in divestitures as per your slide? And if you do go through with that coupled with the debt paydown that's planned, are you effectively paying off 80% to 90% of your term loans? And where would the covenant stand if you do deliver on this over the next 12 months, number one? Second, is the EPS hit from these only $0.50 if I'm doing my math right on the EBITDA? And then finally for Linda perhaps, Linda, the covenant at least the way it stands right now, is implying $4.8 billion is the trailing 12-month EBITDA [and EBIT] during Q3. Will that change if you make the amendment? And if you could, give us any color on that fact and why is it not going up. Thank you.

Okay, I'm going to try to get all of them. Let's try to start with where are we with our non-core asset sales as well as what will happen with the covenants. I'll start with that, and then, Linda, you might want to pick up on anything that I missed on that one. First and foremost, as I said on the call, we're evaluating our strategic alternatives for a number of non-core business and geographies that represent revenue of greater than $2 billion. Based on what we've seen for comparable asset sales and/or some unsolicited indications of interest we've received, these assets represent a transaction value of up to $8 billion based on 11 times EBITDA. So that's where I'd start with. One of the things I want to say, though, that this excludes our core asset sales. What we've tried to do in thinking about the use of these proceeds is that, in addition to some of the EBITDA generation from our cash, we do believe that we can certainly pay down, as I said on the call, at least $5 billion over the next 18 months, and potentially could be higher if we sell all $8 billion. And I'm not trying to suggest on the call we're doing that. At this time, what we are doing – we don't have a plan to sell them. We are exploring our strategic options with some bankers that we've asked to help us, so only looking at exploring strategic options at this time. So that's probably the first part of the commentary. Linda, on the second question we were asked, if we pay down up to $5 billion plus some additional, or let's say up to $8 billion, that would take approximately two-thirds of the bank debt reduction, from approximately $12 billion debt down to $4 billion if we pay down $8 billion. Is that correct?

That is correct.

Okay. On the second part of the question, really what you've done, Umer, I believe, is just take that 11 times EBITDA and try to determine the $0.50 of EPS. Is that correct is what you were saying?

Right.

I'm going to tell you that I don't want to do math while I'm on the phone, but directionally that seems correct. But I want to get back to everybody on that question and get that confirmed as we go through the call, and I'll try to get to that answer by the end of the call. I just hate to do math while I'm on the phone for an earnings call. And the last question was Xifaxan, and remind me of that one, one more time.

Basically I was just wondering why isn't going up? And I just wanted to clarify something on your $8 billion too, but I'll let you answer Xifaxan first.

First and foremost, let me be clear. Xifaxan is going up in terms of the prescriptions. The prescriptions for Xifaxan were up 28%. Sales were up about 36%, but that's a harder comparison. I think we just talk about the 28% prescription difference for Xifaxan as probably the best way to look at it. Now as you can see on our chart, though, it's very important to look at what happened to Xifaxan a year ago in 2014 – 2015 as we think through that because I think that certainly gives you the best trajectory of change. In terms of looking at...

If I can just clarify...

Page 10 is what I was referring to. Looking at the retail TRx performance, you could see 2014 – 2015 and then the Xifaxan increase we see year to date versus 2015 on the slide.

Got it. Joe, if I can just clarify, first on the $8 billion you mentioned, how much of that is unsolicited bids versus you guys doing comp analysis? If you could, just give us broadly a third of it is unsolicited bids or not, so number one. And then on Xifaxan, so Q1 versus Q2, I just wanted to understand. Why is it flat to down versus being up? That's all I was trying to ask.

I'm sorry, got it.

A few things. It's an inventory burn that took place in the quarter and slightly lower ASPs, although ASPs have now stabilized.

On the question on the unsolicited, I'm probably not going to give you exact numbers, but I will say that over a third of it has been unsolicited offers that have come in to us. Over one-third of it has been unsolicited offers. I probably don't want to go too much further than that.

Thank you so much.

Okay. Operator, next question, please?

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

Thanks. So on Nitropress and Isuprel, can you just remind us? What is in the guidance in terms of generic competition? And more broadly, what are your thoughts on when we're going to see generic competition on both products? And then also just to follow up on Xifaxan, I think you alluded to ASPs stabilizing. Can you maybe just talk about what you're seeing there in terms of prior auth and actual scripts getting filled? And do you think that the early success of Viberzi has actually been a headwind for Xifaxan in playing a role in why the product hasn't been growing as much as you'd like? Thanks.

Sure. Let me start with Nitropress and Isuprel. We are expecting generic competition, as you noted. We believe that generic competition will occur sometime in the next six to 12 months for both of the products, starting with Nitropress, and then later Isuprel would experience generic competition. But as I said, we expect it within the next six to 12 months. And that was part of what Rob tried to illustrate on the loss of exclusivity as he looked at some of the things that he had and certainly some of the things I talked about on the slide that looked at 2017 – 2018 slide. On the question of Xifaxan, we're very pleased with our position on commercial access. We believe Xifaxan has covered lives of more than – 98% covered lives for the first half of 2016. So we think that's an excellent position to be in. Importantly, I can tell you that we've gotten a couple of very important wins recently with Xifaxan that has reduced the amount of prior authorization process that had to occur with Xifaxan. So for those reasons, we think we're in a very good position with Xifaxan. Obviously in some cases, we had a chance to remove one of the step therapies that occurred, but I think that we think the opportunity is very good. On the question of Rx fill, we are seeing the improvement in hepatic encephalopathy refill, so we think that's an important part of what we're trying to do to improve the compliance of this program, and the team has put together some compliance programs for the future. I think the only real issue with Xifaxan is the one that Rob mentioned was there has certainly been some inventory adjustments in between the first quarter and second quarter as the primary major areas of difference. Operator, next question. Okay, go ahead.

Just to be clear, so Nitropress and Isuprel generics are not in the second-half assumption for the guide, right?

We have them planned for the next six to 12 months is what we've got planned into this.

All right, thanks. Operator, next question.

Our next question comes from the line of Cindy Guan from Goldman Sachs. Your line is open.

Hi, thanks. I wanted to ask on the sentence in the slide, the restored new profitability to new derm scripts starting August 5. I was wondering. How does that timing compare to what was originally expected, and also related to that, the timing of the Relistor launch in September and obviously the delay in latanoprostene? I think on the one call, first quarter call, you mentioned there was conservatism built in for both new product launches and fixing Walgreens. So how does that compare to the original expectations? Are negative ACs no longer an issue, or are there still some items that need to be addressed? And then quickly secondly on the $5 billion debt repayment over 18 months, does that include revolver paydown of $1.35 billion, or all of that $5 billion is loans? And my understanding is that's asset sales that needs to go to loans. So I guess related to that, how are you thinking about addressing the near-dated 2018 unsecured bonds? Thank you.

Okay, I'll take the first two questions about net profitability of derm and the new products. And then, Linda, if you can, help on the debt question specifically and the paydown on the revolver question. Okay, first of all, as we stated on the last call in June, I stated that we believe we would resolve the issues with the Walgreens program within 30 to 60 days. I will say that we've been very pleased with the cooperation we've received from Walgreens, so the teams are working together very well. And indeed, we did achieve the improvement in net profitability in early August. So I think that's right in line with the 30 to 60 days. And in fact, we actually got some of the couponing programs for the independent pharmacists out within the 30-day timeframe. So I think everything has moved along very consistent with what we had said previously. On the question of our pipeline, when I was out on the call, one of the things I tried to illustrate is that we have three action dates with our pipeline that I was very excited about for the second half of 2016 on the first quarter call on June 7. And indeed, one of the things I said was that we'd be very pleased and it would be a good day for us if we received two out of the three, and indeed, that's what we did get. We got the brodalumab recommendation by the Advisory Committee for approval and also Oral Relistor. It is a delay on latanoprostene, but we think we know what the important items are for that Complete Response Letter, and we're going to be working very closely with the FDA on those issues to get that one moving forward. But I think we've tried to be somewhat conservative in bringing those numbers into our plan, and I think we're going to continue to keep that as a mindset until the products are launched and we're out in the marketplace. We want to be relatively conservative on new products. The last past of the question, Linda, was on debt.

Sure. Cindy, on the $5 billion from free cash flow and non-core asset sales, we will use that to pay down a mix of revolvers, term loans, and bonds, I expect. As you know, the asset sale proceeds do need to go to pay down secured debt, so that portion of the $5 billion would go directly to our secured debt. As far as the 2018 unsecured bonds, we are focused on that maturity and want to consider that in the mix as we look to optimize the capital structure and stay in front of our maturities.

Great. Thank you, Linda.

Thanks, Linda. Operator, next question.

Our next question comes from the line of Lennox Gibbs from TD Securities. Your line is open.

Good morning, thank you. As we think about the turnaround in the existing dermatology portfolio, how should we think about the near-term revenue potential of that business? And how perhaps should we look at it relative to the pre-Walgreens revenue performance for the business?

Sure. So one of the things that is clear is that we've been looking at the new prescription levels going back historically, and I think we've had good success on new prescriptions. One of the things that has occurred is we've seen a lowering of some of the refill prescriptions that have occurred, but I think we're seeing some progress with our programs with Walgreens to help patients with compliance. So I think we're going to continue to work with our partner at Walgreens. We're very, as I said, happy with the interactions between Walgreens and Valeant. And we think collectively, we're going to try to find ways to help make sure patients get the medications they need in a very compliant fashion and indeed to work through that. But I probably don't want to go into any specific promises on exactly what's going to happen with refill rates and/or just how we think it's going to affect the entire dermatology franchise. I think we're going to just continue to stick with the overall comments we've made on the guidance commentary for the year in terms of looking at what we're going to expect. But I do think the program is working with Walgreens. We're seeing good receptivity to our programs with Walgreens and there's been good interaction with Walgreens. And once again, it's a 20-year relationship with Walgreens and ourselves. So I think we're looking forward to continuing to improve it as we go forward.

Thanks very much.

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

Hi, thanks for taking my question. I wanted to go back to two of the areas that you cited as the big problem areas, the GI and the derm right now. So in GI, you mentioned that you needed – you had some sales force turnover. Where are you in terms of – you said you stabilized the sales force. Have you put a new sales force in place to be able to get that franchise growing again? And for the dermatology side, with the prior authorization program with Walgreens, if you put this program in place where I believe you're I guess trying to institute some kind of copay for these dermatology products or these prescriptions that had prior authorization, is that what you're talking about in terms of prior authorization programs? And if in fact it is a copay program that you've instituted, is that having any kind of impact or do you expect that to have any kind of impact on prescription fills, or are people walking away from prescriptions? Thanks.

Sure, okay. First, on stabilizing the sales force, what my comments were really meant to say is that from the beginning parts of the year through June, we have stabilized the sales force, and we've seen a reduction in turnover of the sales organization. So that was really what my comment was meant to be. But specifically on your question, did we add additional sales resources, yes, during the time period we added some incremental sales reps for the Xifaxan organization, and I believe it was an incremental 67%. So let me just check that for people that are promoting our hepatic encephalopathy. So let me check that exact number. But to be clear, we did add some additional sales reps for our Xifaxan team for hepatic encephalopathy. Is it 60%?

65%.

65% was added incremental number of sales reps. On the question, second question on derm prior authorization programs, we've done a couple things. We did launch the program that we refer to as a prior authorization process with CoverMyMeds. They're an independent company that helps the patients through the prior authorization process to try to make it easier for patients, easier for physicians to receive the medications that their patients want to receive. So indeed, we have launched that program. That program kicked off August 4, so that is the program I was referencing on the call. And indeed, we did look at – as we moved to improve the net profitability of our dermatology prescriptions, we did look at copay levels, and that was part of the program that we instituted in August, so that did occur. And relative to the impact on prescriptions, I think probably the best answer to that is we're going to be monitoring that and tracking it. We haven't seen anything yet, but it's obviously less than a week, so it would be too early to make any comments specifically on any impact on prescription levels. But it is something we are going to monitor very closely.

Okay. If I could...

Operator, next call – go ahead, please.

Sorry. On GI, the inventory impact, can you quantify the impact and whether inventories should be stable on GI going forward?

The overall inventory levels did come down. The actual number of inventory levels in terms of months on hand has come down by approximately 0.1%, so I guess that would be approximately less than a week I'd say, just in terms of a general comment.

Thanks.

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

Great, thanks for the questions, just a couple quick ones here. First on the non-core asset sales, can you just elaborate a little bit more on how you're considering what is core and non-core in the business? Is this based on what's able to be efficiently monetized right now, or is this really going product or business by business of what fits in with your vision for the company going forward versus what's no longer part of the new Valeant, I guess? Second, and I guess, this falls on the non-core side, based on the sales and EBITDA multiples that seem to be referenced on slide 25, these businesses seem to have margins more in line with the Durable Growth segment. Is that where we should be thinking about some of these assets coming from, or is it really across the three new segments that you laid out? Thanks very much.

Okay, maybe a couple comments on it, Chris, and then I'll get to each part of your question. First of all, I want to make sure. As I said, this process is in the exploratory phase at this point. I'm not going to make too many comments about it other than we've initiated – the comments I've said that we've initiated the process and worked with some banks to help us explore the options in front of us. Relative to the question specifically about core products and what is core, what's non-core, core can be, getting back to what I said before, are several areas. Number one, our dermatology business is core. Number two, our eye care or Bausch + Lomb business is core. And then number three, our Salix or GI business is core. In addition to that, we've also specified consumer as being a core part of what we believe we can do in terms of once again building Durable Growth businesses for the future. On the other part of the question, though, there is also a geographic question. We've specified that clearly the U.S. and Canada, our home market, are core markets for us as a company. So I'll make sure I talk about both from a core product but also from a core geography as important to us. On the question of where these are coming from, it really is across the portfolio rather than any individual business unit. We've looked across the portfolio. Some of the assets that are potentially as I would refer to non-core are opportunities for us to look at asset sales for the future.

Thank you.

Rob, anything you want to add to that comment? Okay, operator, next question?

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

Hi, good morning. Joe, could you review how much you'll be able to enhance the profitability of the derm prescriptions through Walgreens? I know it just started, but order of magnitude on that would help and how long it will take to really work through this and make all those prescriptions profitable. And then do you still plan to do the second part of the Walgreens deal in generics later this year? Thanks.

I probably don't want to give exact details about the profitability because I think it's still very early. All I will simply say is though that we are confident that putting this program in place, we are dramatically reducing the number of prescriptions that would be what I referred to previously as a negative average selling price. So we do believe that it is restoring net profitability, as I made comment in the call. On the question of – I'm sorry, the second part of this question was?

The original second part of the Walgreens deal that's supposed to be in generics later this year.

Thank you. The answer to that is yes, we are moving forward with Plan B. I think we've said though we're working very closely with our partner on that Plan B. It is likely to be a gradual rollout of opportunities to look at the opportunity to sell our branded products for generic prescriptions. But that is a more gradual process than perhaps we had originally talked, but we are looking to move that one forward as well in the latter half of 2016.

Okay, and just a quick follow-up. Based on all the recent conversations, any new branded products that could potentially be added into Walgreens once you've made some of these fixes in dermatology?

I would say in terms of new branded products, we're going to continue to work very closely with Walgreens. I don't think I'm going to identify any specific products at this time. But whether it be the Part B or other programs that we're thinking about, we'll figure out once we work through all these questions if there are other things that will make sense to Walgreens and makes sense to Valeant and clearly it makes sense for helping to improve patients' lives by making healthcare products available, we're going to make sure we explore those options but I don't want to go into any specifics at this time.

Okay, great. Thanks.

Our next question comes from the line of Andrew Finkelstein from Susquehanna Financial Group. Your line is open.

Good morning and thank you for taking the question. I was hoping you could talk a bit more about cash flows in the quarter. Were there any pushes and pulls and how you see yourself on track for the at least $1.7 billion in generation for the year? And then as you gave that slide on looking at the ability to overcome the impact of losses of exclusivity over the next couple years, are non-core asset sales contemplated in that? And if you do go through with selling the $2 billion in revenue that you talked about, I assume a lot of that is the international segment that would be included along with Bausch + Lomb in your new segmentation, but any elaboration you could give would be helpful.

Two comments I'd make about the cash flows. Again, the cash flow for the quarter was $448 million. That did include a one-time legal payment around the Salix settlement. And working capital was better than it has been historically. So net, I think we feel good about the cash flow.

On the question of the illustrative chart that we walked through from 2016 to 2018, we did not factor any sales at this time, obviously, until we know specifically which products it would have an impact on, potentially some of the products that have losses of exclusivity or could have impacted some of the other areas. But we did not factor any assets sold at this time because, as I said, at this point we're exploring those options but we have not factored that into the specifics on that slide. Once again, that slide for us was mostly for illustrative purposes to help you understand how we plan to look at some of the headwind/tailwinds going into the out year.

All right, thanks very much.

Our next question comes from the line of Gregg Gilbert from Deutsche Bank. Your line is open.

Thank you. Joe, will the new reorganized Valeant have a new name? What will the costs be associated with the reorg, and how long will it take? And then secondly, I have a question on Xifaxan. Joe, what's your view on the duration of Xifaxan given the formidable competitor that presumably met the guidance and is challenging the patents? Thanks.

Sure. On the question of the reorganization, you're asking a question certainly on name. I don't have any further comment on the name. Our name is Valeant, and we'll stick with that name at this point. On the question, obviously that's something we'll always continue to evaluate. On the question of where we are with the cost of that, this reorganization is really meant to look at a couple things. Certainly we are making some changes in the management team, and that's contemplated in our model. We're also looking at how we're going to structure our sales, but that really is more of a concept that really this is how we think the best way to organize the company is, how we're organizing it with these three segments of Bausch + Lomb/international, the branded Rx, and then the diversified products. We think those give us businesses that look at certainly sustainable durable growth, also an opportunity to grow with the Rx business et cetera. So I think there's not any specific cost associated with that other than just some of the personnel changes we're planning. Most of that we think will be offset by the work that Rob and the finance team is doing to help us to look at SG&A across the organization, which I would refer to as really more of a reallocation for us to open up and be able to spend more in research and development but offsetting that by spending – or getting some more efficiencies from some of the things that we think, for example, as we look at a process where we have a chance to get cost of goods sold synergies because we're going to build out one procurement organization versus the multiple that we have today, we think that's going to get us some savings that will help us to reallocate it and make it available to get a return on investment for our R&D programs. On the question of Xifaxan, I think you asked some questions relative to our position. As you know, we have patents that run from 2019 to 2029. We have 22 patents in total, and we feel very good about that position. Having said that, I will be clear that we do think there's an opportunity to look at a reformulation of Xifaxan to improve the patient experience. And that's one of the things I mentioned in the call is that we are going to look at a reformulation page, and my R&D team already has that underway. They've got some interesting data that they're looking at to help try to reformulate the product to make it a better patient experience for the future. So look to us to have more to say about that in the future, but that also could have a very meaningful impact on what we believe the future of this product looks like and the entire franchise for Xifaxan.

Thanks.

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

Hi, thanks for taking my question. So first of all here, can you give more color on your launch plan for Oral Relistor, how much incremental sales we could see from this product, and how confident you are that the sales force can effectively promote this product given some of the disruptions that you talked about earlier on the call? And then secondly here, just back on VESNEO for a quick minute, on the CRL, was the Tampa inspection a preapproval inspection or just a regular inspection, and can you give more color on the Form 483? And then lastly, Joe, just given your experience at Perrigo, what can you do to enhance Valeant's OTC drug portfolio? Thanks.

Okay, Louise, I'll try to get all of them. On Oral Relistor, our plan is to launch it in September. There is a major convention or meeting in mid-September that we'll plan to launch the product Oral Relistor for. Mark and his team have plans in place for that launch. We've got the sales force stabilized, as I mentioned to you on the call, so we do feel there's stabilization of the sales force. Obviously, it's something we'll continue to keep eyes on because it is one of the most important variables as we think about the future success of any prescription branded market. On the question of disruptions, as I said, I think we've got that handled. Obviously, we'll continue to monitor that. On the question of the Tampa facility, it was both a general inspection and a preapproval inspection in February of 2016, so both preapproval and a general inspection occurred, to my knowledge. And it was during the preapproval side that they experienced some questions that they've raised. And we've been working very diligently since that February time to resolve those questions. As to the situation we find ourselves today with the CRL, we feel that the changes that will be required for re-inspection is something that we can get accomplished within the next six months and be ready for a re-inspection at that time. So this is where we're working very hard to try to continue to move latanoprostene bunod forward in our pipeline and get it to the marketplace for the patients that need the improved lowering of intraocular pressure. On the question of OTC, I will tell you that we've got a great team here doing the OTC products. I believe that they've done a great job here in the United States, but even around the world. So I don't know if there's much I can add, but certainly it's an area of focus because one of the things I believe is very important, and that's part of why I've structured the business this way, is that I do believe from a segment point of view that we can structure a franchise of what we refer to as durable growth assets. Those would be the Bausch + Lomb assets, the global OTC assets, some of the things that we do in our international markets. And we believe what makes them and brings them together is this concept of the fact that they are brands that have a durable, sustainable business for the future and they have very nice growth characteristics. So I think that the OTC team has done well before my arrival, but what I'm going to simply try to do is bring that business together as a segment and look for building a sustainable, durable business for the future. I think I've got all your questions, Louise.

Thank you.

Our next question comes from the line of Doug Miehm from RBC Capital Markets. Your line is open.

Hi there. It's Joel on for Doug, just a quick question. I'm wondering if you can outline the copay changes to patients that were not receiving prior authorization approval and just outline how copays have changed for Jublia. I think we saw them increase from zero to $35 now. Is that correct?

We did need to make some adjustments in the copays. That is correct. I don't think I'm going to go through the specific ones because there is some variability. So it's probably best at this point just to make mention of the fact that we did make adjustments in the copays. The copay changes were, once again, specifically for places where patients have a prior authorization process and before they receive the drug and we were allowing Walgreens to fill that prescription. That's a place where we did make some changes in prior authorization and the co-pays required.

Okay, thank you. Could you outline what the new process is for the PA patients now?

Sure, there are really essentially three types of patients. Patient A is a cash paying patient. That cash paying patient, we did put a price for our products that make it available on a cash basis for those patients. The second type of patient is a patient that has insurance. They may or may not have a requirement for prior authorizations. If there's a prior authorization requirement – let's say there's no prior authorization requirement first. Those will go through in terms of a normal covered prescription. They have various copay requirements depending on their individual plan. It is the third category where we have had some previous negative average selling price where there was a prior authorization requirement. And until that requirement was met, we were allowing the prescriptions to flow through, but at this point we're going to continue to allow those prescriptions to flow through, but there will be a copay requirement for that prescription. And that is perhaps the area that had the most questions and then how we've been working with our partner, Walgreens, to resolve that.

Perfect, thank you.

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

Hi, good morning. Thanks for taking the questions. First, Joe, in terms of the reformulation of Xifaxan that you just mentioned, is that geared towards one of the indications, IBS-D, or is that HE?

Really what it's meant to do, Doug, is to look at the current Xifaxan formulation and look to find avenues of pursuit that will improve the patient experience with the product. Whether it be for HE or IBS-D, it is really intended because the action of this drug is predominantly a local action in the GI tract. And with very little absorbed, we do believe there's an opportunity to reformulate this and get an improved patient experience across any indication for Xifaxan. So look to us spend more time and more comments on that, but that's the concept. What can we do with this product to help improve the patient experience? We think a reformulation could help improve that for the future for patients, and that's what we're spending some time and effort on. And Tage [Ramakrishna] and the team already have some early data, and we'll look to have more comments on that in the future.

Okay, great. And then just in terms of the dermatology business, what percentage of the overall volume is now going through Walgreens versus some of the other channels? And then just also, the ex-U.S. business, both emerging markets as well as developed, look to be much better than we were expecting. Were there any particular countries or product lines that are worth calling out just so we can understand some trends for the second half of the year? Thank you.

Right now, and let me answer the first question, approximately 50% of our dermatology business is working through the Walgreens program. I think that was the first part of your question. And then, Rob, do you want to get the second part? It was the emerging markets question. Do you want to handle that particular question?

China continues to perform very, very well. Asia overall performs very, very well. Certain countries in Europe have done very, very well. Mexico and Latin America, while there have been challenges in other parts of Latin America, Mexico has been a very strong performer.

Thank you, and your expectation, Rob, that that should continue into the second half of the year?

As I mentioned, remember last time when we corrected for the inventory shift that we made in Q1, there was healthy growth in the emerging markets. And as you'll see from the press tables, that continued and we do expect that to continue for the second half.

Okay, great. Thank you very much.

Our next question comes from the line of Irina Koffler from Mizuho. Your line is open.

Hi, thanks for taking the questions. So your developed markets business and your U.S. business is actually flat to down Q-over-Q, which is somewhat different than other companies in the sector which traditionally have a weaker first quarter and then rebound back after deductibles have been eased off of, and just wondering why we should have conviction in the business rebounding in the back half of the year when Jublia is down quarter over quarter, the GI business is essentially flat, and Xifaxan is down Q-over-Q. So the first question is I guess what's really going to put the steam behind this business in the second half of the year? And then the second question I had was around the $8 billion in divestitures. You outlined some divestitures today in your press release, and they were structured as a little bit in upfront payments and then a lot in back-loaded milestones. So do we have conviction that if you were to get the $8 billion, you would get it all up front in cash or that a lot of it would be back-loaded? Thank you.

Let me start with the question on developed markets and the sequential result. Number one, as we've looked at the revenue, just to point out, the revenue year to date we're at 48% of the revenue guidance for the full year. So it doesn't take a big increase in revenue for us to really reflect – while we expect some, we're at 48% and we're halfway through the year on revenue, so just first comment on revenue for the first half. On the second question, though, obviously there are other things we're taking steps to do. Rob made mention of some of the things that we're looking at in terms of one of the things that we're doing on SG&A and how we're looking at the SG&A in the organization and importantly how we're reallocating some dollars towards R&D. Those are all things that we think are important parts for our second half. The one other comment I want to reflect on is that, as we've made mention to a previous caller, we also did see some reductions in inventory months on hand moving from the first quarter to the second quarter. That's not something we expect to see forever. So when you correct for that, that's partially how you get some incremental opportunity to look at what's going to happen in the second half of the year. I'm going to go to your upfront milestones question but, Rob, anything else you want to add to this commentary on the first half versus second half?

I agree with what Joe said. Obviously, the steam will come from dermatology as well as Salix and overall execution I'd say across the business. There obviously were bright spots in the developed markets in consumer, U.S. contact lens, GI obviously year over year still having growth. But as we said on the Q1 call, we think there is more opportunity there.

Right, and I think that's really what you tried to illustrate in your guidance commentary on some of the tailwinds for that second half. On the question of the $8 billion and what is received up front versus milestones, I think it's probably important to say every deal is a different deal. And the deals that we announced or we put into the presentation today, you're absolutely correct. Much of it was in upfront but there were some significant sales improvement milestones in the deal structure. I would say that was specific to things that we had that were in this particular segment for selling. Clearly, some of them, like brodalumab, there are obviously sales milestones when the product is approved. That's just something that's going to happen. It's not existing in-market product. That differs dramatically from what we're looking at in terms of the $8 billion potential that we're exploring options for where these are currently marketed products. So clearly, that is the difference in a structure that is appropriate for what we announced today but may not be appropriate for what we're thinking about in terms of the future asset sales that we're contemplating. Is that understandable?

Yes, thank you.

Okay. Operator?

Our next question comes from the line of David Steinberg from Jefferies. Your line is open.

Thanks. I just wanted to loop back on the subject of sales force turnover given the importance of customer-facing. What if anything have you done to retain salespeople, and how would you classify morale among the sales force? And then broadly speaking in the corporation, what kind of attrition rate have you seen this year? And I know give or take nine months ago, the company instituted a one-year retention package largely skewed towards senior executives. Have you had to re-up or are you considering doing that? And just quickly on your forecast, for Bausch + Lomb I think you look at 6% to 8% revenue growth, and for derm and GI 5% to 10% for next year. I'm just curious what the mix of price and volume would be in those forecasts.

Okay, David, I'm going to try to get all of them. But if I miss any, I'm sure you'll let me know, David. First of all, turnover and morale, I do believe that we've made some improvements in the turnover, as I made mention through the data that we have through June. It is something, though, that is very important. It's something that we're going to continue to track very closely because it is what – the relationship, especially in our very targeted markets where we have significant market share and also good relationships with our physicians, if we are going to be successful, it is because of those relationships we have with our physicians in terms of how we bring our products to market and how we can help those physicians identify unmet medical need. So it is important. We've been monitoring it. The business unit leaders have done a very nice job of getting close to their individual district managers and regional managers. It's something we're going to continue to work very closely on because I do believe, as I mentioned on my very first call, it's part of just re-recruiting our employees to the Valeant Company. On the question of overall morale, I probably am not the best one to make mention of it because I've only been here three months, but I do think that we've made progress. We've made progress every single day as we get new products approved, as we make progress in working very hard to improve patients' lives. And I believe that's what's going to be the real important driver to this company because yes, it's a job, but more importantly, it's about making a difference in patients' lives. And I think that's the most important thing that I keep reminding the company about in terms of where we're going and what direction we're taking and how we're going to become a trusted healthcare partner. So I do believe that's the way I'm trying to address the question of morale and the challenges we face. On the senior leadership side, with the exception of the announcement of some of the changes that I've announced just yesterday, there has been very limited turnover. But it is something that, as I said, we're trying to make some changes in the new management structure, especially as we look at the new reporting segments of the business and how we're putting together the business for the future. But I do believe that's very important to our future because I think it will provide the investors and the analysts greater transparency into what we're doing for the company. Rob, did I miss anything that you want to contribute to on that one?

Not on that one, but do you want to get to the segment growth on the...

Why don't you take that one?

Just on the two, what I'd say is both the B+L and international segment and the branded segment have strong – either high single-digit top line growth and leverage to the EBITDA growth. B+L is being driven by the emerging market growth, which we've talked about and will continue to drive it as well as where we stand in terms of the various technologies. In terms of the price/volume, the price assumptions are quite modest, as we have said, but getting back on doing appropriate pricing is something that the corporation will get back to. And then second I'd say is that the two years that we picked out, you have the issue of where's the pipeline and where's the launch and where's broda. And so again, I'd end by saying both of these will provide good robust growth looking forward beyond 2018.

Thank you, Rob. Operator, next question?

Our next question comes from the line of Alan Ridgeway from Scotia Bank. Your line is open.

Hi. Good morning, guys. Thanks for taking the questions, just two questions for me this morning. First of all, we're now over a year since Salix was acquired and pulled into the business, and we're still talking about inventory. Is inventory now finally where it should be, and can we start to follow the facts and then some of the products more directly based on demand as opposed to having these inventory issues every quarter? And maybe just a comment on where rest of world inventory sits at this point because that was an issue in Q1 as well. And then secondly, just on Xifaxan, you talk about 98% covered lives, but clearly there are prior auths and step therapy required for a number of those. Can you just tell us what percentage of those covered lives have prior auth and step therapy? And on the one big win, Joe, that you talked about on managed care and having some of those step therapies removed, how meaningful is that win? How many patients – how many covered lives were covered by that win? And I'll leave it at that. Thanks.

Hey, so I'm going to try to take them each in order, and I'll start with the inventory question and I'll give you my comment. But, Rob, please feel free to join in on this comment. Number one, on the inventory question, as I mentioned, what I was really referring to is the overall inventory. It wasn't specifically addressed to Xifaxan, but clearly Xifaxan being our largest product has obviously some impact. But as I said, the inventory adjustment was approximately 0.1 month, so it's not a big change. I said it was less than a week, so just to give you some sense of it's not a big change but it did come down slightly in the quarter. Rest of world inventory, Rob, anything we could add to the rest of world?

You'll read about it in the 10-Q. We obviously talked and disclosed about it. We continue to monitor those around the world, and they are continuing to come down, as we disclosed in the Q1 10-Q.

On the question of the 98% covered lives, you're absolutely correct. To give you some specifics, we have 68% unrestricted, and that's approximately 20 million lives. But the prior authorizations largely are part of whether it's the hepatic encephalopathy indication or it's the IBS-D. Specifically on the question that the wins that I was referring to, actually it was more than one win. I just pointed to a win, but it is actually wins with two very large customers. And those also affect somewhere around 20 million lives for two very large customers that occurred starting on or about August 1 in terms of timing. So that's where we made progress with two very large customers affecting 20 million lives that remove some of the step edits starting August 1.

Are those step edits specifically on the IBS side or on both the HE and the IBS side in general?

They're actually on both. They're actually on both.

Great, thanks.

In one case it was reduction of a need for a step edit for a loperamide or antispasmodic for IBS-D prior authorization. That was one of the removal of step edits as an example for IBS-D.

Our next question comes from the line of David Gallant (sic) [Common] from JPMorgan. Your line is open.

Yes, good morning. It's David Common. Thank you and thanks for the extended Q&A. I really think it's the right thing to be doing. I have just two questions and two I think just clarifications. The two questions are, did the changes you just outlined to the copays resolve the negative ASP issue that you had for your derm products? The second question is can you remind us really what's in your expectations on timing for competition for the handful of really highest-margin neuro products which became controversial on account of their pricing? And then the clarifications, if I have this right, your $5 billion of debt reduction on the next 18 months, is that $3 billion to $3.5 billion from free cash flow, and then just assuming a very small subset of the potential asset sales you called out? And then I guess this is for Linda. I see on the press release just a small reduction in the senior notes quarter over quarter. Is that possible that that would be open market repurchases, and really what's your view on that from free cash flow? Thank you.

First of all, thank you for the comment on the extended Q&A. We do think it's important to try to be as transparent as possible and why we've extended the Q&A. On the questions, a couple of them, the first question was do the copay changes reduce the situation with negative average selling price, the answer to that is yes. On the questions of the expectations, you asked about the highest margin products in terms of when we will lose exclusivity on those. As I mentioned, we believe we will lose exclusivity on those products really in the next six to 12 months. And more specifically, the product Nitropress is the one we expect to lose exclusivity on first, followed by Isuprel. Both of those are in the neurology business or what we referred to on the call, thinking forward, the diversified business. But within the next six to 12 months is our expectations for Nitropress and Isuprel. Finally, there was a question on, Linda, for debt?

The $5 billion expectation assumes just a small portion of those potential asset sales. Is that right?

Yes, I'll take that one. Yes, that was both from operational EBITDA and asset sales was the $5 billion, but it is a smaller portion that we felt was asset sales. That is correct, your assumption is correct. And then, Linda, there was a question on...

The last one was you asked about was the senior notes. So, no, we did not do any repurchases of senior notes this quarter. The one thing to remember on the balance sheet is that it is book value and we have euro debt, which fluctuates based on currency.

Oh, right, good reminder. Thank you.

Thank you. Operator, any additional questions?

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

Thanks very much. I started off by asking one question. And then since everyone else asked six, I have to ask five more.

David, we appreciate the discipline.

I'll just ask a few here. First of all, in terms of negative ASP, could you just explain what you mean by that, Joe? I never understood that, how a product can have negative revenue. And then second, with respect to the improvement in net profitability in early August, obviously that was within a week. So could you just explain maybe in more technical terms exactly how the profitability changed overnight? Obviously it has because you've stated it, but I don't quite understand that either. And then finally, one of the slides indicates that you plan to return to inorganic growth in 2018 and beyond. Could you just talk a little bit about that as well? Thank you.

Sure, right. Let me explain the first comment on negative ASP. What I was referring to there, and let me be first and foremost very clear. That was referring to a comment that I made during the first quarter earnings call on June 7. What I was referring to at that time was a situation where we were allowing prescriptions to flow through the process at Walgreens if the prior authorization was not approved. For that reason, we were not receiving any cash for that prescription. However, we were still paying fees for that prescription. So as a result of that, I referred to it as a negative average selling price because we received no cash for the prescription but we were allowing the prescription to flow through and paying the fees. Now that is something that I made mention of we would get corrected in 30 to 60 days. And now, as I mentioned, we now believe we have that corrected based on the new programs we've put in place that kicked off in early August. Is that part clear, David, in terms of the negative ASP question?

Yes, that's clear. Thank you.

On the second part of the question, that is the basis by which I made the comment that we will have net profitability with our prescriptions because we will ensure that the copays that patients pay will cover the fee structure even during the time period if we do not receive the initial approval for that prior authorization. So the copays will cover those fees, and that will allow us to avoid a situation with negative ASPs. Is that clear?

Yes.

Okay. And then on the final question, I want to be clear. It's 2018 and beyond. I said that we would look at a more balanced-growth profile where we assume that we will pay down our debt. We would get to a manageable debt level. And at that point when we're at a manageable debt level, we would look at trying to grow the business both organically through our own research and development, but also through inorganic means because we believe we have very important franchise positions with the products in dermatology, with the products in gastro, in eye care. We believe we have very important relationships, very important positions where we've got a great pipeline. Plus, there are some places where some of our competitors or other players in the marketplace may have a product that we think makes a lot of sense. And if we have a leadership position, for example, in GI, we just announced the Norgine relationship that we have as a perfect example. We have a position in the GI category. Norgine has a product. We felt that would be a perfect example of us going out and through inorganic means building a stronger pipeline for the future. That's what I was really referring to in 2018 and beyond. I'm not making any comments yet about what percentage would be organic, what percent inorganic. But that concept, once we get to a state where we get our debt position to a more manageable place, we do believe there are going to be opportunities for inorganic opportunities. But clearly, we've got a lot of debt paydowns that happen first, and I don't want to get too far ahead of that transformation stage.

Thank you very much.

Thank you, Dave.

Our next question comes from Prakash Gowd from CIBC. Your line is open.

Thank you, good morning. Joe, just a couple of questions. First on payers, I wonder if you could just maybe outline some of your discussions with payers and the outcomes there. Are you still seeing challenges from legacy pricing issues? And specifically, what steps are you taking to reverse any proposed formulary exclusions? And secondly on Xifaxan, you're probably in the midst of a strategy shift, moving from IBS-D more to focusing on HE. And in Q1, you talked about implementation of educational programs and increasing the number of reps focusing on that. If you can, just update us on how that's progressing and when you think we can expect to see the full effect of these initiatives. Thanks very much.

Sure, let me start with the payers discussion. Yes, we have had discussions with a number of payers. I will compliment the team that was here before I got here. Anne Whitaker and her team and Sandy [Loreaux] have done just an outstanding job of improving our relationships with the payers. So I think we feel good about where we are. There are still challenges, to be clear. I don't want to suggest for an instant that there are not challenges. There are still things we need to work on, but we like our position for 2016, as I mentioned. We've got a number of wins. I mentioned the Xifaxan win as certainly one example of a recent win that affects – actually it's two wins that affect a combined 20 million lives where we think that's just a great opportunity to remove some of the step therapy hurdles that we've had. And that's what we're going to continue to work towards doing, just to make sure that our drugs are available for patients when they need them. I think it all goes back to what we're saying about our mission in trying to improve patients' lives with our healthcare products. So that's really the focus we've taken and how we're going to continue to look to the future on trying to improve lives. There is no doubt though there are going to still be some challenges and we're going to work our way through them. On the questions of – I think the next question really asked was about Xifaxan. We do believe hepatic encephalopathy is a very important opportunity for us. We wanted to make sure there were incremental resources put behind that opportunity, and Mark McKenna and his team have done that. As I said, we put an incremental 60-plus percentage more sales representatives behind hepatic encephalopathy. We think that's a place where we can make a very important contribution to a patient's life and reduce overall healthcare expenditures because the facts are that those patients are very expensive patients. If we can reduce the need for re-hospitalization or additional diagnostic work, that's important, and that's what the team is working on. Relative to when we're going to get there in terms of hitting a peak performance, we think the peak performance of Xifaxan is certainly out many years. One of the things I talked about on the last call is that we think the potential opportunity for Xifaxan if all patients for hepatic encephalopathy, for example, were treated, it would be over a $5 billion opportunity. We're nowhere close to that, let's be clear, but we do think there's certainly a significant upside from where we are today for Xifaxan. We've got a lot of years to still work on that, and we're going to work very diligently on progressing our success with Xifaxan in hepatic encephalopathy and IBS-D for that matter.

Can I just ask a follow-up on the payer question? Just around your discussions with those payers, are the negotiations around you having to lower prices to maintain formulary status?

I would phrase it differently. I would phrase it that – and what we acknowledged earlier this year is that what we did is we've looked at the amount of rebates and discounts that we provided to these payers to ensure that we got the appropriate access for our drugs. It's not so much reducing prices as much as it is looking at the rebate structure of what we're doing as a company has really been what has gained the additional access for our products.

Thank you, Joe.

Our next question comes from the line of Murali Ganti from Citigroup. Your line is open.

Hi, good morning. So my main debt-related questions have been answered, so maybe I'll ask a bigger-picture question here. Operationally, are you now fully staffed at the senior management level? Do you have any more key hires you need to make to execute on your longer-term strategy, particularly with regard to the new segment structure you laid out?

Sure. On the question of – I feel very good about our team, but there are some additional hires that I do believe we need to make in the company, yes, and look to us to have more comment on that in the future. But I do feel we've got a good team, but there are still some additional areas that we want to strengthen at the Valeant organization, so we'll have more to say about that in the near future.

Okay, thank you.

And our next question comes from the line of Gregg Gilbert from Deutsche Bank. Your line is open.

Hi. Sorry, just one follow-up. Joe, you mentioned one thin cushion on debt covenants. I'm sorry if I missed this, but can you describe the financial implications and the timeline to achieve that, at least generally, for us? Thanks.

You're asking relative to the amendment, Gregg, that I mentioned?

Yes.

Okay., I'll start but Linda is going to give you the details on that or give some additional information on it. Obviously, we can't say anything because it's not final yet what that is. Gregg, I just want to go back to my comments and what I was trying to say here. The issue that I think we face as a company was that as I become the CEO of the company, every single meeting this question comes up. And while I think it's a very important question, there's no doubt about it, I do also believe it's something we can resolve. And with the great work from Linda and her team, I think it's something we can get resolved relatively quickly. So Linda is going to take on this task of working through this amendment. And importantly, once Linda will go through the details of the financial side, at least some of them, I don't think you'll have too much yet. But I think the important part for me from a big picture point of view is that once we get this behind us, we can go back to talking more about our products, how we plan to improve patients' lives, what our growth trajectory looks like, what the pipeline looks like, what we think is exciting about this new segment in terms of what we think is durable growth for the future. That we think is a lot more exciting than always talking about bank covenants, no disrespect to Linda and her world of treasury. But, Linda, do you want to give any comments on the bank covenants and what you're doing?

Sure. Gregg, we haven't launched the amendment yet. We expect to launch later today. And as Joe mentioned, we plan to modify the interest coverage, financial maintenance covenants, as well as a couple other small changes. This is all opportunistic and focused on giving us the flexibility to optimize our capital structure. So while the interest coverage financial maintenance covenant is a bit tight right now, with this additional cushion, we think we'll be very comfortable going forward and just being able to focus on the strategy of the business and talking about the business.

Thanks.

Thank you, Linda. Thank you, Gregg. Operator, next question. I think we only have time for a couple more because we've gone even further. We wanted to go further, but we've gone quite far. So let's maybe take another one or two questions please.

Our next question comes from the line of Doug Miehm from RBC Capital Markets. Your line is open.

Hi, there. It's Joel in again, just one quick follow-up on the access program amendments. So we checked the pharmacy locator, and I'm wondering if you can outline the number of independent pharmacies you're working with, and again, how you expect that to drive volume growth going forward.

This is not going to be a scientific number, but the answer is all of them. All of the independent pharmacies are all eligible for our couponing program. I think probably the best thing I can do is – I mean that really is the magnitude of what it is. We haven't specified any restrictions on independent pharmacies.

How does that compare to Walgreens locations? Is it double the number of Walgreens locations?

I probably don't want to comment about the specifics on it in terms of the actual numbers. But just simply stated is we've made it eligible for any independent pharmacy that they'll have a couponing system for patients; that if a patient wants to go there, he or she can go there. I will say that we still believe the Walgreens program has preferable advantages for patients. But obviously, individual patients should have the flexibility to make their decisions. But the Walgreens outlet is going to be a preferred outlet for all patients.

Okay. So just to follow up, how do you expect that to increase volume going forward for the derm portfolio recovery? Is there any quantification you can put to that?

I think probably we saw it – just really when the program was launched at the end of June, we did see some pickup in the prescriptions of our dermatology. But I think once again, it's probably too early to make any projections on exact numbers, but we are looking at trying to continue to increase this. We think this is especially important to get these programs in place because, as you know, as people – as many of the teenagers go back to school, that's an important time period for acne and other parts of the dermatology franchise. So we think having these programs in place at the end of June and early August were very important to us as we think about the future return to school type of prescriptions that we often see happen in dermatology. I don't want to give you anything further beyond that other than just, it's early, very early in timing, but it's something that we're looking forward to and will continue to track very closely.

Okay, perfect. Thank you.

And our final question comes from the line of David Maris from Wells Fargo. Your line is open.

Hi. On the first quarter slide, you had a slide on liquidity that on the bottom said, based on guidance we expect to remain in compliance with the credit agreement. That boxed shaded statement is not in the second quarter slide deck. I just wanted to see if that was true or not, if based on your current guidance, you would expect to remain in compliance with the credit agreement as they stand now throughout 2016. And then secondly...

The answer to that is yes, David. That was one of the comments that was made in – I think was made – I made it certainly, but Rob may have made mention of it as well. I'm sorry. Another question?

Okay. And the other is, do you think – I think to Gregg's question, the debt covenant amendments, will they carry with them any cost, and does the guidance include that cost? And separately, do Nitropress and Isuprel generics, when you say they're six to 12 months out, are they included in part in the current 2016 guidance?

Okay. First, Linda, on the question, take the question on the debt covenants. We obviously can't give that pricing information and things like that, David, because it obviously hasn't happened. We just wanted to be transparent to let you know we're going into the market with that. But until that happens, we can't give exact numbers. But I think Linda has directionally thought about what that means to us. And, Linda, anything else you can add to what I just stated?

I think you've covered it, Joe.

I just wondered, Joe. Is that in the current guidance or not in the current guidance?

It is in the current guidance. That is correct, yes. But recognize that we do not have an exact number. We have a ballpark number or range of number, but I just want to be clear that I don't have – I can't know that until we actually get it completed. On the question on Nitropress and Isuprel, as I said, I expect Nitropress to be first, Isuprel to be second. We think it's going to be, call it the next six to 12 months. Nitropress is included in 2016, at the latter part of 2016. Isuprel is in the 2017 timeframe. I think that was the question you had, right, David?

Yes. And then lastly, you have on the slide deck a bridge slide that talks about the first half versus the second half, and something new in this slide deck is that it says that R&D timing will be a benefit. It's included in a few things, but like a $0.38 benefit. Does that mean that R&D will be lower? I think it has to be, based on that slide, lower in the second half.

That's correct, David. We overspent R&D in the first half of the year, predominantly around the comments that Rob made specifically to brodalumab and some of the new products that were coming through. It required us to overspend in the first half of the year versus our projections for the second half.

Okay, great. Thank you.

Thank you. Operator, that concludes our call. Thank you very much, everyone, for your interest in Valeant. We'll be out trying to answer any additional questions. If there are any additional questions, please get in touch with Valeant. We'll be happy to try to provide additional information. Thank you very much for your participation today. Have a great day, everyone.

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