INTRODUCTION
Unless the context otherwise indicates, as used in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," the terms "we," "us," "our," "the Company," and similar terms refer toBausch Health Companies Inc. and its subsidiaries. This "Management's Discussion and Analysis of Financial Condition and Results of Operations" has been updated throughMay 7, 2020 and should be read in conjunction with the unaudited interim Consolidated Financial Statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q for the quarterly period endedMarch 31, 2020 (this "Form 10-Q"). The matters discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contain certain forward-looking statements within the meaning of Section 27A of The Securities Act of 1993, as amended, and Section 21E of The Securities Exchange Act of 1934, as amended, and that may be forward-looking information within the meaning defined under applicable Canadian securities laws (collectively, "Forward-Looking Statements"). See "Forward-Looking Statements" at the end of this discussion. Our accompanying unaudited interim Consolidated Financial Statements as ofMarch 31, 2020 and for the three months endedMarch 31, 2020 and 2019 have been prepared in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP") and the rules and regulations of theUnited States Securities and Exchange Commission (the "SEC") for interim financial statements, and should be read in conjunction with our Consolidated Financial Statements for the year endedDecember 31, 2019 , which were included in our Annual Report on Form 10-K filed onFebruary 19, 2020 . In our opinion, the unaudited interim Consolidated Financial Statements reflect all adjustments, consisting of normal and recurring adjustments, necessary for a fair statement of the financial condition, results of operations and cash flows for the periods indicated. Additional company information is available on SEDAR at www.sedar.com and on theSEC website at www.sec.gov. All currency amounts are expressed inU.S. dollars, unless otherwise noted. OVERVIEW We are a global company whose mission is to improve people's lives with our health care products. We develop, manufacture and market, primarily in the therapeutic areas of eye-health, gastroenterology ("GI") and dermatology, a broad range of: (i) branded pharmaceuticals, (ii) generic and branded generic pharmaceuticals, (iii) over-the-counter ("OTC") products and (iv) medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment and aesthetics devices), which are marketed directly or indirectly in approximately 100 countries. Core Businesses Our strategy is to focus our business on core therapeutic classes that offer attractive growth opportunities. Within our chosen therapeutic classes, we prioritize durable products which we believe have the potential for strong operating margins and evidence of growth opportunities. We believe this strategy has reduced complexity in our operations and maximizes the value of our: (i) eye-health, (ii) GI and (iii) dermatology businesses which collectively now represent a substantial portion of our revenues. We have found and continue to believe there is significant opportunity in these businesses and we believe our existing portfolio, commercial footprint and pipeline of product development projects position us to successfully compete in these markets and provide us with the greatest opportunity to build value for our shareholders. We identify these businesses as "core", meaning that we believe we are best positioned to grow and develop them. Reportable Segments and Strategies Our portfolio of products falls into four operating and reportable segments: (i) Bausch + Lomb/International, (ii) Salix, (iii)Ortho Dermatologics and (iv) Diversified Products. The Bausch + Lomb/International segment - consists of our Global Bausch + Lomb eye-health business and our International Rx business. Our Global Bausch + Lomb eye-health business includes our Global Vision Care, Global Surgical, Global Consumer and Global Ophthalmology Rx products, which in aggregate accounted for approximately 41%, 42% and 43% of our Company's revenues for the three months endedMarch 31, 2020 and the years 2019 and 2018, respectively. Our International Rx business, with the exception of our Solta products, includes sales inCanada ,Europe ,Asia ,Australia ,Latin America ,Africa and theMiddle East of branded pharmaceutical products, branded generic pharmaceutical products and OTC products, which in aggregate accounted for approximately 14%, 13% and 13% of our Company's revenues for the three months endedMarch 31, 2020 and the years 2019 and 2018, respectively. Our Bausch + Lomb business is a fully-integrated eye-health business, which we believe is critical to maintaining and developing our position in the global eye-health market. As a fully integrated eye-health business with a 165-year legacy, Bausch + Lomb has an established line of contact lenses, intraocular lenses and other medical devices, surgical systems and devices, 39 -------------------------------------------------------------------------------- vitamin and mineral supplements, lens care products, prescription eye-medications and other consumer products that positions us to compete in all areas of the eye-health market. As part of our Global Bausch + Lomb business strategy, we continually look for key trends in the eye-health market to meet changing consumer/patient needs and identify areas for investment and growth. For instance, one of these trends is the increasing rate of myopia, and importantly, myopia as a potential risk factor for glaucoma, macular degeneration and retinal detachment. We continue to see increased demand for new eye-health products that address conditions brought on by factors, such as increased screen time, lack of outdoor activities and academic pressures, as well as conditions brought on by an aging population for example, as more and more baby-boomers in theU.S. are reaching the age of 65. To supplement our well-established Bausch + Lomb product lines, we continue to identify new products tailored to address these key trends, which we develop internally with our own research and development ("R&D") team to generate organic growth. We also license selective molecules or technology in leveraging our own R&D expertise through development, as well as seek out external product development opportunities. Recent product launches include Biotrue® ONEday daily disposable contact lenses, the next generation of Bausch + Lomb ULTRA® contact lenses,SiHy Daily contact lenses, Lumify® (an eye redness treatment), Vyzulta® (a pressure lowering eye drop for patients with angle glaucoma or ocular hypertension) and Ocuvite® Eye Performance (vitamins to protect the eye from stressors such as sunlight and blue light emitted from digital devices). The Salix segment - consists of sales in theU.S. of GI products and includes our Xifaxan® product. Our Xifaxan® product accounted for revenues of$375 million ,$1,452 million and$1,195 million for the three months endedMarch 31, 2020 and the years 2019 and 2018, respectively. As part of our acquisition ofSalix Pharmaceuticals, Ltd. inApril 2015 (the "Salix Acquisition"), we acquired the intellectual property to a number of products that have provided us with year-over-year revenue growth, particularly the intellectual property behind Xifaxan® for, amongst other indications, irritable bowel syndrome with diarrhea ("IBS-D"), and Relistor® for opioid induced constipation. Revenues from our Xifaxan® product increased approximately 23%, 22% and 22% during the three months endedMarch 31, 2020 and in the years 2019 and 2018, respectively. We attribute the growth in our Salix revenues to the investments we have been making since 2017, including: (i) hiring 200 trained and experienced sales force representatives to expand the commercial field force for Xifaxan®, (ii) increasing the focus on the development of next generation formulations of our Salix intellectual property to address new indications, (iii) completing the strategic acquisition of certain assets ofSynergy Pharmaceuticals Inc. ("Synergy"), which included the Trulance® product, (iv) increasing the number of sales force representatives for Trulance® and (v) entering into licensing agreements for investigational products, which, once developed and if approved by theU.S. Food and Drug Administration ("FDA"), will be new treatments for certain GI and liver diseases. Each of these opportunities potentially provides us with the ability to expand our GI portfolio and allows us to leverage our existing GI sales force, supply channel and distribution channel. TheOrtho Dermatologics segment - consists of: (i) sales in theU.S. ofOrtho Dermatologics (dermatological products) and (ii) global sales of Solta dermatological devices. TheOrtho Dermatologics business is our medical dermatology business dedicated to the treatment of a range of therapeutic areas, including psoriasis, actinic keratosis, acne, atopic dermatitis, onychomycosis and other dermatoses and includes our Duobrii®, Bryhali®, Jublia® and Siliq® product lines. As part of our business strategy for theOrtho Dermatologics segment, we have made significant investments to build out our psoriasis, atopic dermatitis and acne product portfolios, which are the markets within dermatology where we see the greatest opportunities, with a focus on topical gel and lotion products over injectable biologics. We continue to support and develop injectable biologics; however, we believe some patients prefer topical products as an alternative to injectable biologics. Further, as topical products can, in many cases, defer the use of injectable biologics that often come with associated risk/benefit profiles, a topical product is usually readily adopted by payors, is less expensive and can be more cost-effective than injectable biologics. Therefore, we believe topical products represent alternative treatments for physicians, payors and patients, and as the preferred choice of treatment, have the potential to drive greater volumes, generate better margins and will ultimately be a key contributing factor of ourOrtho Dermatologics business. During 2017 through the date of this filing, we have made significant investments to build out our aesthetics, psoriasis and acne product portfolios, which we believe, coupled with our experienced dermatology sales leadership team and our recently expandedOrtho Dermatologics sales force, will position ourOrtho Dermatologics business for growth. Our Solta business is dedicated to the development of innovative treatment technologies that provide proven and effective medical aesthetic and therapeutic benefits to consumers. Global Solta revenues were$51 million and$38 million for the three months endedMarch 31, 2020 and 2019 and$194 million and$135 million the years 2019 and 2018, respectively. The increase in revenue is primarily attributable to Next Generation Thermage FLX®, a fourth-generation non-invasive treatment option using a radiofrequency platform designed to optimize key functional characteristics and improve patient outcomes. During 2018 and 2019, Next Generation Thermage FLX® was launched inHong Kong ,Japan ,Korea ,Taiwan ,Philippines ,Singapore ,Indonesia , 40 --------------------------------------------------------------------------------Malaysia ,China ,Thailand ,Vietnam , andAustralia as part of our Solta medical aesthetic devices portfolio. These launches have been successful as Next Generation Thermage FLX® revenues for three months endedMarch 31, 2020 and 2019 were$26 million and$12 million , respectively and in full-year 2019 were$77 million . The Diversified Products segment - consists of sales in theU.S. of: (i) pharmaceutical products in the areas of neurology and certain other therapeutic classes, such as Wellbutrin®, Aplenzin®, Cuprimine®, Ativan® and Migranal®, (ii) generic products, such as Uceris® authorized generic ("AG"), Elidel® AG and Diastat® AG and (iii) dentistry products, such as Arestin® and NeutraSal®. The Company utilizes the Diversified Products segment to extend the long-term cash flows from a number of assets that are expected to decline over time due to the loss of exclusivity, by launching and selling authorized generic versions of certain branded assets. For a comprehensive discussion of our business, business strategy, products and other business matters, see Item 1. "Business" included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC and the Canadian Securities Administrators ("CSA") on SEDAR onFebruary 19, 2020 . Impact of COVID-19 Pandemic InDecember 2019 , a novel strain of the coronavirus disease, COVID-19, was identified inWuhan, China . Since then, COVID-19 has spread to other parts of the world, includingthe United States ,Canada andEurope , and was declared a global pandemic by theWorld Health Organization (the "WHO") onMarch 11, 2020 . As a global health care company, now more than ever, we remain focused on our mission of helping to improve people's lives with our health care products. The unprecedented nature of the COVID-19 pandemic has adversely impacted the global economy. The COVID-19 pandemic and the rapidly evolving reactions of governments, private sector participants and the public in an effort to contain the spread of the COVID-19 virus and/or address its impacts have intensified and have had significant direct and indirect effects on businesses and commerce. This includes but is not limited to, disruption to supply chains, employee base and transactional activity, facilities closures and production suspensions, and significantly increased demand for certain goods and services, such as pandemic-related medical services and supplies, alongside decreased demand for others, such as retail, hospitality, elective medical procedures and travel. As the global economic landscape changes, there is a wide range of possible outcomes regarding the nature and timing of events and reactions relating to the COVID-19 pandemic, each of which are highly dependent on variables that are difficult to predict at this time. The extent and duration of the pandemic, the rapidly evolving reactions of governments, private sector participants and the public to the COVID-19 pandemic and the associated disruption to business and commerce generally, and the extent to which these may impact the Company's business, financial condition, cash flows, development programs and results of operations in particular, will depend on future developments which are highly uncertain and many of which are outside the Company's control. Such developments include the ultimate geographic spread and duration of the pandemic, new information which may emerge concerning the severity of the COVID-19 pandemic, the effectiveness and intensity of measures to contain COVID-19 and/or address its impacts, and the ultimate economic impact of the pandemic. Such developments, among others, depending on their nature, duration and intensity, could have a significant adverse effect on our business, financial condition, cash flows and results of operations. To date, the Company has been able to continue its operations with limited disruptions in supply and manufacturing. Although, it is difficult to predict the broad macroeconomic effects that the COVID-19 virus will have on industries or individual companies, the Company has assessed the possible effects and outcomes of the pandemic on, among other things, its supply chain, customers and distributors, discounts and rebates, employee base, product sustainability, research and development efforts, product pipeline and consumer demand. Primarily due to this assessment, we have taken actions to manage the level of our investment in support of certain existing products, anticipated launches and the expansion of our sales footprint inEurope . Postponing these investments may impact the extent and timing in achieving our longer-term forecasts for certain business units, however we believe these actions will not have a material impact on the underlying value of the related businesses or their associated assets. We are and will continue to closely monitor the impacts of the COVID-19 pandemic and related responses from governments and private sector participants on the Company, our customers, supply chain, third-party suppliers, project development timelines, costs, revenue, margins, liquidity and financial condition and our planned actions and responses to this pandemic. We believe we have responded quickly to the human and commercial challenges brought on by COVID-19 and that our early actions have, so far, enabled us to keep our employees safe and our supply lines largely intact and we believe these actions have laid the foundation for us to work our way through the uncertainties to come. Importantly, we believe that the steps we took over the last several years to manage our capital structure place us in a strong position to maintain sufficient liquidity to continue operations through an extended pandemic and we believe that our businesses will not see their long-term value diminished by this unprecedented situation. 41 -------------------------------------------------------------------------------- Our Employees The health and safety of our employees is paramount. Our senior management team meets regularly to assess this ongoing situation and has implemented multiple actions to protect our employees. In most locations, employees not directly involved in production, including our sales forces, are working remotely. For essential personnel in our manufacturing and distribution centers, we are taking every precaution to ensure that these employees are working in an environment that is as safe as possible, including following procedures as prescribed by global public health organizations, such as the WHO andU.S. Centers for Disease Control and Prevention . Our Supply Chain and Manufacturing Facilities Our objective is to maintain the uninterrupted availability of our products to meet the needs of patients, consumers and our customers, and in fact, we have stepped up production to meet increased demand for certain of our consumer products. Business continuity plans and site-level biosecurity procedures are in place to ensure the well-being of our employees while we work to maintain the integrity of our supply chain. As of the date of this filing, we have not experienced any disruption in our supply chain that would have a material impact on our results of operations. Our global supply chain team worked diligently to stay ahead of this challenge once it appeared inAsia and has used that experience to put in place procedures to mitigate the risks of closures and disruptions at our manufacturing facilities in other regions. We have multiple sources of active pharmaceutical ingredients ("API") and intermediates for many of our products, the availability of which has not had, and at this time we do not expect will have, a material impact on our supply chain. We have been largely successful in keeping our manufacturing facilities operational, although our facilities inMilan ,Laval andChina were closed for short periods of time but have since resumed operations. With respect to our largest product, Xifaxan®, as ofApril 30, 2020 , we have over five months' supply of Xifaxan® on hand and enough API to manufacture another five months' supply of Xifaxan® finished goods. We also have open orders for API that we currently expect will arrive on schedule. However, if we were to experience a lack of availability of API for Xifaxan®, such disruption to our supply chain could have a significant adverse effect on our business, financial condition and results of operations. Our Product Pipeline Our leadership team actively manages the Company's product pipeline to identify what we believe are innovative and realizable projects aligned with our core businesses that are expected to provide incremental and sustainable revenues and growth. During the COVID-19 pandemic, our R&D team remains focused on meeting these objectives in a timely manner; however, there are significant events and circumstances regarding the COVID-19 pandemic that may materially affect our R&D team's ability to do so, many of which are beyond the Company's control. As a result of these events and circumstances, we have had to pause certain early stage clinical trial and research efforts, which in turn is expected to lead to delays in the development and the anticipated launch of certain projects. Due to the challenges of the COVID-19 pandemic, most notably those attributable to "stay at home" and travel restrictions, we have been forced to pause certain R&D activities. Clinical trials that started prior to governmental shutdowns remain enrolled and existing patients are progressing, while new patient enrollments in clinical trials have been temporarily paused as most trial sites are not able to accept new patients. While we anticipate resuming these projects as soon as possible, the ultimate impact on the timing and completion of the affected clinical trial programs, and the expected approval and launch of the product candidates to which these development programs relate, is dependent upon when many COVID-19 pandemic uncertainties are resolved and we may resume new patient enrollments and other impacted development activities. As of the date of this filing, the delays in our clinical trials have not had a material impact on our operating results. However, continued delays in our ability to resume new patient enrollments along with other possible COVID-19 pandemic related challenges impacting our R&D projects, which are beyond the Company's control, could lead to additional disruptions. Other possible COVID-19 pandemic related challenges include, but are not limited to, facility closures, delays by third-party service providers, deferrals of doctor visits, postponement of elective medical procedures and surgeries and changes in prioritization by the FDA and other regulatory authorities. Delays caused by COVID-19 pandemic challenges such as these and others, will likely adversely affect the timely approval, launch, commercialization and the commercial success of our products, which could have a significant adverse effect on our future operating results. Our Liquidity Our primary sources of liquidity are our cash and cash equivalents, cash collected from customers, funds as available from our 2023 Revolving Credit Facility, issuances of long-term debt and issuances of equity and equity-linked securities. We believe these sources will be sufficient to meet our current liquidity needs for at least twelve months from the date of issuance of this Form 10-Q. Further, in 2019 and 2018, we generated positive cash from operations of$1,501 million and$1,501 million , respectively. Should our operating results during the COVID-19 pandemic materially suffer in comparison to our 2019 and 2018 42 -------------------------------------------------------------------------------- operating results, we believe we would continue to generate sufficient cash flows from operations to meet our obligations in the ordinary course of business. As of the date of this filing, we have no debt maturing or mandatory amortization of debt payments until the first quarter of 2022. Additionally, we have no outstanding borrowings,$168 million of issued and outstanding letters of credit and remaining availability of$1,057 million under our 2023 Revolving Credit Facility as defined below. In the event of a future, unexpected, need for near-term liquidity, our 2023 Revolving Credit Facility would be a source of funding for us. After reviewing the terms of our Restated Credit Agreement as defined below and considering a broad range of possible outcomes of the COVID-19 pandemic, we expect that we will have access to capital under our 2023 Revolving Credit Facility across a broad range of scenarios in the event it is required. See Note 10, "FINANCING ARRANGEMENTS" to our unaudited interim Consolidated Financial Statements and "Management's Discussion and Analysis - Liquidity and Capital Resources: Long-term Debt" for additional discussion of these matters. Our Operating Results While we are taking actions to mitigate the impact of the COVID-19 pandemic on our daily operations, the pandemic has and is expected to impact our operating results until the pandemic subsides. The changing dynamics of the pandemic, related responses from governments and private sector participants and the precautionary measures taken by our customers and the health care patients and consumers we serve, are expected to impact the timing and amount of our revenues in the near-term. Certain of our businesses have experienced COVID-19 pandemic related declines in revenues during the three months endedMarch 31, 2020 and we expect continued pandemic-related revenue declines in these and other businesses in the second quarter and possibly the remainder of 2020. During the pandemic, the public has been advised to: (i) remain at home, (ii) limit social interaction, (iii) close non-essential businesses and (iv) postpone certain surgical and elective medical procedures in order to prioritize/conserve available health care resources. During the three months endedMarch 31, 2020 , these factors have negatively impacted, most notably, the revenues of our Global Vision Care and Global Surgical businesses inAsia where the COVID-19 pandemic originated. We anticipate further revenue declines in these businesses during 2020, as we saw steeper declines in these revenues in the month of March as social restrictions, particularly in theU.S. andEurope , were put in place. Beginning in March and into our second quarter, we also experienced and are anticipating COVID-19 pandemic-related revenue declines in intraocular lenses, medical devices, surgical systems and certain pre- and post-operative eye-medications of our Ophthalmology business, in medical aesthetics and therapeutic products of our Global Solta business, and in certain branded pharmaceutical products of our Salix,Ortho Dermatologics and Dentistry businesses, as the offices of many health care providers are closed and certain surgeries and elective medical procedures are being deferred. Based on our assessment, we believe our revenues will be most impacted by the pandemic during our second quarter, as the infection rate of the COVID-19 virus accelerated in March into April, the virus had spread beyondAsia into different geographies including theU.S. andEurope , and the number of shelter-in-place directives issued by local authorities increased. Although we expect each of the affected businesses and geographies to recover at different rates, overall we anticipate that the negative trend in our revenues will begin to stabilize during our second quarter and continue into our third quarter with the revenues of all our businesses possibly returning to pre-pandemic levels as early as late 2020, but, if not, then in 2021. This assessment assumes, among other matters, that the precautionary measures taken by the public are successful in decelerating the spread of the virus, there will be no resurgence of the virus in the second half of 2020 that will lead to significant social restrictions,there will be no significant social restrictions in place at the end of 2020, responses from governments and private sector participants will be successful in bringing about a quick orderly recovery of the global economy, there will be no major interruptions in our supply, manufacturing and distribution channels and we are able to continue to execute on our strategies in response to the pandemic. The changes in our segment revenues and segment profits, including the impact of the COVID-19 virus on our revenues for the three months endedMarch 31, 2020 , are discussed in further detail in the subsequent section titled "Reportable Segment Revenues and Profits". Through the date of this filing, the impacts of the COVID-19 pandemic appears to have only a limited impact on our Xifaxan® product revenues and the COVID-19 pandemic is not expected to have a material impact on the Company's revenues once the pandemic subsides. As such, the impacts of the COVID-19 pandemic on the amounts and timing of the Company's revenues are not expected to be substantial enough to materially adversely affect the recoverability of any of the Company's assets and are not material enough to indicate that the fair values of any reporting unit may be below their respective carrying values. However, if market conditions further deteriorate, if the factors and circumstances regarding the COVID-19 pandemic escalate beyond management's expectations, or if the Company is unable to execute its strategies, it may be necessary to record impairment charges in the future and those charges can be material. 43 -------------------------------------------------------------------------------- Business Strategy Our Focus on Core Businesses In order to continue to focus on our core businesses where we believe there is potential for strong operating margins and evidence of growth opportunities, we have: (i) directed capital allocation to drive growth within our core businesses, (ii) made measurable progress in effectively managing our capital structure, (iii) increased our efforts to improve patient access and (iv) continued to invest in sustainable growth drivers to position us for long-term growth. Direct Capital Allocation to Drive Growth Within Our Core Businesses Our capital allocation is driven by our long-term growth strategies. We have been aggressively allocating resources to promote our core businesses globally through: (i) strategic acquisitions, (ii) R&D investment and (iii) strategic investments in our infrastructure. The outcome of this process allows us to better drive value in our product portfolio and generate operational efficiencies. Strategic Acquisitions - We remain very selective when considering any acquisition and pursue only those opportunities that we believe align well with our current organization and strategic plan. We sometimes refer to these opportunities as "bolt on" acquisitions. In being selective, we seek to enter into only those acquisitions that provide us with significant synergies with our existing business, thereby minimizing risks to our core businesses and providing long-term growth opportunities. Recently, we have entered into transactions that, although not immediately impactful to our operating results, are expected to be accretive to our bottom line in future years and contribute to our long-term growth strategies. InMarch 2019 , we completed the acquisition of certain assets of Synergy whereby we acquired the worldwide rights to the Trulance® (plecanatide) product, a once-daily tablet for adults with chronic idiopathic constipation, or CIC and irritable bowel syndrome with constipation, or IBS-C. We believe that the Trulance® product complements our existing Salix products and allows us to effectively leverage our existing GI sales force. OnFebruary 18, 2019 , we acquired theU.S. rights to EM-100 from Eton Pharmaceuticals, Inc. EM-100, is an investigational eye drop that, if approved by the FDA, will be the first OTC preservative-free formulation eye drop for the treatment of ocular itching associated with allergic conjunctivitis. A Phase 3 trial has been completed and submitted to the FDA for review and we anticipate their response in the second half of 2020. If approved, EM-100 is expected to complement our broad range of Bausch + Lomb integrated eye-health products. We are considering further acquisition opportunities within our core therapeutic areas, some of which could be material in size.R&D Investment - We continuously search for new product opportunities through internal development and strategic licensing agreements, that if successful, will allow us to leverage our commercial footprint, particularly our sales force, and supplement our existing product portfolio and address specific unmet needs in the market. Internal R&D Projects - Our R&D organization focuses on the development of products through clinical trials. As ofDecember 31, 2019 , approximately 1,400 dedicated R&D and quality assurance employees in 23 R&D facilities were involved in our R&D efforts internally. Our R&D expenses for the three months endedMarch 31, 2020 and the years 2019 and 2018, were$122 million ,$471 million and$413 million , respectively, and was approximately 6% as a percentage of revenue for the three months endedMarch 31, 2020 and 5% as a percentage of revenue in each of the years 2019 and 2018. Our investment in R&D reflects our commitment to drive organic growth through internal development of new products, a pillar of our strategy. We have over 225 projects in our global pipeline. Certain core R&D projects that have received a significant portion of our R&D investment in current and prior periods are listed below. However, due to the challenges of the COVID-19 pandemic, most notably those attributable to "stay at home" and travel restrictions, we have been forced to pause certain R&D activities. Clinical trials that started prior to governmental shutdowns remain enrolled and existing patients are progressing, while new patient enrollments in clinical trials have been temporarily paused as most trial sites are not able to accept new patients. While we anticipate resuming these projects as soon as possible, the ultimate impact on the timing and completion of the affected clinical trial programs, and the expected approval and launch of the product candidates to which these development programs relate, is dependent upon when many COVID-19 pandemic uncertainties are resolved and we may resume new patient enrollments and other impacted development activities. As of the date of this filing, the delays in our clinical trials have not had a material impact on our operating results. However, continued delays in our ability to resume new patient enrollments along with other possible COVID-19 pandemic related challenges impacting our R&D projects, which are beyond the Company's control, could lead to additional disruptions. Other possible COVID-19 pandemic related challenges include, but are not limited to, facility closures, delays by third-party 44 -------------------------------------------------------------------------------- service providers, deferrals of doctor visits, postponement of elective medical procedures and surgeries and changes in prioritization by the FDA and other regulatory authorities. Delays caused by COVID-19 pandemic challenges such as these and others, will likely adversely affect the timely approval, launch, commercialization and the commercial success of our products. As a result, our estimates regarding the timing and success of our R&D efforts (some of which are set out below), including as it relates to study initiation, enrollment and completion, availability of study results, regulatory submissions, regulatory approvals and commercial launches, may change. • Dermatology - InJune 2019 , we launched Duobrii®, the first and only
topical lotion that contains a unique combination of halobetasol
propionate and tazarotene for the treatment of moderate-to-severe plaque
psoriasis in adults. Halobetasol propionate and tazarotene are each
approved to treat plaque psoriasis when used separately, but the duration
of halobetasol propionate is limited by FDA labeling constraints and the
use of tazarotene can be limited due to tolerability concerns. However,
the combination of these ingredients in Duobrii®, with a dual mechanism of
action, allows for expanded duration of use, with reduced adverse events. • Bausch + Lomb -SiHy Daily is a silicone hydrogel daily disposable contact
lens designed to provide clear vision throughout the day. In September
2018, we launched this product in
AQUALOX™. We anticipate launching our
during the second half of 2020 under its
be announced.
• Dermatology -
with a fixed combination of benzoyl peroxide, clindamycin phosphate and
adapalene. Phase 3 studies initiated in
a result of COVID-19 related factors and are expected to resume in the second half of 2020 assuming clinical sites throughout the various geographies re-open to allow for enrollment of new patients.
• Bausch + Lomb - Lumify® (brimonidine tartrate ophthalmic solution, 0.025%)
is an OTC eye drop developed as an ocular redness reliever. We have several line extensions under development. Further clinical studies are planned for late 2020 and early 2021.
• Gastrointestinal - Topline data from our Phase 2 study for the treatment
of overt hepatic encephalopathy with a new formulation of rifaximin showed
a treatment benefit. Patients receiving 40 mg twice daily showed a
statistically significant separation from placebo. The topline results of
this study will help inform further research on potential new indications
for rifaximin using this formulation, including in sickle cell anemia
where we expect our clinical trials to commence late 2020 or early 2021.
• Gastrointestinal - We are preparing to initiate a Phase 2 study to
evaluate rifaximin for the treatment of small intestinal bacterial
overgrowth or SIBO. Patient enrollment remains subject to getting clinical
sites activated post COVID-19 and we expect our clinical trials to commence in the second half of 2020.
• Gastrointestinal - We have entered into a collaboration with Cedars Sinai
Medical Center to evaluate a new formulation of rifaximin for the
treatment of IBS. Studies to support this research program have been
paused as a result of COVID-19 related factors and are expected to resume
upon the re-opening of the relevant clinical sites. • Dermatology - IDP-120 is an acne product with a fixed combination of
mutually incompatible ingredients: benzoyl peroxide and tretinoin. Phase 3
enrollment has been completed with results expected in the second half of
2020.
• Dermatology - Arazlo™ (tazarotene) Lotion, 0.045% (formerly IDP-123) is an
acne product containing lower concentration of tazarotene in a lotion form
to help reduce irritation while maintaining efficacy. The FDA approved the
New Drug Application ("NDA") for Arazlo™ on
expect to launch in the first half of 2020. • Gastrointestinal - Our partner Alfasigma S.p.A. ("Alfasigma") is
initiating a Phase 2/3 study for the treatment of postoperative Crohns
disease using a novel rifaximin extended release formulation in the second
quarter of 2021; the start has been delayed due to COVID-19 related factors.
• Gastrointestinal - We are developing a probiotic supplement to address
gastrointestinal disturbances. Clinical trial is completed and a full data
set is available. We expect to launch this product in the second half of
2020. • Dermatology - IDP-124 is a topical lotion product designed to treat moderate to severe atopic dermatitis, with pimecrolimus. Phase 3
enrollment has been completed with results expected in the second half of
2020.
• Bausch + Lomb - Biotrue® ONEday for Astigmatism is a daily disposable
contact lens for astigmatic patients. The Biotrue® ONEday contact lens
incorporates Surface Active Technology™ to provide a dehydration barrier.
The Biotrue® ONEday for Astigmatism also includes evolved peri-ballast
geometry to deliver stability and comfort for the astigmatic patient. We
45 --------------------------------------------------------------------------------
launched this product in
("OVD") product, with a formulation to protect corneal endothelium during
phacoemulsification process during a cataract surgery and to help chamber
maintenance and lubrication during interocular lens delivery. The FDA
clinical study for cohesive OVD started in
paused as a result of COVID-19 related factors and is expected to resume
as soon as possible. InApril 2021 , we filed a Premarket Approval application for the dispersive OVD with the FDA.
• Bausch + Lomb - In
etabonate ophthalmic gel) 0.38%, a new formulation for the treatment of
post-operative inflammation and pain following ocular surgery. Lotemax® SM
is the lowest concentrated loteprednol ophthalmic corticosteroid indicated
for the treatment of post-operative inflammation and pain following ocular
surgery in the
• Bausch + Lomb - enVista® Trifocal intraocular lens is an innovative lens
design. We initiated an investigative device exemption study for this product inMay 2018 and initiated a Phase 2 study inOctober 2019 .
• Bausch + Lomb - We are developing a preloaded intraocular lens injector
platform for enVista interocular lens. We have received approvals from the
anticipate launching this platform in the second half of 2020.
• Bausch + Lomb - We are developing an extended depth of focus intraocular
lens which we anticipate approval in
to COVID-19 delays.
• Bausch + Lomb - Bausch + Lomb ULTRA® Multifocal for Astigmatism contact
lens is the first and only multifocal toric lens available as a standard
offering in the eye care professional's fit set. The new monthly silicone
hydrogel lens, which was specifically designed to address the lifestyle
and vision needs of patients with both astigmatism and presbyopia,
combines the Company's unique 3-Zone Progressive™ multifocal design with
the stability of its OpticAlign® toric with MoistureSeal® technology to
provide eye care professionals and their patients an advanced contact lens
technology that offers the convenience of same-day fitting during the initial lens exam. Bausch + Lomb ULTRA® Multifocal for Astigmatism was launched inJune 2019 .
• Bausch + Lomb - Renu® Advanced Multi-Purpose Solution ("MPS") contains a
triple disinfectant system that kills 99.9% of germs, and has a dual
surfactant system that provides up to 20 hours of moisture. Renu® Advanced
MPS is FDA cleared with indications for use to condition, clean, remove
protein, disinfectant, rinse and store soft contact lenses including those
composed of silicone hydrogels. Renu® Advanced MPS has gained regulatory
approvals in
• Bausch + Lomb - Custom soft contact lens (Ultra buttons) is a latheable
silicone hydrogel button for custom soft specialty lenses including: Sphere, Toric, Multifocal, Toric Multifocal and irregular corneas. If approved by the FDA, we expect to launch in the fourth quarter of 2021;
the change in date is due to specification change activities delaying the
original launch date.
• Bausch + Lomb - In
for presbyopia exclusively available with Zenlens™ and Zen™ RC scleral
lenses and will allow eye care professionals to fit presbyopic patients
with irregular and regular corneas and those with ocular surface disease,
such as dry eye. The Zen™ Multifocal Scleral Lens incorporates decentered
optics, enabling the near power to be positioned over the visual axis. • Bausch + Lomb - InMarch 2019 , we launched Tangible® Hydra-PEG®, a
high-water polymer coating that is bonded to the surface of a contact lens
and designed to address contact lens discomfort and dry eye. Tangible®
Hydra-PEG® coating technology in combination with our Boston® materials
and Zenlens™ family of scleral lenses will help eye care professionals
provide a better lens wearing experience for their patients with
challenging vision needs.
Strategic Licensing Agreements - To supplement our internal R&D initiatives and to build-out and refresh our product portfolio, we also search for opportunities to augment our pipeline through arrangements that allow us to gain access to unique products and investigational treatments, by strategically aligning ourselves with other innovative product solutions. In the normal course of business, the Company will enter into select licensing and collaborative agreements for the commercialization and/or development of unique products primarily in theU.S. andCanada . These products are sometimes investigational treatments in early stage development that target unique conditions. The ultimate outcome, including whether the product will be: (i) fully developed, (ii) approved by the FDA, (iii) covered by third-party payors or (iv) profitable for distribution cannot be fairly predicted. 46 -------------------------------------------------------------------------------- InDecember 2019 , we announced that we had acquired an exclusive license fromNovaliq GmbH for the commercialization and development in theU.S. andCanada of the investigational treatment NOV03 (perfluorohexyloctane), a first-in-class investigational drug with a novel mechanism of action to treat Dry Eye Disease ("DED") associated with Meibomian gland dysfunction ("MGD"). We expect to initiate a Phase 3 study for this product in the second half of 2020. If approved by the FDA, we believe the addition of this investigational treatment for DED will help build upon our strong portfolio of integrated eye-health products. InOctober 2019 , we acquired an exclusive license from Clearside Biomedical, Inc. ("Clearside") for the commercialization and development of Xipere™ (triamcinolone acetonide suprachoroidal injectable suspension) in theU.S. andCanada . Xipere™ is a proprietary suspension of the corticosteroid triamcinolone acetonide formulated for suprachoroidal administration via Clearside's proprietary SCS Microinjector™ that is being investigated as a targeted treatment of macular edema associated with uveitis. Clearside expects to resubmit its New Drug Application for Xipere™ to the FDA in the fourth quarter of 2020. InApril 2019 , we entered into two licensing agreements which present us with unique developmental opportunities to address unmet needs of individuals suffering with certain GI and liver diseases. The first of these two licensing agreements is with theUniversity of California for certain intellectual property relating to an investigational compound targeting the pituitary adenylate cyclase receptor 1 in non-alcoholic fatty liver disease ("NAFLD"), nonalcoholic steatohepatitis ("NASH") and other GI and liver diseases. The second is an exclusive licensing agreement withMitsubishi Tanabe Pharma Corporation to develop and commercialize MT-1303 (amiselimod), a late-stage oral compound that targets the sphingosine 1-phosphate receptor that plays a role in autoimmune diseases, such as inflammatory bowel disease and ulcerative colitis. We have completed a thorough QTC study, which evaluated the cardiac safety profile of the compound. Topline results were positive and we expect to initiate a Phase 2 study in the second half of 2020. OnFebruary 27, 2018 , we announced that we entered into an exclusive license agreement with Kaken Pharmaceutical Co., Ltd. ("Kaken") to develop and commercialize a new chemical entity, IDP-131 (KP-470), for the topical treatment of psoriasis. An early proof of concept study has been completed and the results did not meet expectations. As a result, the Company no longer believes that IDP-131 can be viably developed for the treatment of psoriasis. The Company and Kaken are currently considering whether this new chemical entity can be developed to treat other indications. Strategic Investments in our Infrastructure - In support of our core businesses, we have and continue to make strategic investments in our infrastructure, the most significant of which are at ourWaterford facility inIreland and ourRochester facility inNew York . To meet the forecasted demand for our Biotrue® ONEday lenses, inJuly 2017 , we placed into service a$175 million multi-year strategic expansion project of theWaterford facility. The emphasis of the expansion project was to: (i) develop new technology to manufacture, automatically inspect and package contact lenses, (ii) bring that technology to full validation and (iii) increase the size of theWaterford facility. To address the expected global demand for our Bausch + Lomb ULTRA® contact lens, inDecember 2017 , we completed a multi-year,$200 million strategic upgrade to ourRochester facility. The upgrade increased production capacity in support of our Bausch + Lomb Ultra® and SiHy Daily AQUALOX™ product lines and better supports the production of other well-established contact lenses, such as our PureVision®, PureVision®2 (SVS, Toric, and Multifocal), SofLens® 38 and SilSoft®. To address the expected global demand for ourSiHy Daily disposable contact lenses, inNovember 2018 , we initiated$300 million of additional expansion projects to add multiple production lines to ourRochester andWaterford facilities.SiHy Daily disposable contact lenses are expected to be launched in theU.S. in the second half of 2020. We believe the investments in ourWaterford andRochester facilities and related expansion of labor forces further demonstrates the growth potential we see in our Bausch + Lomb products and our eye-health business. Effectively Managing Our Capital Structure We continue to effectively manage our capital structure by: (i) reducing our debt through repayments, (ii) extending the maturities of debt through refinancing and (iii) improving our credit ratings. Debt Repayments - Excluding the impact of the$1,210 million financing of theU.S. Securities Litigation settlement discussed below, we have been able to repay (net of additional borrowings) over$7,900 million of long-term debt during the periodJanuary 1, 2016 through the date of this filing using the net cash proceeds from divestitures of non-core assets, cash generated from operations and cash generated from tighter working capital management. 2017 Refinancing Transactions - In March, October, November andDecember 2017 , we accessed the credit markets and completed a series of transactions, whereby we extended approximately$9,500 million in aggregate maturities of certain debt 47 -------------------------------------------------------------------------------- obligations due to mature inApril 2018 throughApril 2022 , out toMarch 2022 throughDecember 2025 . As part of these transactions, we also extended commitments under our revolving credit facility, originally set to expire inApril 2018 , out toApril 2020 . 2018 Refinancing Transactions - In March, June andNovember 2018 , we accessed the credit markets and completed a series of transactions, whereby we extended approximately$8,300 million in aggregate maturities of certain debt obligations due to mature inMarch 2020 throughJuly 2022 , out toJune 2025 throughJanuary 2027 . As part of these transactions, we obtained less stringent loan financial maintenance covenants under our Senior Secured Credit Facilities and extended commitments under our revolving credit facility by more than three years by replacing our then-existing revolving credit facility, set to expire inApril 2020 with a revolving credit facility of$1,225 million due inJune 2023 (the "2023 Revolving Credit Facility"). 2019 Refinancing Transactions - In March, May andDecember 2019 , we accessed the credit markets and completed a series of transactions, whereby, we extended$4,240 million in aggregate maturities of certain debt obligations due to mature inDecember 2021 throughMay 2023 , out toJanuary 2027 throughJanuary 2030 . Financing of Litigation Settlement - InDecember 2019 , we announced that we had agreed to resolve the putative securities class action litigation in theU.S. (the "U.S. Securities Litigation") for$1,210 million , subject to final court approval. As part of the settlement, the Company and the other settling defendants admitted no liability as to the claims against it and deny all allegations of wrongdoing. This settlement, once approved by the court, will resolve and discharge all claims against the Company in the class action, and as a result will resolve the most significant of the Company's remaining legacy legal matters and eliminate a material uncertainty regarding our Company. To finance the settlement of theU.S. Securities Litigation, onDecember 30, 2019 , we accessed the credit markets and issued: (i)$1,250 million aggregate principal amount of 5.00% Senior Unsecured Notes dueJanuary 2028 (the "5.00%January 2028 Unsecured Notes") and (ii)$1,250 million aggregate principal amount of 5.25% Senior Unsecured Notes dueJanuary 2030 (the "January 2030 Unsecured Notes") in a private placement. The proceeds and cash on hand were used to: (i) redeem$1,240 million of 5.875% Senior Unsecured Notes due 2023 (the "May 2023 Unsecured Notes") onJanuary 16, 2020 , (ii) finance amounts owed under the Company's recently announced$1,210 million settlement agreement relating to theU.S. Securities Litigation (which is subject to final court approval), of which we paid$200 million duringJanuary 2020 and$810 million duringMarch 2020 and (iii) pay all fees and expenses associated with these transactions (collectively, the "December 2019 Financing and Refinancing Transactions"). Through this financing, we have in effect extended the payment terms of the pending settlement of$1,210 million out to 2028 and 2030, without negatively impacting our working capital available for operations. See Note 10, "FINANCING ARRANGEMENTS" to our unaudited interim Consolidated Financial Statements for the details of our debt portfolio as ofMarch 31, 2020 andDecember 31, 2019 . The debt repayments and refinancings outlined above have allowed us to: (i) improve our credit ratings, (ii) finance amounts owed under the Company's recently announced$1,210 million settlement agreement relating to theU.S. Securities Litigation without negatively impacting our working capital available for operations and (iii) as of the date of this filing, have no debt maturing, or mandatory amortization of debt payments, until the first quarter of 2022. Our prepayment and refinancings of debt over the last four years translate into lower repayments of principal over the next four years, which, in turn, we believe will permit more cash flows to be directed toward developing our core assets, identifying new product opportunities and repaying additional debt amounts. The mandatory scheduled principal repayments of our debt obligations as ofMay 7, 2020 , the date of this filing, were as follows and reflects repurchases of our senior unsecured notes in the open market of$8 million , in aggregate, inApril 2020 : (in millions) 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Total $ - $ -$ 1,553 $ 2,443 $ 2,303 $ 10,632 $ 1,500 $ 2,250 $ 2,012 $ 750 $ 1,250 $ 24,693 In addition, as a result of the changes in our debt portfolio, approximately 80% of our debt is fixed rate debt as ofMarch 31, 2020 , as compared to approximately 60% as ofJanuary 1, 2016 . The weighted average stated interest rate of the Company's outstanding debt as ofMarch 31, 2020 andDecember 31, 2019 was 6.01% and 6.21%, respectively. We continue to monitor our capital structure and to evaluate other opportunities to simplify our business and improve our capital structure, giving us the ability to better focus on our core businesses. While we anticipate focusing any future divestiture activities on non-core assets, consistent with our duties to our shareholders and other stakeholders, we will consider dispositions in core areas that we believe represent attractive opportunities for the Company. Also, the Company regularly evaluates market conditions, its liquidity profile and various financing alternatives for opportunities to enhance its capital structure. If the Company determines that conditions are favorable, the Company may refinance or repurchase existing debt or issue additional debt, equity or equity-linked securities. 48 -------------------------------------------------------------------------------- See Note 10, "FINANCING ARRANGEMENTS" to our unaudited interim Consolidated Financial Statements and "Management's Discussion and Analysis - Liquidity and Capital Resources: Long-term Debt" for additional discussion of these matters. Cash requirements for future debt repayments including interest can be found in "Management's Discussion and Analysis - Off-Balance Sheet Arrangements and Contractual Obligations." Improve Patient Access Improving patient access to our products, as well as making them more affordable, is a key element of our business strategy.Patient Access and Pricing Committee - In 2016, we formed thePatient Access and Pricing Committee which is responsible for setting, changing and monitoring the pricing of our products and evaluating contract arrangements that determine the placement of our products on drug formularies.The Patient Access and Pricing Committee considers new to market product pricing, price changes and their impact across channels on patient accessibility and affordability.The Patient Access and Pricing Committee has been committed to limiting the average annual price increase for our branded prescription pharmaceutical products to no greater than single digits and has reaffirmed this commitment for 2020. These pricing changes and programs could affect the average realized pricing for our products and may have a significant impact on our company revenue and profit. Cash-pay Prescription Program - InFebruary 2019 , we launched Dermatology.com, a cash-pay product acquisition program offering certain brandedOrtho Dermatologics products directly to patients. InMarch 2020 , the name Dermatology.com was removed as the cash-pay product program name in order to secure the name Dermatology.com for only online usage including future digital teledermatology and e-commerce offerings. The cash pay program is designed to address the affordability and availability of certain branded dermatology products, when insurers and pharmacy benefit managers are no longer offering those branded prescription pharmaceutical products under their designated pharmacy benefit offerings. Walgreens Fulfillment Arrangements - In the beginning of 2016, we launched a brand fulfillment arrangement withWalgreen Co. ("Walgreens"). Under the terms of the brand fulfillment arrangement, as amended inJuly 2019 , we made certain dermatology and ophthalmology products available to eligible patients through patient access and co-pay assistance programs at WalgreensU.S. retail pharmacy locations, as well as participating independent retail pharmacies. Our products available under this fulfillment agreement include certainOrtho Dermatologics products, including our Jublia®, Luzu®, Retin-A Micro® Gel and Onexton® and select branded prescription pharmaceutical products included in our cash-pay prescription program and certain ophthalmology products, including our Vyzulta®, Besivance®, Lotemax®, Alrex®, Prolensa®, Bepreve® and Zylet® products. Business Trends In addition to the actions previously outlined, the events described below have affected and may affect our business trends. The matters discussed in this section contain Forward-Looking Statements. Please see "Forward-Looking Statements" for additional information. Invest in Sustainable Growth Drivers to Position us for Long-Term Growth We are constantly challenged by the changing dynamics of our industry to innovate and bring new products to market. We have divested certain businesses where we saw limited growth opportunities, so that we can be more aggressive in redirecting our R&D spend and other corporate investments to innovate within our core businesses where we believe we can be most profitable and where we aim to be an industry leader. We believe that we have a well-established product portfolio that is diversified within our core businesses and provides a sustainable revenue stream to fund our operations. However, our future success is also dependent upon our ability to continually refresh our pipeline, to provide a rotation of product launches that meet new and changing demands and replace other products that have lost momentum. We believe we have a robust pipeline that not only provides for the next generation of our existing products, but is also poised to bring new products to market. Invest in our Eye-Health Business - As part of our Global Bausch + Lomb business strategy, we continually look for key trends in the eye-health market to meet changing consumer/patient needs and identify areas for investment to extend our market share through new launches and effective pricing. For instance, there is an increasing rate of myopia, and importantly, myopia as a potential risk factor for glaucoma, macular degeneration and retinal detachment. We continue to see increased demand for new eye-health products that address conditions brought on by factors such as increased screen time, lack of outdoor activities and academic pressures, as well as conditions brought on by an aging population (for example, as more and more baby-boomers in theU.S. are reaching the age of 65). To extend our market share in eye-health, we continually seek to identify new products tailored to address these key trends for development internally with our own R&D team to generate organic growth. Recent product launches include Biotrue® ONEday 49 -------------------------------------------------------------------------------- daily disposable contact lenses, the next generation of Bausch + Lomb ULTRA® contact lenses,SiHy Daily contact lenses, Lumify® (an eye redness treatment), Vyzulta® (a pressure lowering eye drop for patients with angle glaucoma or ocular hypertension) and Ocuvite® Eye Performance (vitamins to protect the eye from stressors such as sunlight and blue light emitted from digital devices). We also license selective molecules or technology in leveraging our own R&D expertise through development, as well as seek out external product development opportunities. As previously discussed, we acquired exclusive licenses for the commercialization and development in theU.S. andCanada for Xipere™ which, if approved by the FDA, will be the first treatment for patients suffering from macular edema associated with uveitis, and for NOV03, an investigational drug with a novel mechanism of action to treat DED associated with MGD. We also acquired theU.S. rights to EM-100 an investigational eye drop that, if approved by the FDA, will be the first OTC preservative-free formulation eye drop for the treatment of ocular itching associated with allergic conjunctivitis. We believe investments in these investigational treatments, if approved by the FDA, will complement, and help build upon, our strong portfolio of integrated eye-health products. As previously discussed, we have also made strategic investments in our infrastructure, the most significant of which are at ourWaterford facility inIreland to meet the forecasted demand for our Biotrue® ONEday lenses and ourRochester facility inNew York to address the expected global demand for our Bausch + Lomb ULTRA® contact lens. During late 2018, we began investing in additional expansion projects at these facilities in order to address the expected global demand for ourSiHy Daily disposable contact lenses expected to be launched in theU.S. in the second half of 2020. We believe our recent product launches, licensing arrangements and the investments in ourWaterford andRochester facilities demonstrate the growth potential we see in our Bausch + Lomb products and our eye-health business and that these investments will position us to further extend our market share in the eye-health market. Leveraging our Salix Infrastructure - We strongly believe in our GI product portfolio and we have implemented initiatives, including increasing our marketing presence and identifying additional opportunities outside our existing GI portfolio, to further capitalize on the value of the infrastructure we built around these products to extend our market share. In the first quarter of 2017, we hired approximately 250 trained and experienced sales force representatives and managers to create, bolster and sustain deep relationships with primary care physicians ("PCP"). With approximately 70% of IBS-D patients initially presenting symptoms to a PCP, we continue to believe that the dedicated PCP sales force is better positioned to reach more patients in need of IBS-D treatment. This initiative provided us with positive results, as we experienced consistent growth in demand for our GI products throughout 2017 and 2018, which was evident by our growth in Salix revenues of 12% in 2018 when compared to 2017. These results encouraged us to seek out ways to bring out further value through leveraging our existing sales force and, in the later portion of 2018 and in 2019, we identified and executed on certain opportunities which we describe below. Strategic Acquisition - As previously discussed, inMarch 2019 , we completed the acquisition of certain assets of Synergy, whereby we acquired the worldwide rights to the Trulance® product, a once-daily tablet for adults with chronic idiopathic constipation, or CIC and irritable bowel syndrome with constipation, or IBS-C. We believe that the Trulance® product complements our existing Salix products and allows us to effectively leverage our existing GI sales force. Licensing Arrangements - As previously discussed, inApril 2019 , we entered into two licensing agreements. The first is for certain intellectual property relating to an investigational compound targeting the pituitary adenylate cyclase receptor 1 in NAFLD, NASH and other GI and liver diseases. The second is to develop and commercialize MT-1303 (amiselimod), a late-stage oral compound that targets the sphingosine 1-phosphate receptor that plays a role in autoimmune diseases, such as inflammatory bowel disease and ulcerative colitis. These licenses present unique developmental opportunities to address unmet needs of individuals suffering with certain GI and liver diseases and if developed and approved by the FDA, will allow us to further utilize our existing sales force and infrastructure to extend our market share in the future and create value. Investment in Next Generation Formulations - We continue to see growth in our Xifaxan® product. Revenues from our Xifaxan® product increased approximately 22%, 22% and 11% in 2019, 2018 and 2017, respectively. In order to extend growth in Xifaxan®, we continue to directly invest in next generation formulations of Xifaxan® and rifaximin, the principal semi-synthetic antibiotic used in our Xifaxan® product. In addition to one R&D program in progress, we have three other R&D programs planned to start in 2020 for next generation formulations of Xifaxan® (rifaximin) which address new indications. We believe that the acquisition and licensing opportunities discussed above will be accretive to our business by providing us access to products and investigational compounds that are a natural pairing to our Xifaxan® business, allowing us to effectively leverage our existing infrastructure and sales force. We believe these opportunities, coupled with our investment in next generation formulations, will allow our GI franchise to continue to further extend market share. 50 -------------------------------------------------------------------------------- Position the Ortho Dermatologics Business for Growth - In support of ourOrtho Dermatologics business and the opportunities we see for growth in this business, we continue to allocate resources and make additional investments in this business to recruit and retain talent and focus on our core dermatology portfolio of products. To position theOrtho Dermatologics business for growth, we have taken and are taking a number of actions that we believe will help our efforts to stabilize our dermatology business. These actions include: (i) rebranding our dermatology business, (ii) recruiting a new experienced leadership team, (iii) making significant investment in our core dermatology portfolio, (iv) increasing and reorganizing our dermatology sales force around roughly 195 territories, as we work to rebuild relationships with prescribers of our products and (v) improving patient access to ourOrtho Dermatologics products through our cash-pay prescription program previously discussed. With these actions substantially complete, we believed that ourOrtho Dermatologics business was positioned for growth in 2020. While we continue to believe that our strategies will return ourOrtho Dermatologics business to growth sometime in the future, the impacts of the COVID-19 pandemic has had us reassess this timing. The closure of many health care facilities and medical offices during the pandemic has limited patient access to new prescriptions and we now believe that we will not see theOrtho Dermatologics business return to growth until the COVID-19 pandemic subsides and theU.S. economy stabilizes. Recruit and Retain Talent - In 2017, we identified and retained a proven leadership team of experienced dermatology sales professionals and marketers. InJanuary 2018 , the leadership team, encouraged by the success of our GI sales force expansion program, increased ourOrtho Dermatologics sales force by more than 25% in support of our growth initiatives for ourOrtho Dermatologics business. We believe the additional sales force is vital to meet the demand we expect from our recently launched products and those we expect to launch in the near-term, pending FDA approval. We continue to monitor our pipeline for other near-term launches that we believe will create opportunity needs in our other core businesses requiring us to make additional investment to retain people for additional leadership and sales force roles. Investment in Our Core Dermatology Portfolio - We have made significant investments to build out our aesthetics, psoriasis and acne product portfolios, which are the markets within dermatology where we see the greatest opportunities to extend our market share. Aesthetics - In 2017, we launched our Next Generation Thermage FLX® product in theU.S. , a fourth-generation non-invasive treatment option using a radiofrequency platform designed to optimize key functional characteristics and improve patient outcomes. During 2018 and 2019, Next Generation Thermage FLX® was launched inHong Kong ,Japan ,Korea ,Taiwan ,Philippines ,Singapore ,Indonesia ,Malaysia ,China ,Thailand ,Vietnam , andAustralia as part of our Solta medical aesthetic devices portfolio. These launches have been successful as Next Generation Thermage FLX® revenues for three months endedMarch 31, 2020 and 2019 were$26 million and$12 million , respectively, and in full-year 2019 were$77 million . Psoriasis - As the number of reported cases of psoriasis in theU.S. has increased, we believe there is a need to make further investments in this market in order to maximize our opportunity and supplement our current psoriasis product portfolio. We have filed NDAs for several new topical psoriasis products, launched Duobrii® inJune 2019 and launched Bryhali® inNovember 2018 . We expect that Duobrii® and Bryhali® will align well with our existing topical portfolio of psoriasis treatments and, supplemented by our injectable biologic products, such as Siliq®, will provide a diverse choice of psoriasis treatments to doctors and patients. InJuly 2017 , we launched Siliq®, an IL-17 receptor blocker monoclonal antibody biologic for treatment of moderate-to-severe plaque psoriasis, which we estimate to be an over$5,000 million market in theU.S. (Siliq® has a Black Box Warning for the risks in patients with a history of suicidal thoughts or behavior and was approved with a Risk Evaluation and Mitigation Strategy involving a one-time enrollment for physicians and one-time informed consent for patients). As previously discussed, we entered into an exclusive license agreement with Kaken to develop and commercialize products containing a new chemical entity, IDP-131 (KP-470), for the topical treatment of psoriasis. An early proof of concept study has now been completed and the results did not meet expectations. As a result, the Company no longer believes that IDP-131 can be viably developed for the treatment of psoriasis. The Company and Kaken are currently considering whether this new chemical entity can be developed to treat other indications. Acne - In support of our established acne product portfolio, we have developed several products, which include Retin-A Micro® 0.06% (launched inJanuary 2018 ) and Altreno® (launched in theU.S. October 2018 ), the first lotion (rather than a gel or cream) product containing tretinoin for the treatment of acne. We also anticipate launching ArazloTM (tazarotene) Lotion in the first half of 2020 and we have three other unique acne projects in earlier stages of development that, if approved by the FDA, we believe will further innovate and advance the treatment of acne. Bolstered by new product launches in our aesthetics, psoriasis and acne product lines and the potential of other products under development, our experienced dermatology sales leadership team, our sales force and our cash-pay prescription program, we believe we have set the groundwork to position theOrtho Dermatologics business for future growth. 51 --------------------------------------------------------------------------------U.S. Health Care Reform TheU.S. federal and state governments continue to propose and pass legislation designed to regulate the health care industry. InMarch 2010 , the Patient Protection and Affordable Care Act (the "ACA") was enacted in theU.S. The ACA contains several provisions that impact our business, including: (i) an increase in the minimum Medicaid rebate to states participating in the Medicaid program, (ii) the extension of the Medicaid rebates to Managed Care Organizations that dispense drugs to Medicaid beneficiaries, (iii) the expansion of the 340(B)Public Health Services drug pricing program, which provides outpatient drugs at reduced rates, to include additional hospitals, clinics and health care centers and (iv) a fee payable to the federal government based on our prior-calendar-year share relative to other companies of branded prescription drug sales to specified government programs. In addition, in 2013 federal subsidies began to be phased in for brand-name prescription drugs filled in the Medicare Part D coverage gap. The ACA also included provisions designed to increase the number of Americans covered by health insurance. In 2014, the ACA's private health insurance exchanges began to operate. The ACA also allows states to expand Medicaid coverage with most of the expansion's cost paid for by the federal government. For 2019 and 2018, we incurred costs of$20 million and$36 million , respectively, related to the annual fee assessed on prescription drug manufacturers and importers that sell branded prescription drugs to specifiedU.S. government programs (e.g., Medicare and Medicaid). For 2019 and 2018, we also incurred costs of$137 million and$90 million , respectively, on Medicare Part D utilization incurred by beneficiaries whose prescription drug costs cause them to be subject to the Medicare Part D coverage gap (i.e., the "donut hole"). OnJuly 28, 2014 , theU.S. Internal Revenue Service issued final regulations related to the branded pharmaceutical drug annual fee pursuant to the ACA. Under the final regulations, an entity's obligation to pay the annual fee is triggered by qualifying sales in the current year, rather than the liability being triggered upon the first qualifying sale of the following year. We adopted this guidance in the third quarter of 2014, and it did not have a material impact on our financial position or results of operations. The financial impact of the ACA will be affected by certain additional developments over the next few years, including pending implementation guidance and certain health care reform proposals. Additionally, policy efforts designed specifically to reduce patient out-of-pocket costs for medicines could result in new mandatory rebates and discounts or other pricing restrictions. Also, it is possible, as discussed further below, that under the current administration, legislation will be passed byCongress repealing the ACA in whole or in part. Adoption of legislation at the federal or state level could materially affect demand for, or pricing of, our products. In 2018, we faced uncertainties due to federal legislative and administrative efforts to repeal, substantially modify or invalidate some or all of the provisions of the ACA. However, we believe there is low likelihood of repeal of the ACA, given the recent failure of theSenate's multiple attempts to repeal various combinations of ACA provisions. There is no assurance that any replacement or administrative modifications of the ACA will not adversely affect our business and financial results, particularly if the replacing legislation reduces incentives for employer-sponsored insurance coverage, and we cannot predict how future federal or state legislative or administrative changes relating to the reform will affect our business. In 2019, theU.S. Health and Human Services Administration announced a preliminary plan to allow for the importation of certain lower-cost drugs fromCanada . The preliminary plan excludes insulin, biological drugs, controlled substances and intravenous drugs. The preliminary plan relies on individual states to develop proposals for safe importation of those drugs fromCanada and submit those proposals to the federal government for approval. Although the preliminary plan has some support from the current administration, at this time, studies to evaluate the related costs and benefits, evaluate the reasonableness of the logistics, and measure the public reaction of such a plan have not been performed. While we do not believe this will have a significant impact on our future cash flows, we cannot provide assurance as to the ultimate context, timing, effect or impact of such a plan. In 2019, theGovernment of Canada (Health Canada ) published in theCanadian Gazette the new pricing regulation for patented drugs. These regulations will become effective onJuly 1, 2020 . The draft application guidelines are available with the final guidelines to be published in 2020. The new regulations will change the mechanics of establishing the pricing for products submitted for approval afterAugust 21, 2019 ; they will also require full transparency of discounts agreed with provincial bodies; and finally, will change the number and composition of reference countries used to determine if a drug's price is excessive. While we do not believe this will have a significant impact on our future cash flows, as additional facts materialize, we cannot provide assurance as to the ultimate content, timing, effect or impact of such regulations. Other legislative efforts relating to drug pricing have been proposed and considered at theU.S. federal and state level. We also anticipate thatCongress , state legislatures and third-party payors may continue to review and assess alternative health care delivery and payment systems and may in the future propose and adopt legislation or policy changes or implementations affecting additional fundamental changes in the health care delivery system. 52 --------------------------------------------------------------------------------Generic Competition and Loss of Exclusivity Certain of our products face the expiration of their patent or regulatory exclusivity in 2020 or in later years, following which we anticipate generic competition of these products. In addition, in certain cases, as a result of negotiated settlements of some of our patent infringement proceedings against generic competitors, we have granted licenses to such generic companies, which will permit them to enter the market with their generic products prior to the expiration of our applicable patent or regulatory exclusivity. Finally, for certain of our products that lost patent or regulatory exclusivity in prior years, we anticipate that generic competitors may launch in 2020 or in later years. Following a loss of exclusivity ("LOE") of and/or generic competition for a product, we would anticipate that product sales for such product would decrease significantly shortly following the loss of exclusivity or entry of a generic competitor. Where we have the rights, we may elect to launch an authorized generic of such product (either ourselves or through a third-party) prior to, upon or following generic entry, which may mitigate the anticipated decrease in product sales; however, even with launch of an authorized generic, the decline in product sales of such product would still be expected to be significant, and the effect on our future revenues could be material. A number of our products already face generic competition. Prior to and during 2020, in theU.S. , these products include, among others, Ammonul®, Apriso®, Benzaclin®, Bupap®, Cuprimine®, Edecrin®, Elidel®, Glumetza®, Istalol®, Isuprel®, Locoid® Lotion, Lotemax® Suspension, Mephyton®, Nitropress®, Solodyn®, Syprine®, Uceris® Tablet, Virazole®, Wellbutrin XL®, Xenazine®, Zegerid® and Zovirax® cream. InCanada , these products include, among others, Glumetza®, Wellbutrin® XL and Zovirax® ointment. 2019 LOE Branded Products - Branded products that began facing generic competition in theU.S. during 2019 include, Apriso®, Cuprimine®, Lotemax® Suspension, Solodyn® and Zovirax® cream. In aggregate, these products accounted for 3% of our total revenues in 2019. We believe the entry into the market of generic competition generally would have an adverse impact on the volume and/or pricing of the affected products, however we are unable to predict the magnitude or timing of this impact. 2020 through 2024 LOE Branded Products - Based on current patent expiration dates, settlement agreements and/or competitive information, we have identified branded products that we believe could begin facing potential loss of exclusivity and/or generic competition in theU.S. during the years 2020 through 2024. These products and year of expected loss of exclusivity include, but are not limited to, Clindagel® (2020), Lotemax® Gel (2021), Migranal® (2020), MoviPrep® (2020), Noritate® (2020), Targretin® Gel (2022), Xerese® (2022) and certain other products that are subject to settlement agreements which could impact their exclusivity during the years 2020 through 2024. In aggregate, these products accounted for 3% of our total revenues in 2019. These dates may change based on, among other things, successful challenge to our patents, settlement of existing or future patent litigation and at-risk generic launches. We believe the entry into the market of generic competition generally would have an adverse impact on the volume and/or pricing of the affected products, however we are unable to predict the magnitude or timing of this impact. 2021 LOE OTC Product - PreserVision® AREDS and PreserVision® AREDS 2 are OTC eye vitamin formulas for those with moderate-to-advanced age-related macular degeneration. PreserVision® products accounted for 2% of our total revenues in 2019. The PreserVision® formulation patent expires in 2021, and whereas the Company cannot predict the magnitude or timing of the impact from its patent expiry, as this is an OTC product the impact is not expected to be as significant as the loss of exclusivity of a branded pharmaceutical product. In addition, for a number of our products (including Uceris®, Relistor®, Plenvu®, Xifaxan® 200mg and 550mg, Bepreve®, Bryhali® and Jublia®, in theU.S. and Jublia® inCanada ), we have commenced (or anticipate commencing) and have (or may have) ongoing infringement proceedings against potential generic competitors in theU.S. andCanada . If we are not successful in these proceedings, we may face increased generic competition for these products. Bryhali® Lotion, 0.01% (Glenmark ) - InDecember 2019 , the Company announced that it had reached an agreement to resolve the outstanding intellectual property litigation with Glenmark Pharmaceuticals, Ltd. ("Glenmark"). Under the terms of the agreement, the Company will grantGlenmark a non-exclusive license to its intellectual property relating to Bryhali® in theU.S. and, beginning in 2026 (or earlier under certain circumstances),Glenmark will have the option to market a royalty-free generic version of Bryhali® Lotion, should it receive approval from the FDA. The parties have agreed to dismiss all litigation related to Bryhali® Lotion, and all intellectual property protecting Bryhali® Lotion remains intact. Bryhali® Lotion, 0.01% (Perrigo) - OnMarch 20, 2020 , the Company received a Notice of Paragraph IV Certification fromPerrigo Israel Pharmaceuticals, Ltd. ("Perrigo"), in which Perrigo asserted that certainU.S. patents, each of which is listed in theFDA's Orange Book for Bryhali™ (halobetasol propionate) lotion, 0.01% are either invalid, unenforceable and/or will not be infringed by the commercial manufacture, use or sale of Perrigo's generic halobetasol propionate lotion, for which an Abbreviated New Drug Application ("ANDA") has been filed by Perrigo. The Company has forty-five (45) days from the date of receipt of this notice to file suit against Perrigo pursuant to the Hatch-Waxman Act, alleging infringement by Perrigo of one or more claims 53 -------------------------------------------------------------------------------- of the Bryhali™ Patents to trigger a 30-month stay of the approval of Perrigo ANDA for halobetasol propionate lotion. The Company intends to file within this time period. Xifaxan® 550mg Patent Litigation (Sandoz Inc. ) - InOctober 2019 , the Company announced that it and its licensor, Alfasigma had commenced litigation againstSandoz Inc. ("Sandoz"), a Novartis division, alleging patent infringement of 14 patents by Sandoz's filing of its ANDA for Xifaxan® (rifaximin) 550 mg tablets. OnMay 6, 2020 , the Company announced that an agreement had been reached with Sandoz that resolved this litigation. Under the terms of the agreement, the parties agreed to dismiss all litigation related to Xifaxan® (rifaximin), Sandoz acknowledged the validity of the licensed patents for Xifaxan® (rifaximin) 550 mg tablets and all intellectual property protecting Xifaxan® (rifaximin) 550 mg tablets will remain intact and enforceable until expiry inOctober 2029 . The agreement also grants Sandoz a non-exclusive license to the intellectual property relating to Xifaxan® (rifaximin) 550 mg tablets inthe United States beginningJanuary 1, 2028 (or earlier under certain circumstances). Under the terms of the agreement, beginningJanuary 1, 2028 (or earlier under certain circumstances), Sandoz will have the right to market a royalty-free generic version of Xifaxan® (rifaximin) 550 mg tablets, should it receive approval from the FDA on its ANDA. Sandoz will be able to commence such marketing earlier if another generic rifaximin product is granted approval and such other generic rifaximin product begins to be sold or distributed inthe United States beforeJanuary 1, 2028 . The Company will not make any financial payments or other transfers of value as part of this agreement with Sandoz. Xifaxan® 550mg Patent Litigation (Norwich Pharmaceuticals Inc. ) - OnMarch 26, 2020 , The Company and its licensor Alfasigma filed suit againstNorwich Pharmaceuticals Inc. ("Norwich"), alleging infringement by Norwich of one or more claims of the 23 Xifaxan® Patents by Norwich's filing of its ANDA for Xifaxan® (rifaximin) 550 mg tablets. Xifaxan® is protected by 23 patents covering the composition of matter and the use of Xifaxan® listed in theFDA's Approved Drug Products with Therapeutic Equivalence Evaluations, or the Orange Book. The Company remains confident in the strength of the Xifaxan® patents and will continue to vigorously pursue these two matters and defend its intellectual property. Relistor® Tablets Patent Litigation - OnDecember 6, 2016 , the Company initiated litigation againstActavis Laboratories FL, Inc.'s ("Actavis"), which alleged infringement by Actavis of one or more claims ofU.S. Patent No. 8,524,276 (the "'276 Patent"), which protects the formulation of RELISTOR® tablets. Actavis had challenged the validity of such patent and alleged non-infringement by its generic version of such product. InJuly 2019 , we announced that theU.S. District Court of New Jersey had upheld the validity of and determined that Actavis infringed the '276 Patent, expiring inMarch 2031 . Xifaxan® 550mg Patent Litigation (Actavis)- OnMarch 23, 2016 , the Company initiated litigation against Actavis, which alleged infringement by Actavis of one or more claims of each of the Xifaxan® patents. OnSeptember 12, 2018 , we announced that we had reached an agreement with Actavis that resolved the existing litigation and eliminated the pending challenges to our intellectual property protecting Xifaxan® (rifaximin) 550 mg tablets. As part of the agreement, the parties agreed to dismiss all litigation related to Xifaxan® (rifaximin), Actavis acknowledged the validity of the licensed patents for Xifaxan® (rifaximin) 550 mg tablets and all intellectual property protecting Xifaxan® (rifaximin) 550 mg tablets will remain intact and enforceable until expiry in 2029. The agreement also grants Actavis a non-exclusive license to the intellectual property relating to Xifaxan® (rifaximin) 550 mg tablets inthe United States beginningJanuary 1, 2028 (or earlier under certain circumstances). The Company will not make any financial payments or other transfers of value as part of the agreement. In addition, under the terms of the agreement, beginningJanuary 1, 2028 (or earlier under certain circumstances), Actavis will have the option to: (1) market a royalty-free generic version of Xifaxan® tablets, 550 mg, should it receive approval from the FDA on its ANDA, or (2) market an authorized generic version of Xifaxan® tablets, 550 mg, in which case, we will receive a share of the economics from Actavis on its sales of such an authorized generic. Actavis will be able to commence such marketing earlier if another generic rifaximin product is granted approval and such other generic rifaximin product begins to be sold or distributed beforeJanuary 1, 2028 .Generic Competition to Uceris® - InJuly 2018 , a generic competitor launched a product which will directly compete with our Uceris® Tablet product. As disclosed in our prior filings, the Company initiated various infringement proceedings against this generic competitor. The Court construed the claims of the asserted patents onAugust 2, 2019 and, onOctober 24, 2019 , the Company agreed to a judgment that the asserted patents did not cover the generic tablets under the Court's claim construction, while reserving its right to appeal the claim construction. The Company continues to believe that its Uceris® Tablet-related patents are enforceable and is proceeding with an appeal; however, the ultimate outcome of the matter is not predictable. The ultimate impact of this generic competitor on our future revenues cannot be predicted; however, Uceris® Tablet revenues for the three months endedMarch 31, 2020 and 2019 were approximately$3 million and$8 million , respectively, and for the full years 2019, 2018 and 2017 were approximately$20 million ,$84 million and$134 million , respectively.Generic Competition to Jublia® - OnJune 6, 2018 , theU.S. Patent andTrial Appeal Board ("PTAB") completed its inter partes review for an Orange Book-listed patent covering Jublia® and issued a written determination invalidating such patent. OnMarch 13, 2020 , theCourt of Appeals for the Federal Circuit reversed this decision and remanded the matter back to the PTAB for further proceedings. Jublia® revenues for the three months endedMarch 31, 2020 and 2019 were approximately$30 million and$20 million , respectively, and for the full years 2019, 2018 and 2017 were approximately$110 million ,$89 million and$96 million , respectively. The Company continues to believe that the Jublia® related patent is valid and enforceable, but the ultimate 54 -------------------------------------------------------------------------------- outcome of this matter is not predictable. Jublia® continues to be covered by eleven remaining Orange Book-listed patents owned by the Company or its licensor, which expire in the years 2028 through 2035. In August andSeptember 2018 , we received notices of the filing of a number of ANDAs with paragraph IV certification, and have timely filed patent infringement suits against these ANDA filers, and, in addition, we have also commenced certain patent infringement proceedings inCanada against two separate defendants. See Note 18, "LEGAL PROCEEDINGS" to our unaudited interim Consolidated Financial Statements elsewhere in this Form 10-Q, as well as Note 21, "LEGAL PROCEEDINGS" of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC and the CSA on SEDAR onFebruary 19, 2020 for further details regarding certain infringement proceedings. The risks of generic competition are a fact of the health care industry and are not specific to our operations or product portfolio. These risks are not avoidable, but we believe they are manageable. To manage these risks, our leadership team continually evaluates the impact that generic competition may have on future profitability and operations. In addition to aggressively defending the Company's patents and other intellectual property, our leadership team makes operational and investment decisions regarding these products and businesses at risk, not the least of which are decisions regarding our pipeline. Our leadership team actively manages the Company's pipeline in order to identify what we believe are the proper projects to pursue. Innovative and realizable projects aligned with our core businesses that are expected to provide incremental and sustainable revenues and growth into the future. We believe that our current pipeline is strong enough to meet these objectives and provide future sources of revenues, in our core businesses, sufficient enough to sustain our growth and corporate health as other products in our established portfolio face generic competition and lose momentum. We believe that we have a well-established product portfolio that is diversified within our core businesses. We also believe that we have a robust pipeline that not only provides for the next generation of our existing products, but also brings new solutions into the market. See Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC and the CSA on SEDAR onFebruary 19, 2020 for additional information on our competition risks. Regulatory Matters In the normal course of business, our products, devices and facilities are the subject of ongoing oversight and review by regulatory and governmental agencies, including general, for cause and pre-approval inspections by the relevant competent authorities where we have business operations, including the FDA. Currently, all of our global operations and facilities have the relevant operational certificates. Through the date of this filing, the Company's operating sites are in good compliance standing with no material noncompliance, and all sites under FDA jurisdiction are rated as either No Action Indicated (where there was no Form 483 observation) or Voluntary Action Indicated ("VAI") (where there was a Form 483 with one or more observations). In the case of VAI inspection outcomes, the FDA has accepted our responses to the issues cited in the Form 483, which will be verified when the agency makes its next inspection of those specific facilities. A Form 483 is issued at the end of each inspection when FDA investigators have observed any condition that in their judgment may constitute violations of current good manufacturing practice. SELECTED FINANCIAL INFORMATION The following table provides selected unaudited financial information for the three months endedMarch 31, 2020 and 2019: Three Months Ended March 31, (in millions, except per share data) 2020 2019 Change Revenues$ 2,012 $ 2,016 $ (4 ) Operating income$ 248 $ 287 $ (39 ) Loss before benefit from income taxes$ (178 ) $ (122 ) $ (56 ) Net loss attributable to Bausch Health Companies Inc.$ (152 )
Basic and diluted loss per share attributable to Bausch Health Companies Inc.$ (0.43 ) $ (0.15 ) $ (0.28 ) Financial Performance Summary of the Three Months EndedMarch 31, 2020 Compared to the Three Months EndedMarch 31, 2019 Revenue for the three months endedMarch 31, 2020 and 2019 was$2,012 million and$2,016 million , respectively, a decrease of$4 million , or less than 1%. The decrease was primarily driven by: (i) higher sales deductions, (ii) the unfavorable 55 -------------------------------------------------------------------------------- effect of foreign currencies, primarily inEurope andLatin America , (iii) the impact of divestitures and discontinuations and (iv) the impacts of the COVID-19 pandemic. The decreases in our revenues were partially offset by: (i) higher gross selling prices (ii) higher volumes and (iii) the incremental product sales of our Trulance® product, which we added to our portfolio inMarch 2019 as part of the acquisition of certain assets of Synergy. As discussed in the "Impact of COVID-19 Pandemic" section above, although volumes were higher during the three months endedMarch 31, 2020 as compared to the same period in 2019, we are experiencing revenue declines in our second quarter in certain businesses in connection with the COVID-19 pandemic. The changes in our segment revenues and segment profits, including the impact of the COVID-19 virus on our revenues for the three months endedMarch 31, 2020 , are discussed in further detail in the subsequent section titled "Reportable Segment Revenues and Profits". Operating income for the three months endedMarch 31, 2020 and 2019 was$248 million and$287 million , respectively, a decrease of$39 million and reflects, among other factors: • an increase in contribution (Product sales revenue less Cost of goods
sold, excluding amortization and impairments of intangible assets) of
million primarily due to: (i) higher gross selling prices, (ii) the
incremental contribution of the sales of our Trulance® product, which we
added to our portfolio in
assets of Synergy, and (iii) lower third-party royalty costs. The increases were partially offset by higher sales deductions;
• an increase in Selling, general and administrative expenses ("SG&A") of
$46 million primarily due to: (i) higher professional service costs, (ii) higher compensation expense, (iii) higher selling expenses and (iv) the
impact of the acquisition of certain assets of Synergy. The increases were
partially offset by the favorable impact of foreign currencies;
• an increase in R&D of
projects within our Bausch + Lomb and GI businesses;
• a decrease in Amortization of intangible assets of
attributable to fully amortized intangible assets no longer being amortized in 2020; • an increase in Asset impairments of$11 million , primarily related to decreases in forecasted sales of a certain product line during the three months endedMarch 31, 2020 ; and
• an increase in Other expense (income), net of
attributable to expenses related to Litigation and other matters during
the three months ended
Operating income for the three months endedMarch 31, 2020 and 2019 was$248 million and$287 million , respectively, and included non-cash charges for Depreciation and amortization of intangible assets of$481 million and$532 million , Asset impairments of$14 million and$3 million and Share-based compensation of$27 million and$24 million for the three months endedMarch 31, 2020 and 2019, respectively. Our Loss before benefit from income taxes for the three months endedMarch 31, 2020 and 2019 was$178 million and$122 million , respectively, an increase of$56 million . The increase in our Loss before benefit from income taxes is primarily attributable to: (i) the decrease in our operating results of$39 million , as previously discussed, (ii) an increase in Loss on extinguishment of debt of$17 million due to theDecember 2019 Financing and Refinancing Transactions, which were completed inJanuary 2020 , and (iii) an unfavorable net change in Foreign exchange and other of$13 million . The increase in our Loss before benefit from income taxes was partially offset by a decrease in Interest expense of$10 million . Net loss attributable toBausch Health Companies Inc. for the three months endedMarch 31, 2020 and 2019 was$152 million and$52 million , respectively, a decrease in our reported results of$100 million . The decrease in our results was primarily due to: (i) the increase in our Loss before benefit from income taxes of$56 million , as previously discussed and (ii) the unfavorable change in Benefit from income taxes of$48 million . 56 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Our unaudited operating results for the three months endedMarch 31, 2020 and 2019 were as follows: Three Months Ended March 31, (in millions) 2020 2019 Change Revenues Product sales$ 1,986 $ 1,989 $ (3 ) Other revenues 26 27 (1 ) 2,012 2,016 (4 ) Expenses Cost of goods sold (excluding amortization and impairments of intangible assets) 505 524 (19 ) Cost of other revenues 14 13 1 Selling, general and administrative 633 587 46 Research and development 122 117 5 Amortization of intangible assets 436 489 (53 ) Asset impairments 14 3 11 Restructuring and integration costs 4 20 (16 ) Acquisition-related contingent consideration 13 (21 ) 34 Other expense (income), net 23 (3 ) 26 1,764 1,729 35 Operating income 248 287 (39 ) Interest income 7 4 3 Interest expense (396 ) (406 ) 10 Loss on extinguishment of debt (24 ) (7 ) (17 ) Foreign exchange and other (13 ) - (13 ) Loss before benefit from income taxes (178 ) (122 ) (56 ) Benefit from income taxes 26 74 (48 ) Net loss (152 ) (48 ) (104 ) Net income attributable to noncontrolling interest - (4 ) 4 Net loss attributable to Bausch Health Companies Inc.$ (152 ) $ (52 ) $ (100 ) 57
-------------------------------------------------------------------------------- Three Months EndedMarch 31, 2020 Compared to the Three Months EndedMarch 31, 2019 Revenues The Company's revenues are primarily generated from product sales, principally in the therapeutic areas of eye-health, GI and dermatology, that consist of: (i) branded pharmaceuticals, (ii) generic and branded generic pharmaceuticals, (iii) OTC products and (iv) medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment and aesthetics devices). Other revenues include alliance and service revenue from the licensing and co-promotion of products and contract service revenue primarily in the areas of dermatology and topical medication. Our revenues were$2,012 million and$2,016 million for the three months endedMarch 31, 2020 and 2019, respectively, a decrease of$4 million , or less than 1%. The decrease was primarily driven by: (i) higher sales deductions of$67 million primarily in our Salix andOrtho Dermatologics segments, (ii) the unfavorable effect of foreign currencies of$18 million primarily inEurope andLatin America and (iii) the impact of divestitures and discontinuations of$7 million . The decreases in our revenues were partially offset by: (i) higher gross selling prices of$59 million primarily in our Salix segment, (ii) higher volumes of$15 million primarily in our Salix and Bausch + Lomb/International segments, partially offset by lower volumes in our Diversified Products segment and the impacts of the COVID-19 pandemic, (iii) the incremental product sales of our Trulance® product, which we added to our portfolio inMarch 2019 as part of the acquisition of certain assets of Synergy, of$13 million and (iv) an increase in other revenues of$1 million . As discussed in the "Impact of COVID-19 Pandemic" section above, although volumes were higher during the three months endedMarch 31, 2020 as compared to the same period in 2019, we are experiencing revenue declines in our second quarter in certain businesses in connection with the COVID-19 pandemic. Our segment revenues and segment profits for the three months endedMarch 31, 2020 and 2019, including the impact of the COVID-19 virus on our revenues for the three months endedMarch 31, 2020 , are discussed in further detail in the subsequent section titled "Reportable Segment Revenues and Profits". Cash Discounts and Allowances, Chargebacks and Distribution Fees As is customary in the pharmaceutical industry, gross product sales are subject to a variety of deductions in arriving at net product sales. Provisions for these deductions are recognized concurrently with the recognition of gross product sales. These provisions include cash discounts and allowances, chargebacks, and distribution fees, which are paid or credited to direct customers, as well as rebates and returns, which can be paid or credited to direct and indirect customers. Price appreciation credits are generated when we increase a product's wholesaler acquisition cost ("WAC") under our contracts with certain wholesalers. Under such contracts, we are entitled to credits from such wholesalers for the impact of that WAC increase on inventory on hand at the wholesalers. In wholesaler contracts such credits are offset against the total distribution service fees we pay on all of our products to each such wholesaler. In addition, some payor contracts require discounting if a price increase or series of price increases in a contract period exceeds a negotiated threshold. Provision balances relating to amounts payable to direct customers are netted against trade receivables and balances relating to indirect customers are included in accrued liabilities. We actively manage these offerings, focusing on the incremental costs of our patient assistance programs, the level of discounting to non-retail accounts and identifying opportunities to minimize product returns. We also concentrate on managing our relationships with our payors and wholesalers, reviewing the ranges of our offerings and being disciplined as to the amount and type of incentives we negotiate. Provisions recorded to reduce gross product sales to net product sales and revenues for the three months endedMarch 31, 2020 and 2019 were as follows: Three Months Ended March 31, 2020 2019 (in millions) Amount Pct. Amount Pct. Gross product sales$ 3,323 100.0 %$ 3,250 100.0 % Provisions to reduce gross product sales to net product sales Discounts and allowances 156 4.7 % 204 6.3 % Returns 42 1.3 % 33 1.0 % Rebates 602 18.0 % 533 16.4 % Chargebacks 484 14.6 % 443 13.6 % Distribution fees 53 1.6 % 48 1.5 % Total provisions 1,337 40.2 % 1,261 38.8 % Net product sales 1,986 59.8 % 1,989 61.2 % Other revenues 26 27 Revenues$ 2,012 $ 2,016 58
-------------------------------------------------------------------------------- Cash discounts and allowances, returns, rebates, chargebacks and distribution fees as a percentage of gross product sales were 40.2% and 38.8% for the three months endedMarch 31, 2020 and 2019, respectively. The increase in cash discounts and allowances, returns, rebates, chargebacks and distribution fees as a percentage of gross product sales was primarily driven by: • discounts and allowances as a percentage of gross product sales was lower
primarily due to lower gross product sales and lower discount rates for
our Glumetza® AG, Syprine® AG, Migranal® AG and Benzamycin® AG. The lower
discounts and allowances as a percentage of gross product sales was
partially offset by the impact of: (i) the release of certain generics,
such as Apriso® AG (
• returns as a percentage of gross product sales was higher primarily due
to higher return experience for a limited number of products, primarily
Glumetza® SLX, partially offset by lower returns for Solodyn®, Nitropress® and Xifaxan®;
• rebates as a percentage of gross product sales were higher primarily due
the impact of: (i) increases in gross product sales for products that carry higher contractual rebates and co-pay assistance programs, including the impact of incremental rebates from contractual price increase limitations for promoted products, such as Xifaxan® ,
Wellbutrin® and Prolensa®, (ii) sales of our Trulance® product, which we
added to our portfolio in
certain assets of Synergy, and (iii) rebates associated with our Duobrii®
product launched in
product sales for products which carry higher rebate rates, such as
Apriso®, Lotemax® Suspension, Lotemax® Gel, Zovirax® and Cuprimine®. The
decreases in gross product sales for these products were due in part to
generic competition and the release of certain branded generics.
• chargebacks as a percentage of gross product sales were higher primarily
due to the impact of: (i) higher gross product sales of Xifaxan®, (ii) higher chargeback rates for Xifaxan® and Glumetza® SLX and (iii) the release of certain generics, such as Apriso® AG (December 2019 ). The
higher chargebacks as a percentage of gross product sales were partially
offset by the impact of lower gross product sales of: (i) certain branded
products, such as and Nifediac® and Retin-A Micro® 0.06% and (ii) certain
generic products, such as Glumetza® AG, Ofloxacin and Syprine® AG; and • distribution service fees as a percentage of gross product sales were higher due to the impact of: (i) higher sales of branded products, such
as Xifaxan®, (ii) sales of our Trulance® product, which we added to our
portfolio in
Synergy, and (iii) sales of our Duobrii® product launched in
The higher distribution service fees as a percentage of gross product
sales were partially offset by the impact of lower gross product sales of
certain branded products, such as Apriso® as a result of its generic
release and Cuprimine®. Price appreciation credits are offset against the
distribution service fees we pay wholesalers and were
for the three months endedMarch 31, 2020 and 2019, respectively.
Expenses
Cost of Goods Sold (excluding amortization and impairments of intangible assets) Cost of goods sold primarily includes: manufacturing and packaging; the cost of products we purchase from third parties; royalty payments we make to third parties; depreciation of manufacturing facilities and equipment; and lower of cost or market adjustments to inventories. Cost of goods sold excludes the amortization and impairments of intangible assets. Cost of goods sold was$505 million and$524 million for the three months endedMarch 31, 2020 and 2019, respectively, a decrease of$19 million , or 4%. The decrease was primarily driven by: (i) the favorable impact of foreign currencies, (ii) lower third-party royalty costs and (iii) the impact of divestitures and discontinuations. The decrease was partially offset by: (i) product mix and (ii) the incremental costs of sales of our Trulance® product, which we added to our portfolio inMarch 2019 as part of the acquisition of certain assets of Synergy. Cost of goods sold as a percentage of product sales revenue was 25.4% and 26.3% for the three months endedMarch 31, 2020 and 2019, respectively, a decrease of 0.9 percentage points. Costs of goods sold as a percentage of Product sales revenue was favorably impacted as a result of: (i) higher gross selling prices, (ii) the favorable impact of foreign currencies on cost of goods sold and (iii) lower third-party royalty costs. These factors were partially offset by: (i) higher sales deductions and (ii) product mix. Selling, General and Administrative Expenses SG&A expenses primarily include: employee compensation associated with sales and marketing, finance, legal, information technology, human resources and other administrative functions; certain outside legal fees and consultancy costs; product promotion expenses; overhead and occupancy costs; depreciation of corporate facilities and equipment; and other general and administrative costs. 59 -------------------------------------------------------------------------------- SG&A expenses were$633 million and$587 million for the three months endedMarch 31, 2020 and 2019, respectively, an increase of$46 million , or 8%. The increase was primarily driven by: (i) higher professional service costs, (ii) higher compensation expense, (iii) higher selling expenses and (iv) the impact of the acquisition of certain assets of Synergy. The increases were partially offset by the favorable impact of foreign currencies. Research and Development Expenses Included in Research and development are costs related to our product development and quality assurance programs. Expenses related to product development include: employee compensation costs; overhead and occupancy costs; depreciation of research and development facilities and equipment; clinical trial costs; clinical manufacturing and scale-up costs; and other third-party development costs. Quality assurance are the costs incurred to meet evolving customer and regulatory standards and include: employee compensation costs; overhead and occupancy costs; amortization of software; and other third-party costs. R&D expenses were$122 million and$117 million for the three months endedMarch 31, 2020 and 2019, respectively, an increase of$5 million , or 4%, primarily attributable to a number of projects within our Bausch + Lomb and GI businesses. R&D expenses as a percentage of Product sales were approximately 6% for both the three months endedMarch 31, 2020 and 2019. Amortization of Intangible Assets Intangible assets with finite lives are amortized using the straight-line method over their estimated useful lives, generally 2 to 20 years. Amortization of intangible assets was$436 million and$489 million for the three months endedMarch 31, 2020 and 2019, respectively, a decrease of$53 million . The decrease was primarily attributable to fully amortized intangible assets no longer being amortized in 2020. Management continually assesses the useful lives related to the Company's long-lived assets to reflect the most current assumptions. See Note 8, "INTANGIBLE ASSETS AND GOODWILL" to our unaudited interim Consolidated Financial Statements regarding further details related to the Amortization of intangible assets. Asset Impairments Long-lived assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Impairment charges associated with these assets are included in Asset impairments in the Consolidated Statement of Operations. The Company continues to monitor the recoverability of its finite-lived intangible assets and tests the intangible assets for impairment if indicators of impairment are present. Asset impairments were$14 million and$3 million for the three months endedMarch 31, 2020 and 2019, respectively, an increase of$11 million . Asset impairments for the three months endedMarch 31, 2020 were due to decreases in forecasted sales of a certain product line. Asset impairments for the three months endedMarch 31, 2019 were due to the discontinuance of a specific product line not aligned with the focus of the Company's core businesses. See Note 8, "INTANGIBLE ASSETS AND GOODWILL" to our unaudited interim Consolidated Financial Statements regarding further details related to our intangible assets. Restructuring and Integration Costs The Company evaluates opportunities to improve its operating results and implements cost savings programs to streamline its operations and eliminate redundant processes and expenses. The expenses associated with the implementation of these cost savings programs include expenses associated with: (i) reducing headcount, (ii) eliminating real estate costs associated with unused or under utilized facilities and (iii) implementing contribution margin improvement and other cost reduction initiatives. Restructuring and integration costs were$4 million and$20 million for the three months endedMarch 31, 2020 and 2019, respectively, a decrease of$16 million . During the three months endedMarch 31, 2020 , these costs included$3 million of facility closure costs and$1 million of severance costs. During the three months endedMarch 31, 2019 , these costs included: (i)$10 million of severance costs associated with the acquisition of certain assets of Synergy, which were not essential to complete, close and report the acquisition, (ii)$6 million of other severance costs and (iii)$4 million of facility closure costs. The Company continues to evaluate opportunities to streamline its operations and identify additional cost savings globally. Although a specific plan does not exist at this time, the Company may identify and take additional exit and cost-rationalization restructuring actions in the future, the costs of which could be material. See Note 5, "RESTRUCTURING AND INTEGRATION COSTS" to our unaudited interim Consolidated Financial Statements for further details regarding these actions. 60 -------------------------------------------------------------------------------- Acquisition-Related Contingent Consideration Acquisition-related contingent consideration primarily consists of potential milestone payments and royalty obligations associated with businesses and assets we acquired in the past. These obligations are recorded in the Consolidated Balance Sheets at their estimated fair values at the acquisition date, in accordance with the acquisition method of accounting. The fair value of the acquisition-related contingent consideration is remeasured each reporting period, with changes in fair value recorded in the Consolidated Statements of Operations. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in fair value measurement accounting. Acquisition-related contingent consideration was a loss of$13 million for the three months endedMarch 31, 2020 , and included net fair value adjustments of$7 million and accretion for the time value of money of$6 million . Acquisition-related contingent consideration was a gain of$21 million for the three months endedMarch 31, 2019 , and included net fair value adjustments of$27 million , which included adjustments to future royalty payments, partially offset by accretion for the time value of money of$6 million . Other Expense (Income), Net Other expense (income), net for the three months endedMarch 31, 2020 and 2019 consists of the following: Three Months Ended March 31, (in millions) 2019 2018 Net gain on sale of assets$ (1 ) $ (10 ) Acquired in-process research and development costs 1 1 Acquisition-related costs - 8 Litigation and other matters 23 2 Other, net - (4 )$ 23 $ (3 ) Non-Operating Income and Expense Interest Expense Interest expense primarily consists of interest payments due and amortization of debt discounts and deferred financing costs on indebtedness under our credit facilities and notes. Interest expense was$396 million and$406 million , and included non-cash amortization and write-offs of debt premiums, discounts and deferred financing costs of$15 million and$17 million , for the three months endedMarch 31, 2020 and 2019, respectively. Interest expense for the three months endedMarch 31, 2020 decreased$10 million , or 2%, as compared to the three months endedMarch 31, 2019 , primarily due to: (i) interest related to the Company's cross-currency swaps and (ii) lower weighted average interest rate, partially offset by higher outstanding principal balances. The weighted average stated rates of interest as ofMarch 31, 2020 and 2019 were 6.01% and 6.38%, respectively. Loss on Extinguishment of Debt Loss on extinguishment of debt represents the differences between the amounts paid to settle extinguished debts and the carrying value of the related extinguished debt. Loss on extinguishment of debt was$24 million and$7 million for the three months endedMarch 31, 2020 and 2019, respectively. Loss on extinguishment of debt for the three months endedMarch 31, 2020 is primarily related to theDecember 2019 Financing and Refinancing Transactions, which were completed inJanuary 2020 . Loss on extinguishment of debt for the three months endedMarch 31, 2019 is related to a series of transactions which allowed us to refinance portions of our debt arrangements. See Note 10, "FINANCING ARRANGEMENTS" to our unaudited interim Consolidated Financial Statements for further details. Foreign Exchange and Other Foreign exchange and other was a loss of$13 million and$0 for the three months endedMarch 31, 2020 and 2019, respectively, an unfavorable net change of$13 million . Foreign exchange and other includes translation gains/losses on intercompany loans and third-party liabilities and the gain/loss due to the change in fair value of foreign currency exchange contracts. 61 -------------------------------------------------------------------------------- Income Taxes Benefit from income taxes was$26 million and$74 million for the three months endedMarch 31, 2020 and 2019, respectively, a decrease of$48 million . Our effective income tax rate for the three months endedMarch 31, 2020 and 2019 differs from the statutory Canadian income tax rate primarily due to: (i) the recording of valuation allowance on entities for which no tax benefit of losses is expected, (ii) the tax benefit generated from our annualized mix of earnings by jurisdiction and (iii) the discrete treatment of certain tax matters, primarily related to: (a) the net tax benefit related to uncertain tax positions and (b) the adjustments for book to income tax return provisions. See Note 16, "INCOME TAXES" to our unaudited interim Consolidated Financial Statements for further details. Reportable Segment Revenues and Profits Our portfolio of products falls into four operating and reportable segments: (i) Bausch + Lomb/International, (ii) Salix, (iii)Ortho Dermatologics and (iv) Diversified Products. The following is a brief description of our segments: • The Bausch + Lomb/International segment consists of: (i) sales in theU.S.
of pharmaceutical products, OTC products and medical device products,
primarily comprised of Bausch + Lomb products, with a focus on the Vision
Care, Surgical, Consumer and Ophthalmology Rx products and (ii) with the exception of sales of Solta products, sales inCanada ,Europe ,Asia ,Australia ,Latin America ,Africa and theMiddle East of branded pharmaceutical products, branded generic pharmaceutical products, OTC products, medical device products and Bausch + Lomb products.
• The Salix segment consists of sales in the
• TheOrtho Dermatologics segment consists of: (i) sales in theU.S. ofOrtho Dermatologics (dermatological) products and (ii) global sales of Solta medical aesthetic devices. • The Diversified Products segment consists of sales in theU.S. of: (i) pharmaceutical products in the areas of neurology and certain other
therapeutic classes, (ii) generic products and (iii) dentistry products.
Segment profit is based on operating income after the elimination of intercompany transactions. Certain costs, such as Amortization of intangible assets, Asset impairments, In-process research and development costs, Restructuring and integration costs, Acquisition-related contingent consideration costs and Other expense (income), net, are not included in the measure of segment profit, as management excludes these items in assessing segment financial performance. See Note 19, "SEGMENT INFORMATION" to our unaudited interim Consolidated Financial Statements for a reconciliation of segment profit to Loss before benefit from income taxes. 62 -------------------------------------------------------------------------------- The following table presents segment revenues, segment revenues as a percentage of total revenues, and the period-over-period changes in segment revenues for the three months endedMarch 31, 2020 and 2019. The following table also presents segment profits, segment profits as a percentage of segment revenues and the period-over-period changes in segment profits for the three months endedMarch 31, 2020 and 2019. Three Months Ended March 31, 2020 2019 Change (in millions) Amount Pct. Amount Pct. Amount Pct. Segment Revenues Bausch + Lomb/International$ 1,114 55 %$ 1,118 55 %$ (4 ) - % Salix 477 24 % 445 22 % 32 7 % Ortho Dermatologics 133 7 % 138 7 % (5 ) (4 )% Diversified Products 288 14 % 315 16 % (27 ) (9 )% Total revenues$ 2,012 100 %$ 2,016 100 %$ (4 ) - % Segment Profits / Segment Profit Margins Bausch + Lomb/International$ 325 29 %$ 319 29 %$ 6 2 % Salix 319 67 % 288 65 % 31 11 % Ortho Dermatologics 48 36 % 57 41 % (9 ) (16 )% Diversified Products 202 70 % 236 75 % (34 ) (14 )% Total segment profits$ 894 44 %$ 900 45 %$ (6 ) (1 )% Organic Revenues and Organic Growth Rates (non-GAAP) Organic growth, a non-GAAP metric, is defined as a change on a period-over-period basis in revenues on a constant currency basis (if applicable) excluding the impact of recent acquisitions, divestitures and discontinuations. Organic revenue growth (non-GAAP) is growth in GAAP Revenue (its most directly comparable GAAP financial measure), adjusted for certain items, of businesses that have been owned for one or more years. Organic revenue (non-GAAP) is impacted by changes in product volumes and price. The price component is made up of two key drivers: (i) changes in product gross selling price and (ii) changes in sales deductions. The Company uses organic revenue (non-GAAP) and organic revenue growth (non-GAAP) to assess performance of its reportable segments, and the Company in total, without the impact of foreign currency exchange fluctuations and recent acquisitions, divestitures and product discontinuations. The Company believes that such measures are useful to investors as they provide a supplemental period-to-period comparison. Organic revenue growth (non-GAAP) reflects adjustments for: (i) the impact of period-over-period changes in foreign currency exchange rates on revenues and (ii) the revenues associated with acquisitions, divestitures and discontinuations of businesses divested and/or discontinued. These adjustments are determined as follows: Foreign currency exchange rates: Although changes in foreign currency exchange rates are part of our business, they are not within management's control. Changes in foreign currency exchange rates, however, can mask positive or negative trends in the underlying business performance. The impact for changes in foreign currency exchange rates is determined as the difference in the current period reported revenues at their current period currency exchange rates and the current period reported revenues revalued using the monthly average currency exchange rates during the comparable prior period. Acquisitions, divestitures and discontinuations: In order to present period-over-period organic revenues (non-GAAP) on a comparable basis, revenues associated with acquisitions, divestitures and discontinuations are adjusted to include only revenues from those businesses and assets owned during both periods. Accordingly, organic revenue growth (non-GAAP) excludes from the current period, all revenues attributable to each acquisition for twelve months subsequent to the day of acquisition, as there are no revenues from those businesses and assets included in the comparable prior period. Organic revenue growth (non-GAAP) excludes from the prior period (but not the current period), all revenues attributable to each divestiture and discontinuance during the twelve months prior to the day of divestiture or discontinuance, as there are no revenues from those businesses and assets included in the comparable current period. 63 --------------------------------------------------------------------------------
The following table presents a reconciliation of GAAP revenues to organic
revenues (non-GAAP) and the period-over-period changes in organic revenue
(Non-GAAP) for the three months ended
Three Months Ended March 31, 2020 Three Months Ended March 31, 2019 Change in Revenue Changes in Revenue Organic Revenue as Exchange Organic Revenue as Divestitures and Organic Revenue (in millions) Reported Rates Acquisition (Non-GAAP) Reported Discontinuations (Non-GAAP) Amount Pct. Bausch + Lomb/International$ 1,114 $ 17 $ - $ 1,131$ 1,118 $ (7 ) $ 1,111$ 20 2 % Salix 477 - (13 ) 464 445 - 445 19 4 % Ortho Dermatologics 133 1 - 134 138 - 138 (4 ) (3 )%
Diversified
Products 288 - - 288 315 - 315 (27 ) (9 )% Total$ 2,012 $ 18 $ (13 ) $ 2,017$ 2,016 $ (7 ) $ 2,009$ 8 - % Bausch + Lomb/International Segment: Bausch + Lomb/International Segment Revenue The Bausch + Lomb/International segment has a diversified product line with no single product group representing 10% or more of its product sales. The Bausch + Lomb/International segment revenue was$1,114 million and$1,118 million for the three months endedMarch 31, 2020 and 2019, respectively, a decrease of$4 million , or less than 1%. The decrease was primarily attributable to: (i) the unfavorable effect of foreign currencies of$17 million , primarily attributable to our revenues inEurope andLatin America and (ii) the impact of divestitures and discontinuations of$7 million , related to the divestiture and discontinuance of several products. These decreases were partially offset by: (i) an increase in volume of$10 million and (ii) an increase in average realized pricing of$10 million , primarily driven by increases in our Global Vision Care, International Rx and Global Consumer businesses, partially offset by the decrease in our Global Ophtho Rx business. The increase in volume is primarily attributable to our Global Consumer and International Rx businesses, driven by: (i) our eye vitamin franchise, which includes LUMIFY® and (ii) increased demand as consumers prepared for the COVID-19 pandemic by ensuring they had access to essential products and prescriptions. The increased volumes in our Global Consumer and International Rx businesses were partially offset by decreased volumes in our Global Vision Care, Global Surgical and Global Ophtho Rx businesses primarily inAsia andEurope and which we believe are in part due to the precautionary measures in response to the COVID-19 pandemic as previously discussed. Our Vision Care business was most impacted by declines in contact lens use inAsia , as a result of retail store closures as well as reduced contact lens wear due to decreased social interaction. As discussed in the "Impact of COVID-19 Pandemic" section above, although volumes were higher during the three months endedMarch 31, 2020 as compared to the same period in 2019, we are experiencing revenue declines in our second quarter in certain businesses in connection with the COVID-19 pandemic. In response to the COVID-19 pandemic, many health care facilities and medical offices are closed and certain surgeries and elective medical procedures have been postponed, which we expect to impact the revenues of our Bausch + Lomb/International segment during 2020. Bausch + Lomb/International Segment Profit The Bausch + Lomb/International segment profit for three months endedMarch 31, 2020 and 2019 was$325 million and$319 million , respectively, an increase of$6 million , or 2%. The increase was primarily driven by: (i) the favorable effect of foreign currencies on our contribution and (ii) the increase in average realized pricing, as previously discussed. The increase was partially offset by: (i) product mix and (ii) higher selling expenses. Salix Segment: Salix Segment Revenue The Salix segment includes the Xifaxan® product line, which accounted for 79% and 69% of the Salix segment product sales and 19% and 15% of the Company's product sales for the three months endedMarch 31, 2020 and 2019, respectively. No other single product group represents 10% or more of the Salix segment product sales. Salix segment revenue for the three months endedMarch 31, 2020 and 2019 was$477 million and$445 million , respectively, an increase of$32 million , or 7%. The increase includes: (i) an increase in volume of$30 million and (ii) sales of our Trulance® product, which we added to our portfolio inMarch 2019 as part of the acquisition of certain assets of Synergy, of$13 million . The increase in volumes was primarily attributable to increased demand for Xifaxan®, Relistor® and Glumetza® SLX, partially offset by the impact of generic competition as certain products, such as Apriso® and Uceris®, lost exclusivity. These increases in revenue were partially offset by a decrease in average realized pricing of$11 million primarily attributable to higher sales deductions for Glumetza® SLX partially offset by higher gross selling prices for Xifaxan®. 64 -------------------------------------------------------------------------------- As discussed in the "Impact of COVID-19 Pandemic" section above, although volumes were higher during the three months endedMarch 31, 2020 as compared to the same period in 2019, we are experiencing revenue declines in our second quarter in certain businesses in connection with the COVID-19 pandemic. In response to the COVID-19 pandemic, many health care facilities and medical offices are closed and certain surgeries and elective medical procedures have been postponed, which we expect to impact the revenues of our Salix segment during 2020. However, through the date of this filing, we believe that the COVID-19 pandemic has had only a limited impact on the demand for our Xifaxan® products. Further, as ofApril 30, 2020 , we have over five months' supply of Xifaxan® on hand and enough API to manufacture another five months' supply of Xifaxan® finished goods. We also have open orders for API that we currently expect will arrive on schedule. However, if we were to experience a lack of availability of API for Xifaxan®, such disruption to our supply chain could have a significant adverse effect on our business, financial condition and results of operations. Salix Segment Profit The Salix segment profit for the three months endedMarch 31, 2020 and 2019 was$319 million and$288 million , respectively, an increase of$31 million , or 11%. The increase was primarily driven by a net increase in contribution as a result of: (i) the increase in volume, as previously discussed, (ii) lower third-party royalty costs and (iii) gross profit from the sales of our Trulance® product, which we added to our portfolio inMarch 2019 as part of the acquisition of certain assets of Synergy. The increases in segment profit was partially offset by: (i) a decrease in average realized pricing, as previously discussed, (ii) higher selling, advertising and promotion expenses primarily related to our Trulance® product, which we added to our portfolio inMarch 2019 as part of the acquisition of certain assets of Synergy and (iii) higher costs related to professional services. Ortho Dermatologics Segment: Ortho Dermatologics Segment Revenue TheOrtho Dermatologics segment revenue for the three months endedMarch 31, 2020 and 2019 was$133 million and$138 million , respectively a decrease of$5 million , or 4%. The decrease is primarily driven by: (i) a decrease in average realized pricing of$8 million as a result of higher sales deductions in our medical dermatology products and (ii) the unfavorable effect of foreign currencies of$1 million . These decreases were partially offset by an increase in volume of$4 million primarily due to: (i) increased demand of Thermage FLX® and (ii) the launch of Duobrii® (June 2019 ) and partially offset by a decrease in volumes due to the impact of generic competition as certain products, such as Solodyn®, Zovirax® and Elidel®, lost exclusivity. As discussed in the "Impact of COVID-19 Pandemic" section above, although volumes were higher during the three months endedMarch 31, 2020 as compared to the same period in 2019, we are experiencing revenue declines in our second quarter in certain businesses in connection with the COVID-19 pandemic. As a precautionary measure, many health care facilities and medical offices are closed and many elective medical procedures and certain surgeries have been postponed, which we expect to impact the revenues of our medical dermatology, medical aesthetics and therapeutic products during 2020. Ortho Dermatologics Segment Profit TheOrtho Dermatologics segment profit for the three months endedMarch 31, 2020 and 2019 was$48 million and$57 million , respectively, a decrease of$9 million , or 16%. The decrease was primarily driven by a decrease in contribution as a result of the decrease in revenue, as previously discussed. 65 -------------------------------------------------------------------------------- Diversified Products Segment: Diversified Products Segment Revenue The following table displays the Diversified Products segment revenue by product and product revenues as a percentage of segment revenue for the three months endedMarch 31, 2020 and 2019. Three Months Ended March 31, 2020 2019 Change (in millions) Amount Pct. Amount Pct. Amount Pct. Wellbutrin® Franchise$ 58 20 %$ 58 18 % $ - - % Aplenzin® 26 9 % 16 5 % 10 63 % Arestin® 19 7 % 21 7 % (2 ) (10 )% Diastat® Franchise 11 4 % 6 2 % 5 83 % Migranal® Franchise 10 3 % 12 4 % (2 ) (17 )% Neo/Poly/HC Otic 9 3 % 5 2 % 4 80 % Uceris® AG 9 3 % 5 2 % 4 80 % Apriso® 8 3 % - - % 8 - % Ativan® 8 3 % 15 5 % (7 ) (47 )% Tobramycin/Dexamethasone 8 3 % 7 2 % 1 14 % Other product revenues 119 41 % 168 52 % (49 ) (29 )% Other revenues 3 1 % 2 1 % 1 50 %
Total Diversified Products revenues
The Diversified Products segment revenue for the three months endedMarch 31, 2020 and 2019 was$288 million and$315 million , respectively, a decrease of$27 million , or 9%. The decrease was primarily driven by a decrease in volume of$29 million . The decrease in volume was primarily attributable to: (i) our Neurology and Other business as certain products such as Cuprimine®, and Ativan®, lost exclusivity and (ii) our Dentistry business related to the postponement of certain surgeries and elective medical procedures in response to the COVID-19 pandemic. These decreases in volume were partially offset by increased demand for Aplenzin®, a product within our Neurology and Other business. These decreases in revenue were partially offset by increases in: (i) other revenues of$1 million and (ii) average realized pricing of$1 million primarily attributable to higher gross selling prices. Diversified Products Segment Profit The Diversified Products segment profit for three months endedMarch 31, 2020 and 2019 was$202 million and$236 million , respectively, a decrease of$34 million , or 14% and was primarily driven by: (i) the decrease in volume, as previously discussed, and (ii) higher general and administrative expenses. 66 -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES Cash Flows Three Months Ended March 31, (in millions) 2020 2019 Change Net loss$ (152 )
541
459 82 Cash provided by operating activities before changes in operating assets and liabilities
389 411 (22 ) Changes in operating assets and liabilities (128 ) 2 (130 ) Net cash provided by operating activities 261 413 (152 ) Net cash used in investing activities (40 ) (203 ) 163 Net cash used in financing activities (1,521 ) (150 ) (1,371 ) Effect of exchange rate on cash and cash equivalents (21 )
1 (22 ) Net increase in cash, cash equivalents and restricted cash
(1,321 )
61 (1,382 ) Cash, cash equivalents and restricted cash, beginning of period
3,244 723 2,521 Cash, cash equivalents and restricted cash, end of period$ 1,923 $ 784 $ 1,139 Operating Activities Net cash provided by operating activities was$261 million and$413 million for the three months endedMarch 31, 2020 and 2019, respectively, a decrease of$152 million . The decrease was attributable to net decreases in cash from Changes in operating assets and liabilities and Cash provided by operating activities before changes in operating assets and liabilities. Cash provided by operating activities before changes in operating assets and liabilities for the three months endedMarch 31, 2020 and 2019 was$389 million and$411 million , respectively, a decrease of$22 million . The decrease is primarily attributable to higher sales deductions and the unfavorable effect of foreign currencies, primarily inEurope and Latin American partially offset by higher volumes, improved gross margins and cash expense reductions in 2020 as compared to 2019 as previously discussed. Changes in operating assets and liabilities resulted in a net decrease in cash of$128 million for the three months endedMarch 31, 2020 , as compared to the net increase in cash of$2 million for the three months endedMarch 31, 2019 , a decrease of$130 million . During the three months endedMarch 31, 2020 , Changes in operating assets and liabilities was negatively impacted by: (i) the increase in inventories of$94 million and (ii) the timing of other payments in the ordinary course of business of$103 million , partially offset by the collection of trade receivables of$69 million . For the three months endedMarch 31, 2019 , Changes in operating assets and liabilities was positively impacted by the collection of trade receivables of$89 million offset by the increase in inventories of$68 million and the timing of payments in the ordinary course of business of$19 million . Investing Activities Net cash used in investing activities was$40 million for the three months endedMarch 31, 2020 and was driven by Purchases of property, plant and equipment of$72 million offset by Proceeds from sale of assets and businesses, net of costs to sell of$21 million primarily related to the receipt of a milestone payment associated with a prior divestiture and Interest settlements from cross-currency swaps of$11 million . Net cash used in investing activities was$203 million for the three months endedMarch 31, 2019 and was driven by the acquisition of businesses, net of cash acquired of$180 million , related to the acquisition of certain assets of Synergy, and purchases of property, plant and equipment of$47 million , partially offset by proceeds from sale of assets and businesses, net of costs to sell of$25 million , primarily related to the receipt of a milestone payment associated with a prior divestiture. Financing Activities Net cash used in financing activities was$1,521 million for the three months endedMarch 31, 2020 and was primarily driven by the repayments of debt of$1,459 million which consisted of: (i)$1,240 million ofMay 2023 Unsecured Notes, which was previously financed as part of theDecember 2019 Financing and Refinancing Transactions, which were completed inJanuary 2020 , (ii)$100 million of 5.50% Senior Unsecured Notes dueMarch 2023 , (iii)$103 million of ourJune 2025 Term Loan B Facility (as defined below) and (iv) the repurchase and retirement of outstanding senior unsecured notes with an aggregate par value of$17 million in the open market, for an aggregate cost of$16 million . Issuance of long-term debt, net of discounts of$(3) million primarily represents the payment of fees and expenses associated with theDecember 2019 Financing and Refinancing Transactions. 67 -------------------------------------------------------------------------------- Net cash used in financing activities was$150 million for the three months endedMarch 31, 2019 and was primarily driven by the net reduction in our debt portfolio. Repayments of debt for the three months endedMarch 31, 2019 were$1,621 million and consisted of: (i) repayments of principal amounts due under our Senior Notes of$1,318 million , (ii) repayments of term loans under our Senior Secured Credit Facilities of$228 million and (iii) repayments of our revolving credit facility of$75 million . Net proceeds from the issuances of long-term debt for the three months endedMarch 31, 2019 was$1,514 million and included the net proceeds of: (i)$1,021 million from the issuance of$1,000 million in principal amount ofJanuary 2027 Unsecured Notes and (ii)$494 million from the issuance of$500 million in principal amount ofAugust 2027 Secured Notes. Net proceeds from the issuances of long-term debt is reduced by$1 million for issuance costs paid in 2019 associated with long-term debt issued in previous years. Debt extinguishment costs paid for the refinancing of certain debt was$1 million . See Note 10, "FINANCING ARRANGEMENTS" to our unaudited interim Consolidated Financial Statements for additional information regarding the financing activities described above. Liquidity and Debt Future Sources of Liquidity Our primary sources of liquidity are our cash and cash equivalents, cash collected from customers, funds as available from our revolving credit facility, issuances of long-term debt and issuances of equity and equity-linked securities. We believe these sources will be sufficient to meet our current liquidity needs for at least the twelve months following the issuance of this Form 10-Q. The Company regularly evaluates market conditions, its liquidity profile, and various financing alternatives for opportunities to enhance its capital structure. If opportunities are favorable, the Company may refinance or repurchase existing debt or issue equity or equity-linked securities. We believe our existing cash and cash generated from operations will be sufficient to service our debt obligations in the years 2020 and 2021. Proposed Refinancing Transactions - InFebruary 2020 , we announced intentions to opportunistically amend and refinance the Company's Restated Credit Agreement, in order to extend and reprice our term loans and revolving credit facility and make certain other amendments to the terms of the facilities in connection therewith. We also announced our intention to issue$3,250 million of secured debt securities. The proceeds of the credit agreement refinancing and the offering of the new secured debt securities, along with cash on hand, were to be used to redeem certain outstanding senior secured notes, refinance our outstanding term loans under our Restated Credit Agreement (as defined below) and to pay related fees, premiums and expenses. However, inMarch 2020 , as a result of challenging market conditions, we decided not to pursue these opportunities. We will continue to monitor market conditions and consider opportunistic refinancing transactions from time to time. Long-term Debt Long-term debt, net of unamortized premiums, discounts and issuance costs was$24,428 million and$25,895 million as ofMarch 31, 2020 andDecember 31, 2019 , respectively. Aggregate contractual principal amounts due under our debt obligations were$24,701 million and$26,188 million as ofMarch 31, 2020 andDecember 31, 2019 , respectively, a decrease of$1,487 million during the three months endedMarch 31, 2020 . The decrease was primarily driven by the debt repayments previously discussed under "Cash Flows - Financing Activities". Our prepayment and refinancings of debt over the last four years translate into lower repayments of principal over the next four years, which, in turn, we believe will permit more cash flows to be directed toward developing our core assets, identifying new product opportunities and repaying additional debt amounts. The mandatory scheduled principal repayments of our debt obligations as ofMay 7, 2020 , the date of this filing, were as follows and reflects repurchases of our senior unsecured notes in the open market of$8 million , in aggregate, inApril 2020 : (in millions) 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Total $ - $ -$ 1,553 $ 2,443 $ 2,303 $ 10,632 $ 1,500 $ 2,250 $ 2,012 $ 750 $ 1,250 $ 24,693 See Note 10, "FINANCING ARRANGEMENTS" to our audited Consolidated Financial Statements and "Management's Discussion and Analysis - Liquidity and Capital Resources: Long-term Debt" for further details. Senior Secured Credit Facilities OnJune 1, 2018 , the Company and certain of its subsidiaries as guarantors entered into the "Senior Secured Credit Facilities" under the Company's Fourth Amended and Restated Credit and Guaranty Agreement, as amended by the First Incremental Amendment to the Restated Credit Agreement, dated as ofNovember 27, 2018 , and as further amended (the "Restated Credit 68 -------------------------------------------------------------------------------- Agreement") with a syndicate of financial institutions and investors as lenders. The Restated Credit Agreement provides for a revolving credit facility of$1,225 million , which matures on the earlier ofJune 1, 2023 and the date that is 91 calendar days prior to the scheduled maturity of indebtedness for borrowed money of the Company andBausch Health Americas, Inc. ("BHA") in an aggregate principal amount in excess of$1,000 million (the "2023 Revolving Credit Facility") and term loan facilities of original principal amounts of$4,565 million and$1,500 million , maturing inJune 2025 (the "June 2025 Term Loan B Facility") andNovember 2025 (the "November 2025 Term Loan B Facility"), respectively. Both the Company and BHA are borrowers under the 2023 Revolving Credit Facility, borrowings under which may be made inU.S. dollars, Canadian dollars or euros. Current Description of Senior Secured Credit Facilities Borrowings under the Senior Secured Credit Facilities inU.S. dollars bear interest at a rate per annum equal to, at the Company's option, either: (i) a base rate determined by reference to the highest of: (a) the prime rate (as defined in the Restated Credit Agreement), (b) the federal funds effective rate plus 1/2 of 1.00% or (c) the eurocurrency rate (as defined in the Restated Credit Agreement) for a period of one month plus 1.00% (or if such eurocurrency rate shall not be ascertainable, 1.00%) or (ii) a eurocurrency rate determined by reference to the costs of funds forU.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs (provided however, that the eurocurrency rate shall at no time be less than 0.00% per annum), in each case plus an applicable margin. Borrowings under the 2023 Revolving Credit Facility in euros bear interest at a eurocurrency rate determined by reference to the costs of funds for euro deposits for the interest period relevant to such borrowing (provided however, that the eurocurrency rate shall at no time be less than 0.00% per annum), plus an applicable margin. Borrowings under the 2023 Revolving Credit Facility in Canadian dollars bear interest at a rate per annum equal to, at the Company's option, either: (i) a prime rate determined by reference to the higher of: (a) the rate of interest last quoted by The Wall Street Journal as the "Canadian Prime Rate" or, if The Wall Street Journal ceases to quote such rate, the highest per annum interest rate published by theBank of Canada as its prime rate and (b) the 1 month BA rate (as defined below) calculated daily plus 1.00% (provided however, that the prime rate shall at no time be less than 0.00%) or (ii) the bankers' acceptance rate for Canadian dollar deposits in theToronto interbank market (the "BA rate") for the interest period relevant to such borrowing (provided however, that the BA rate shall at no time be less than 0.00% per annum), in each case plus an applicable margin. Subject to certain exceptions and customary baskets set forth in the Restated Credit Agreement, the Company is required to make mandatory prepayments of the loans under the Senior Secured Credit Facilities under certain circumstances, including from: (i) 100% of the net cash proceeds of insurance and condemnation proceeds for property or asset losses (subject to reinvestment rights and net proceeds threshold), (ii) 100% of the net cash proceeds from the incurrence of debt (other than permitted debt as described in the Restated Credit Agreement), (iii) 50% of Excess Cash Flow (as defined in the Restated Credit Agreement) subject to decrease based on leverage ratios and subject to a threshold amount and (iv) 100% of net cash proceeds from asset sales (subject to reinvestment rights). These mandatory prepayments may be used to satisfy future amortization. The applicable interest rate margins for theJune 2025 Term Loan B Facility and theNovember 2025 Term Loan B Facility are 2.00% and 1.75%, respectively, with respect to base rate and prime rate borrowings and 3.00% and 2.75%, respectively, with respect to eurocurrency rate and BA rate borrowings. As ofMarch 31, 2020 , the stated rates of interest on the Company's borrowings under theJune 2025 Term Loan B Facility and theNovember 2025 Term Loan B Facility were 3.61% and 3.36% per annum, respectively. The amortization rate for both theJune 2025 Term Loan B Facility and theNovember 2025 Term Loan B Facility is 5.00% per annum. The Company may direct that prepayments be applied to such amortization payments in order of maturity. As ofMarch 31, 2020 , the aggregate remaining mandatory quarterly amortization payments for the Senior Secured Credit Facilities were$1,023 million throughNovember 1, 2025 . The applicable interest rate margins for borrowings under the 2023 Revolving Credit Facility are 1.50%-2.00% with respect to base rate or prime rate borrowings and 2.50%-3.00% with respect to eurocurrency rate or BA rate borrowings. As ofMarch 31, 2020 , the stated rate of interest on the 2023 Revolving Credit Facility was 3.36% per annum. As ofMarch 31, 2020 , the Company had no outstanding borrowings,$168 million of issued and outstanding letters of credit and remaining availability of$1,057 million under its 2023 Revolving Credit Facility. In addition, the Company is required to pay commitment fees of 0.25%-0.50% per annum with respect to the unutilized commitments under the 2023 Revolving Credit Facility, payable quarterly in arrears. The Company also is required to pay: (i) letter of credit fees on the maximum amount available to be drawn under all outstanding letters of credit in an amount equal to the applicable margin on eurocurrency rate borrowings under the 2023 Revolving Credit Facility on a per annum basis, payable quarterly in arrears, (ii) customary fronting fees for the issuance of letters of credit and (iii) agency fees. 69 -------------------------------------------------------------------------------- The Restated Credit Agreement permits the incurrence of incremental credit facility borrowings up to the greater of$1,000 million and 28.5% of Consolidated Adjusted EBITDA (as defined in the Restated Credit Agreement), subject to customary terms and conditions, as well as the incurrence of additional incremental credit facility borrowings subject to a secured leverage ratio of not greater than 3.50:1.00, and, in the case of unsecured debt, a total leverage ratio of not greater than 6.50:1.00 or an interest coverage ratio of not less than 2.00:1.00. Senior Secured Notes The Senior Secured Notes are guaranteed by each of the Company's subsidiaries that is a guarantor under the Restated Credit Agreement and existing Senior Unsecured Notes (together, the "Note Guarantors"). The Senior Secured Notes and the guarantees related thereto are senior obligations and are secured, subject to permitted liens and certain other exceptions, by the same first priority liens that secure the Company's obligations under the Restated Credit Agreement under the terms of the indentures governing the Senior Secured Notes. The Senior Secured Notes and the guarantees rank equally in right of repayment with all of the Company's and Note Guarantors' respective existing and future unsubordinated indebtedness and senior to the Company's and Note Guarantors' respective future subordinated indebtedness. The Senior Secured Notes and the guarantees related thereto are effectively pari passu with the Company's and the Note Guarantors' respective existing and future indebtedness secured by a first priority lien on the collateral securing the Senior Secured Notes and effectively senior to the Company's and the Note Guarantors' respective existing and future indebtedness that is unsecured, including the existing Senior Unsecured Notes, or that is secured by junior liens, in each case to the extent of the value of the collateral. In addition, the Senior Secured Notes are structurally subordinated to: (i) all liabilities of any of the Company's subsidiaries that do not guarantee the Senior Secured Notes and (ii) any of the Company's debt that is secured by assets that are not collateral. Upon the occurrence of a change in control (as defined in the indentures governing the Senior Secured Notes), unless the Company has exercised its right to redeem all of the notes of a series, holders of the Senior Secured Notes may require the Company to repurchase such holder's notes, in whole or in part, at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest. Senior Unsecured Notes The Senior Unsecured Notes issued by the Company are the Company's senior unsecured obligations and are jointly and severally guaranteed on a senior unsecured basis by each of its subsidiaries that is a guarantor under the Senior Secured Credit Facilities. The Senior Unsecured Notes issued by BHA are senior unsecured obligations of BHA and are jointly and severally guaranteed on a senior unsecured basis by the Company and each of its subsidiaries (other than BHA) that is a guarantor under the Senior Secured Credit Facilities. Future subsidiaries of the Company and BHA, if any, may be required to guarantee the Senior Unsecured Notes. On a non-consolidated basis, the non-guarantor subsidiaries had total assets of$2,562 million and total liabilities of$1,034 million as ofMarch 31, 2020 , and revenues of$329 million and operating income of$21 million for the three months endedMarch 31, 2020 . If the Company experiences a change in control, the Company may be required to make an offer to repurchase each series of Senior Unsecured Notes, in whole or in part, at a purchase price equal to 101% of the aggregate principal amount of the Senior Unsecured Notes repurchased, plus accrued and unpaid interest. Covenant Compliance Any inability to comply with the covenants under the terms of our Restated Credit Agreement, Senior Secured Notes indentures or Senior Unsecured Notes indentures could lead to a default or an event of default for which we may need to seek relief from our lenders and noteholders in order to waive the associated default or event of default and avoid a potential acceleration of the related indebtedness or cross-default or cross-acceleration to other debt. There can be no assurance that we would be able to obtain such relief on commercially reasonable terms or otherwise and we may be required to incur significant additional costs. In addition, the lenders under our Restated Credit Agreement, holders of our Senior Secured Notes and holders of our Senior Unsecured Notes may impose additional operating and financial restrictions on us as a condition to granting any such waiver. During 2017 through the three months endedMarch 31, 2020 , the Company completed several actions which included using cash flows from operations to repay debt and refinancing debt with near-term maturities. These actions have reduced the Company's debt balance and positively affected the Company's ability to comply with the financial maintenance covenant. As ofMarch 31, 2020 , the Company was in compliance with its financial maintenance covenant related to its outstanding debt. The Company, based on its current forecast as adjusted for the potential impacts of the COVID-19 pandemic, expects to remain in compliance with the financial maintenance covenant and meet its debt service obligations for at least the twelve months following the date of issuance of this Form 10-Q. 70 -------------------------------------------------------------------------------- The Company continues to take steps to improve its operating results to ensure continual compliance with its financial maintenance covenant and take other actions to reduce its debt levels to align with the Company's long-term strategy. The Company may consider taking other actions, including divesting other businesses, refinancing debt and issuing equity or equity-linked securities as deemed appropriate, to provide additional coverage in complying with the financial maintenance covenant and meeting its debt service obligations. Weighted Average Interest Rate The weighted average stated rate of interest of the Company's outstanding debt as ofMarch 31, 2020 andDecember 31, 2019 was 6.01% and 6.21%, respectively. See Note 10, "FINANCING ARRANGEMENTS" to our unaudited interim Consolidated Financial Statements for further details. Credit Ratings As ofMay 7, 2020 , the credit ratings and outlook from Moody's,Standard & Poor's and Fitch for certain outstanding obligations of the Company were as follows: Senior Senior Secured Unsecured Rating Agency Corporate Rating Rating Rating Outlook Moody's B2 Ba2 B3 Stable Standard & Poor's B+ BB B Stable Fitch B BB B Stable Any downgrade in our corporate credit ratings or other credit ratings may increase our cost of borrowing and may negatively impact our ability to raise additional debt capital. Future Cash Requirements A substantial portion of our cash requirements for the remainder of 2020 are for debt service. Our other future cash requirements relate to working capital, capital expenditures, business development transactions (contingent consideration), restructuring and integration, benefit obligations and litigation settlements. In addition, we may use cash to enter into licensing arrangements and/or to make strategic acquisitions. In addition to our working capital requirements, as ofMarch 31, 2020 , we expect our primary cash requirements during the remainder of 2020 to be as follows: • Debt service-We expect to make principal and interest payments of
approximately
prepayments and a series of refinancing transactions we have reduced and
extended the maturities of a substantial portion of our long-term debt. As of
the date of this filing, there are no scheduled principal repayments of our
debt obligations through 2021. We may elect to make additional principal
payments under certain circumstances. Further, in the ordinary course of
business, we may borrow and repay amounts under our 2023 Revolving Credit
Facility to meet business needs;
• IT Infrastructure Investment-We expect to make payments of approximately
million for licensing, maintenance and other costs associated with our IT
infrastructure improvement projects during the remainder of 2020;
• Capital expenditures-We expect to make payments of approximately
for property, plant and equipment during the remainder of 2020;
• Contingent consideration payments-We expect to make contingent consideration
and other approval/sales-based milestone payments of approximately
million during the remainder of 2020;
• Restructuring and integration payments-We expect to make payments of
approximately
costs and lease termination obligations associated with restructuring and
integration actions we have taken through
• Benefit obligations-We expect to make payments under our pension and
postretirement obligations of approximately
of 2020.
•
"LEGAL PROCEEDINGS" to our unaudited interim Consolidated Financial
Statements, in
approval. Once approved by the court, the settlement will resolve and
discharge all claims against the Company in the class action. As part of the
settlement, the Company and the other settling defendants admitted no
liability as to the claims against it and deny all allegations of wrongdoing.
This settlement, once approved by the court, will resolve the most
significant of the Company's remaining legacy legal matters and eliminate a
material uncertainty regarding our Company. As of
cash includes
of a settlement agreement regarding certainU.S. securities litigation, subject to final court 71
-------------------------------------------------------------------------------- approval. OnJanuary 27, 2020 the court preliminarily approved the settlement and scheduled the final settlement approval hearing forMay 27, 2020 . The balance of the settlement will be paid in accordance with the payment schedule outlined in the settlement agreement. We continue to evaluate opportunities to improve our operating results and may initiate additional cost savings programs to streamline our operations and eliminate redundant processes and expenses. These cost savings programs may include, but are not limited to: (i) reducing headcount, (ii) eliminating real estate costs associated with unused or under-utilized facilities and (iii) implementing contribution margin improvement and other cost reduction initiatives. The expenses associated with the implementation of these cost savings programs could be material and may impact our cash flows. In the ordinary course of business, the Company is involved in litigation, claims, government inquiries, investigations, charges and proceedings. See Note 18, "LEGAL PROCEEDINGS" to our unaudited interim Consolidated Financial Statements. Our ability to successfully defend the Company against pending and future litigation may impact future cash flows. OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS We have no off-balance sheet arrangements that have a material current effect or that are reasonably likely to have a material effect on our results of operations, financial condition, capital expenditures, liquidity, or capital resources. The following table summarizes our contractual obligations related to our long-term debt, including interest, as ofMarch 31, 2020 : Remainder of 2024 and (in millions) Total 2020 2021 2022 and 2023 2025 Thereafter Long-term debt obligations, including interest$ 33,419 $ 1,164 $ 1,472 $ 6,774$ 15,122 $ 8,887 There have been no other material changes to the contractual obligations disclosed in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Off-Balance Sheet Arrangements and Contractual Obligations" included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC onFebruary 19, 2020 . OUTSTANDING SHARE DATA Our common shares trade on theNew York Stock Exchange and theToronto Stock Exchange under the symbol "BHC". AtApril 30, 2020 , we had 354,727,444 issued and outstanding common shares. In addition, as ofApril 30, 2020 , we had outstanding 9,191,569 stock options and 6,227,030 time-based restricted share units that each represent the right of a holder to receive one of the Company's common shares, and 2,287,525 performance-based restricted share units that represent the right of a holder to receive a number of the Company's common shares up to a specified maximum. A maximum of 4,300,999 common shares could be issued upon vesting of the performance-based restricted share units outstanding. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Critical accounting policies and estimates are those policies and estimates that are most important and material to the preparation of our Consolidated Financial Statements, and which require management's most subjective and complex judgment due to the need to select policies from among alternatives available, and to make estimates about matters that are inherently uncertain. Management has reassessed the critical accounting policies and estimates as disclosed in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC onFebruary 19, 2020 , and determined that there were no significant changes in our critical accounting policies in the three months endedMarch 31, 2020 , except for: (i) estimates and assumptions regarding the nature, timing and extent that the COVID-19 pandemic will possibly have on the Company's operations and cash flows as disclosed in Note 2, "SIGNIFICANT ACCOUNTING POLICIES" to our unaudited interim Consolidated Financial Statements, (ii) the impact that the COVID-19 pandemic has on the Company's assessment of goodwill as disclosed in Note 8, "INTANGIBLE ASSETS AND GOODWILL" to our unaudited interim Consolidated Financial Statements and (iii) recently adopted accounting guidance as discussed in Note 2, "SIGNIFICANT ACCOUNTING POLICIES" to our unaudited interim Consolidated Financial Statements. NEW ACCOUNTING STANDARDS Adoption of New Accounting Guidance Information regarding recently issued accounting guidance is contained in Note 2, "SIGNIFICANT ACCOUNTING POLICIES" of notes to the unaudited interim Consolidated Financial Statements. 72 -------------------------------------------------------------------------------- FORWARD-LOOKING STATEMENTS Caution regarding forward-looking information and statements and "Safe-Harbor" statements under theU.S. Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws: To the extent any statements made in this Form 10-Q contain information that is not historical, these statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and may be forward-looking information within the meaning defined under applicable Canadian securities laws (collectively, "forward-looking statements"). These forward-looking statements relate to, among other things: our business strategy, business plans and prospects and forecasts and changes thereto; product pipeline, prospective products and product approvals, product development and future performance and results of current and anticipated products; anticipated revenues for our products; anticipated growth in ourOrtho Dermatologics business; expected R&D and marketing spend; our expected primary cash and working capital requirements for 2020 and beyond; the Company's plans for continued improvement in operational efficiency and the anticipated impact of such plans; our liquidity and our ability to satisfy our debt maturities as they become due; our ability to reduce debt levels; our ability to meet the financial and other covenants contained in our Fourth Amended and Restated Credit and Guaranty Agreement (the "Restated Credit Agreement"), and senior notes indentures; the impact of our distribution, fulfillment and other third-party arrangements; proposed pricing actions; exposure to foreign currency exchange rate changes and interest rate changes; the outcome of contingencies, such as litigation, subpoenas, investigations, reviews, audits and regulatory proceedings; the anticipated impact of the adoption of new accounting standards; general market conditions; our expectations regarding our financial performance, including revenues, expenses, gross margins and income taxes; our impairment assessments, including the assumptions used therein and the results thereof; and the anticipated impact of the evolving COVID-19 pandemic and related responses from governments and private sector participants on the Company, its supply chain, third-party suppliers, project development timelines, costs, revenue, margins, liquidity and financial condition and the Company's planned actions and responses to this pandemic. Forward-looking statements can generally be identified by the use of words such as "believe", "anticipate", "expect", "intend", "estimate", "plan", "continue", "will", "may", "could", "would", "should", "target", "potential", "opportunity", "designed", "create", "predict", "project", "forecast", "seek", "strive", "ongoing" or "increase" and variations or other similar expressions. In addition, any statements that refer to expectations, intentions, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements may not be appropriate for other purposes. Although we have previously indicated certain of these statements set out herein, all of the statements in this Form 10-Q that contain forward-looking statements are qualified by these cautionary statements. These statements are based upon the current expectations and beliefs of management. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making such forward-looking statements, including, but not limited to, factors and assumptions regarding the items previously outlined, those factors, risks and uncertainties outlined below and the assumption that none of these factors, risks and uncertainties will cause actual results or events to differ materially from those described in such forward-looking statements. Actual results may differ materially from those expressed or implied in such statements. Important factors, risks and uncertainties that could cause actual results to differ materially from these expectations include, among other things, the following: • the risks and uncertainties caused by or relating to the evolving COVID-19
pandemic, the fear of that pandemic, the rapidly evolving reaction of
governments, private sector participants and the public to that pandemic
and the potential effects and economic impact of the pandemic and the reaction to it, the severity, duration and future impact of which are
highly uncertain and cannot be predicted, and which may have a significant
adverse impact on the Company, including but not limited to its supply
chain, third-party suppliers, project development timelines, employee
base, liquidity, stock price, financial condition and costs (which may increase) and revenue and margins (both of which may decrease);
• the expense, timing and outcome of legal and governmental proceedings,
investigations and information requests relating to, among other matters,
our past distribution, marketing, pricing, disclosure and accounting
practices (including with respect to our former relationship with Philidor
Rx Services, LLC ("Philidor")), including pending investigations by theU.S. Attorney's Office for the District of Massachusetts and theU.S. Attorney's Office for the Southern District of New York , the pending
investigations by the
of the Company, the investigation order issued by the Company from the
Autorité des marchés financiers (the "AMF") (the Company's principal
securities regulator inCanada ), a number of pending securities litigations (including certain pending opt-out actions in theU.S. (related to the recently settled securities class action, (which is subject to final court approval, and remains subject to the risk and
uncertainty that the
may not approve the
class action litigation in
purported class actions under the federal RICO statute and other claims,
investigations or proceedings that may be initiated or that may be asserted; 73
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• potential additional litigation and regulatory investigations (and any costs, expenses, use of resources, diversion of management time and efforts, liability and damages that may result therefrom), negative
publicity and reputational harm on our Company, products and business that
may result from the past and ongoing public scrutiny of our past
distribution, marketing, pricing, disclosure and accounting practices and
from our former relationship with Philidor;
• the past and ongoing scrutiny of our legacy business practices, including
with respect to pricing (including the investigations by the
Attorney's Offices for the District of
District of
may be sought or imposed on our products as a result thereof;
• pricing decisions that we have implemented, or may in the future elect to
implement, such as the
that the average annual price increase for our branded prescription
pharmaceutical products will be set at no greater than single digits, or
any future pricing actions we may take following review by our Patient
drugs);
• legislative or policy efforts, including those that may be introduced and
passed by the
costs for medicines, which could result in new mandatory rebates and discounts or other pricing restrictions, controls or regulations (including mandatory price reductions);
• ongoing oversight and review of our products and facilities by regulatory
and governmental agencies, including periodic audits by the
Drug Administration (the "FDA") and the results thereof; • actions by the FDA or other regulatory authorities with respect to our products or facilities;
• our substantial debt (and potential additional future indebtedness) and
current and future debt service obligations, our ability to reduce our outstanding debt levels and the resulting impact on our financial condition, cash flows and results of operations; • our ability to meet the financial and other covenants contained in our
Restated Credit Agreement, senior notes indentures, 2023 Revolving Credit
Facility and other current or future debt agreements and the limitations,
restrictions and prohibitions such covenants impose or may impose on the
way we conduct our business, including prohibitions on incurring
additional debt if certain financial covenants are not met, limitations on
the amount of additional obligations we are able to incur pursuant to other covenants, our ability to draw under our 2023 Revolving Credit Facility and restrictions on our ability to make certain investments and other restricted payments;
• any default under the terms of our senior notes indentures or Restated
Credit Agreement and our ability, if any, to cure or obtain waivers of such default; • any delay in the filing of any future financial statements or other
filings and any default under the terms of our senior notes indentures or
Restated Credit Agreement as a result of such delays;
• any downgrade by rating agencies in our credit ratings, which may impact,
among other things, our ability to raise debt and the cost of capital for
additional debt issuances;
• any reductions in, or changes in the assumptions used in, our forecasts
for fiscal year 2020 or beyond, including as a result of the impacts of COVID-19 on our business and operations, which could lead to, among other things: (i) a failure to meet the financial and/or other covenants
contained in our Restated Credit Agreement and/or senior notes indentures
and/or (ii) impairment in the goodwill associated with certain of our
reporting units or impairment charges related to certain of our products
or other intangible assets, which impairments could be material;
• changes in the assumptions used in connection with our impairment analyses
or assessments, which would lead to a change in such impairment analyses
and assessments and which could result in an impairment in the goodwill
associated with any of our reporting units or impairment charges related
to certain of our products or other intangible assets; • the uncertainties associated with the acquisition and launch of new
products (such as our recently launched Bryhali®, Duobrii® and Ocuvite®
Eye Performance products), including, but not limited to, our ability to
provide the time, resources, expertise and costs required for the commercial launch of new products, the acceptance and demand for new pharmaceutical products, and the impact of competitive products and pricing, which could lead to material impairment charges;
• our ability or inability to extend the profitable life of our products,
including through line extensions and other life-cycle programs; • our ability to retain, motivate and recruit executives and other key employees; 74
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• our ability to implement effective succession planning for our executives
and key employees; • factors impacting our ability to achieve anticipated growth in ourOrtho Dermatologics business, including the success of recently launched
products (such as Bryhali® and Duobrii®), the ability to successfully
implement and operate our new cash-pay prescription program for certain of
our
to achieve the anticipated goals respecting patient access and
fulfillment, the approval of pending and pipeline products (and the timing
of such approvals), expected geographic expansion, changes in estimates on
market potential for dermatology products and continued investment in and
success of our sales force; • factors impacting our ability to achieve anticipated revenues for our products, including changes in anticipated marketing spend on such products and launch of competing products;
• the challenges and difficulties associated with managing a large complex
business, which has, in the past, grown rapidly;
• our ability to compete against companies that are larger and have greater
financial, technical and human resources than we do, as well as other
competitive factors, such as technological advances achieved, patents
obtained and new products introduced by our competitors;
• our ability to effectively operate and grow our businesses in light of the
challenges that the Company has faced and market conditions, including
with respect to its substantial debt, pending investigations and legal
proceedings, scrutiny of our past pricing and other practices, limitations
on the way we conduct business imposed by the covenants contained in our
Restated Credit Agreement, senior notes indentures and the agreements
governing our other indebtedness, and the impacts of the COVID-19 pandemic;
• the extent to which our products are reimbursed by government authorities,
pharmacy benefit managers ("PBMs") and other third-party payors; the impact our distribution, pricing and other practices (including as it relates to our current relationship withWalgreen Co. ("Walgreens")) may have on the decisions of such government authorities, PBMs and other
third-party payors to reimburse our products; and the impact of obtaining
or maintaining such reimbursement on the price and sales of our products;
• the inclusion of our products on formularies or our ability to achieve
favorable formulary status, as well as the impact on the price and sales of our products in connection therewith;
• the consolidation of wholesalers, retail drug chains and other customer
groups and the impact of such industry consolidation on our business;
• our eligibility for benefits under tax treaties and the continued availability of low effective tax rates for the business profits of certain of our subsidiaries;
• the actions of our third-party partners or service providers of research,
development, manufacturing, marketing, distribution or other services,
including their compliance with applicable laws and contracts, which
actions may be beyond our control or influence, and the impact of such
actions on our Company, including the impact to the Company of our former
relationship with Philidor and any alleged legal or contractual non-compliance by Philidor;
• the risks associated with the international scope of our operations,
including our presence in emerging markets and the challenges we face when
entering and operating in new and different geographic markets (including
the challenges created by new and different regulatory regimes in such
countries and the need to comply with applicable anti-bribery and economic
sanctions laws and regulations);
• adverse global economic conditions and credit markets and foreign currency
exchange uncertainty and volatility in certain of the countries in which we do business;
• the impact of
potential changes to other trade agreements;
• the final outcome and impact of Brexit negotiations;
• the trade conflict between
• our ability to obtain, maintain and license sufficient intellectual
property rights over our products and enforce and defend against challenges to such intellectual property (such as in connection with the recent filing byNorwich Pharmaceuticals Inc. ("Norwich") of its
Abbreviated New Drug Application ("ANDA") for Xifaxan® (rifaximin) 550 mg
tablets and the Company's related lawsuit filed against Norwich in connection therewith); 75
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• the introduction of generic, biosimilar or other competitors of our branded products and other products, including the introduction of
products that compete against our products that do not have patent or data
exclusivity rights;
• our ability to identify, finance, acquire, close and integrate acquisition
targets successfully and on a timely basis and the difficulties,
challenges, time and resources associated with the integration of acquired
companies, businesses and products;
• any additional divestitures of our assets or businesses and our ability to
successfully complete any such divestitures on commercially reasonable
terms and on a timely basis, or at all, and the impact of any such divestitures on our Company, including the reduction in the size or scope of our business or market share, loss of revenue, any loss on sale, including any resultant impairments of goodwill or other assets, or any
adverse tax consequences suffered as a result of any such divestitures;
• the expense, timing and outcome of pending or future legal and
governmental proceedings, arbitrations, investigations, subpoenas, tax and
other regulatory audits, examinations, reviews and regulatory proceedings
against us or relating to us and settlements thereof; • our ability to negotiate the terms of or obtain court approval for the settlement of certain legal and regulatory proceedings;
• our ability to obtain components, raw materials or finished products
supplied by third parties (some of which may be single-sourced) and other
manufacturing and related supply difficulties, interruptions and delays;
• the disruption of delivery of our products and the routine flow of manufactured goods;
• economic factors over which the Company has no control, including changes
in inflation, interest rates, foreign currency rates, and the potential
effect of such factors on revenues, expenses and resulting margins;
• interest rate risks associated with our floating rate debt borrowings;
• our ability to effectively distribute our products and the effectiveness
and success of our distribution arrangements, including the impact of our
arrangements with Walgreens; • our ability to effectively promote our own products and those of our co-promotion partners;
• the success of our fulfillment arrangements with Walgreens, including
market acceptance of, or market reaction to, such arrangements (including
by customers, doctors, patients, PBMs, third-party payors and governmental
agencies), and the continued compliance of such arrangements with applicable laws;
• the acceptance and success of our new cash-pay prescription program for
certain of our
• our ability to secure and maintain third-party research, development,
manufacturing, licensing, marketing or distribution arrangements;
• the risk that our products could cause, or be alleged to cause, personal
injury and adverse effects, leading to potential lawsuits, product
liability claims and damages and/or recalls or withdrawals of products
from the market;
• the mandatory or voluntary recall or withdrawal of our products from the
market and the costs associated therewith;
• the availability of, and our ability to obtain and maintain, adequate
insurance coverage and/or our ability to cover or insure against the total
amount of the claims and liabilities we face, whether through third-party
insurance or self-insurance;
• the difficulty in predicting the expense, timing and outcome within our
legal and regulatory environment, including with respect to approvals by
the FDA,
regulatory proceedings and settlements thereof, the protection afforded by
our patents and other intellectual and proprietary property, successful
generic challenges to our products and infringement or alleged infringement of the intellectual property of others; • the results of continuing safety and efficacy studies by industry and government agencies;
• the success of preclinical and clinical trials for our drug development
pipeline or delays in clinical trials that adversely impact the timely
commercialization of our pipeline products, as well as other factors impacting the commercial success of our products, which could lead to material impairment charges; • the results of management reviews of our research and development
portfolio (including following the receipt of clinical results or feedback
from the FDA or other regulatory authorities), which could result in
terminations of specific projects which, in turn, could lead to material impairment charges; 76
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• the seasonality of sales of certain of our products;
• declines in the pricing and sales volume of certain of our products that
are distributed or marketed by third parties, over which we have no or limited control; • compliance by the Company or our third-party partners and service
providers (over whom we may have limited influence), or the failure of our
Company or these third parties to comply, with health care "fraud and
abuse" laws and other extensive regulation of our marketing, promotional
and business practices (including with respect to pricing), worldwide
anti-bribery laws (including theU.S. Foreign Corrupt Practices Act and the Canadian Corruption of Foreign Public Officials Act), worldwide economic sanctions and/or export laws, worldwide environmental laws and regulation and privacy and security regulations;
• the impacts of the Patient Protection and Affordable Care Act, as amended
by the Health Care and Education Reconciliation Act of 2010 (the "Health
Care Reform Act") and potential amendment thereof and other legislative
and regulatory health care reforms in the countries in which we operate,
including with respect to recent government inquiries on pricing;
• the impact of any changes in or reforms to the legislation, laws, rules,
regulation and guidance that apply to the Company and its business and
products or the enactment of any new or proposed legislation, laws, rules,
regulations or guidance that will impact or apply to the Company or its businesses or products;
• the impact of changes in federal laws and policy under consideration by
the Trump administration andCongress , including the effect that such changes will have on fiscal and tax policies, the potential revision of all or portions of the Health Care Reform Act, international trade
agreements and policies and policy efforts designed to reduce patient
out-of-pocket costs for medicines (which could result in new mandatory
rebates and discounts or other pricing restrictions);
• illegal distribution or sale of counterfeit versions of our products;
• interruptions, breakdowns or breaches in our information technology
systems; and
• risks in Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the
year ended
"Risk Factors" of Part II of this Form 10-Q and risks detailed from time
to time in our other filings with the
Administrators (the "CSA"), as well as our ability to anticipate and
manage the risks associated with the foregoing.
Additional information about these factors and about the material factors or assumptions underlying such forward-looking statements may be found in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed onFebruary 19, 2020 , under Item 1A. "Risk Factors", under 1A. "Risk Factors" of Part II of this Form 10-Q and in the Company's other filings with theSEC and CSA. When relying on our forward-looking statements to make decisions with respect to the Company, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. These forward-looking statements speak only as of the date made. We undertake no obligation to update or revise any of these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect actual outcomes, except as required by law. We caution that, as it is not possible to predict or identify all relevant factors that may impact forward-looking statements, the foregoing list of important factors that may affect future results is not exhaustive and should not be considered a complete statement of all potential risks and uncertainties. Item 3. Quantitative and Qualitative Disclosures About Market Risk Other than as indicated below under "- Interest Rate Risk", and under 1A. "Risk Factors" of Part II of this Form 10-Q, there have been no material changes to our exposures to market risks as disclosed in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosures About Market Risks" included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC onFebruary 19, 2020 . Interest Rate Risk As ofMarch 31, 2020 , we had$18,005 million and$5,041 million principal amount of issued fixed rate debt and variable rate debt, respectively, that requiresU.S. dollar repayment, as well as €1,500 million principal amount of issued fixed rate debt that requires repayment in euros. The estimated fair value of our issued fixed rate debt as ofMarch 31, 2020 , including the foreign currency-denominated debt, was$19,654 million . If interest rates were to increase by 100 basis-points, the fair value of our issued fixed rate debt would decrease by approximately$755 million . If interest rates were to decrease by 100 basis-points, the fair value of our issued fixed rate debt would increase by approximately$667 million . We are subject to interest rate risk on our variable rate debt as changes in interest rates could adversely affect earnings and cash flows. A 100 basis-points increase in interest rates, 77 -------------------------------------------------------------------------------- based on 3-month LIBOR, would have an annualized pre-tax effect of approximately$50 million in our Consolidated Statements of Operations and Cash Flows, based on current outstanding borrowings and effective interest rates on our variable rate debt. While our variable-rate debt may impact earnings and cash flows as interest rates change, it is not subject to changes in fair value. Item 4. Controls and Procedures Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), has evaluated the effectiveness of our disclosure controls and procedures as ofMarch 31, 2020 . Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as ofMarch 31, 2020 . Changes in Internal Control Over Financial Reporting There were no changes in the Company's internal controls over financial reporting that occurred during the three months endedMarch 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. 78
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