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Bausch Health Companies Inc.  (NYSE:BHC)
Q1 2019 Earnings Call
May. 06, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Bausch Health 1Q19 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded.

I now would like to turn the call over to your host today Arthur Shannon, SVP, Head of Investor Relations and Global Communications. Please go ahead, sir.

Art Shannon -- Senior Vice President, Investor Relations and Global Communications

Thank you, Keith. Appreciate it. Good morning, everyone, and welcome to our first quarter 2019 financial results conference call. Participating on today's call our Chairman and Chief Executive Officer, Joe Papa; and Chief Financial Officer, Paul Herendeen. In addition to this live webcast, a copy of today's slide presentation and a replay of this conference call will be available on our website under the Investor Relations section.

Before we begin, we'd like to remind you that our presentation today contains forward-looking information. We would ask that you take a moment to read the forward-looking statement legend at the beginning of our presentation as it contains important information. This presentation contains non-GAAP financial measures. For more information about these measures, please refer to Slide 2 of the presentation. Non-GAAP reconciliations can be found in the appendix to the presentation posted on our website.

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

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

Joseph C. Papa -- Chairman of the Board & Chief Executive Officer

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

Beginning with Slide 4, Bausch Health is off to a strong start in 2019 as we pivot to offence. The 21,000 employees of Bausch Health Companies are fully engaged and truly motivated to turnaround Bausch Health and the quarterly results are excellent.

First, organic growth of 5% in the first quarter was the highest quarter of total company organic growth since the third quarter of 2015. Our top 10 products grew organically by 11% in the aggregate compared to the first quarter of 2018. We generated $413 million of cash from operations, and we continued to manage debt and allocate capital strategically, reducing debt by more than $100 million using cash on hand while also completing the Synergy acquisition during the first quarter. We also increased R&D investment by approximately 30% in the first quarter versus last year.

Importantly, as you can see from the list on the right, our new product launches and strategic acquisitions are helping to round out our product portfolio in dermatology, ophthalmology and GI. A few highlights to note. We completed the acquisition of TRULANCE, which is a great addition to the CLF franchise and also acquired dolcanatide, an investigational treatment for ulcerative colitis, opioid-induced constipation. BRYHALI has experienced rapid uptake by dermatologists in the first four months since launch; and in April, DUOBRII was approved by the FDA and we're planning to launch it next month.

Finally, we also completed a number of strategic transactions that have the potential to expand our portfolio including the acquisition of an investigational eye drop for itchy eyes associated with allergies, a license agreement with UCLA to develop and commercialize a novel compound for the treatment of NASH, and an exclusive license agreement with Mitsubishi Tanabe to develop and commercialize a late stage investigational treatment for inflammatory bowel disease.

So, as you can see, overall, 2019 is off to a great start. We are launching new products, we are meeting our operational goals, and we are well-positioned to pivot to offense in 2019.

On Slide 5, we present a snapshot of key Q1 financial highlights for our four segments. In the first quarter, approximately 77% of our revenue is generated by the Bausch & Lomb International segment and the Salix segment, which grew organically by 7% on a combined basis. B&L International grew organically by 8% compared to the prior year quarter driven by the demand. Salix grew by 5% organically driven by XIFAXAN which started the year with a great quarter of 11% growth. Excellent results from our two largest segments.

On Slide 6, we laid out the attributes that make Bausch Health a unique healthcare solution. First, durable revenue flow. Our two largest segments generated approximately 77% of our revenue and are growing organically 7% in Q1 '19.

Second, we have a diverse business by product, geography and revenue type. Only one product accounts for more than 10% of our revenue. We operate in more than 100 countries, so we truly have a global footprint, and we have the opportunity to leverage that global footprint by launching our products in international markets around the world.

Next, a majority of the business is insulated from U.S. branded prescription pricing. As the chart shows, nearly 60% of our revenue is generated from products that are not exposed to U.S. brand prescription pricing, and not subject to LOEs, significant LOEs.

Finally, a critical mass of people consumer products, every day, approximately 150 million people around the world would use a Bausch Health product.

With that, I'll turn it over to Paul.

Paul S. Herendeen -- Executive Vice President & Chief Financial Officer

Thank you, Joe, and good morning. I'm going to cover our Q1 financial results, mainly by focusing on Slide 7, and walking down the top level P&L for the total company. Based on the hard work of our colleagues across Bausch Health, we put a really good quarter on the board. Reported revenue growth of $21 million, or plus 1%, despite $59 million currency headwind and $80 million growth drag from LOE assets and $18 million divested or discontinued revenues contained in the prior year quarter.

Over the period from 2016 to 2018, we dealt with a revenue growth drag aggregating roughly $1.3 billion from a basket of products that lost exclusivity in that relatively short window. And we also absorbed the loss of roughly $870 million of revenue associated with divested assets. So, to start 2019 with 1% reported revenue growth for the quarter feels pretty good to us.

Adjusting for the FX, excluding the $6 million positive impact from the acquisition of Synergy and the impact of discontinued and divested assets, we posted organic revenue growth of 5% in the quarter, a tip of the hat to our various business unit leaders. Our growth was a function of solid fundamental execution, meaning driven by increased volumes for the total company up 2%.

Our promotional efforts combined with roughly 300 basis points of improvements and realized debt pricing enabled us to deliver the 5% organic growth. Joe said it, but I'm going to say it too because it feels good. The 5% organic growth for the company is the highest organic growth we posted since Q3 of 2015.

The B&L International segment representing 55% of our total revenue saw organic growth of 8% with all five sub-segments posting growth versus Q1 of 2018. Increased volume accounted for 7% of the organic growth in our largest segment. That's good stuff.

Global Vision Care was up 9%. We continue to be on a roll in Vision Care. In the U.S., which currently accounts for roughly 30% of our Global Vision Care business, we were up about a 17%, and in international markets, we posted a solid 6% increase. The BioTrue ONEday family of this daily disposables was the main driver both in the U.S. and internationally.

In the U.S., the ramp of BioTrue ONEday Toric was the biggest contributor of BioTrue SVS in our ultra silicon hydrogel lens contributed to growth in the U.S. as well. Internationally, the growth was driven by the BioTrue ONEday family and our daily -- excuse me, silicon hydrogel lenses including both Ultra and daily disposable AQUALOX lenses.

Growth were strongest in the Asia Pac region, but we saw growth from many markets. The Head of International B&L, Tom Appio, and the Head of our International Vision Care Group, Yang Yang, continue to deliver solid results. Our head of U.S. B&L, Joe Gordon, took over a somewhat stagnant U.S. Vision Care business in early 2017, and he together with his lieutenant, John Ferris, and many others in the U.S. Vision Care team have delivered an impressive string of quarterly growth.

Global Surgical was up 4% organically. International surgical costs were about 70% of the revenue in this sub-segment and delivered 7% organic growth, mainly on strengthened anterior and posterior disposables, including for our Stellaris and Stellaris Elite systems. Geographically, growth was seen across all international markets, almost all, excuse me. Our Head of International Surgical, Luc Bonnefoy, has provided terrific leadership of this group as evidenced by the growth delivered quarter after quarter.

Global Consumer revenue was up 6% organically with roughly half of that revenue coming from Lumify that we launched in the U.S. in May last year. Global sales of our eye vitamins, particularly PreserVision continue to grow in response to continued promotional inputs. Note that the global shift of daily contact lenses was and will be a headwind for our solutions business within Global Consumer.

Global Ophtho Rx was up 16% organically, about the same in the U.S. as in international markets. VYZULTA was a growth driver for us accounting for about one-third of the segment growth, mainly on increased volume. Internationally, we had strong performance across a number of geographies, especially in China, the UK and Germany.

International Rx was up 9% organically. This segment had its challenges as we work to put in place the right team to sort through a number of legacy issues, including channel inventory levels and supply chain disruptions. I mentioned in February that it looked like we might have turned the corner with this business. After 8% organic growth in Q4 of '18 versus Q4 of '17, and 9% in Q1 of '19 versus Q1 2018, it feels like we're pointed in the right direction. We had especially strong contributions in the quarter from Canada, Russia, Amoun in Egypt and Eastern Europe.

Before I move on to Salix, important safety tip with respect to the International Rx business. Q1 of 2018 and Q4 of 2017 represented favorable comps for this business unit. We expect the growth of International Rx business to moderate over the remainder of 2019. Overtime, we'd expect this segment to be a relatively consistent mid single-digit grower on a constant currency basis.

Turning to Salix. Salix revenue was up 5% organically. The story here was the continued momentum of XIFAXAN up 11%. XIFAXAN TRxs, a good proxy for units, were up 8% compared with Q1 of 2018. The growth of XIFAXAN plus contributions from RELISTOR and GLUMETZA helped Salix overcome the $26 million growth drag from a loss of exclusivity on UCERIS. The entire Salix team led by Mark McKenna, Josh Coyle and Nicola Kayel continues to perform at a high level.

The Ortho Dermatologics segment was down 1% organically. The medical derm business was down 10% on a 29% volume decline, offset in part by continued improvements in our realized net selling prices. We have made purposeful changes to our co-pay assistance programs in this business to improve gross to nets and to reduce non-profitable volumes. Nearly offsetting the decline in medical derm was a 34% organic growth of Solta. The roll out of Thermage FLX has progressed very well, in fact ahead of expectations, particularly in the Asia Pac region. I'm going to recognize again the leader of Solta, Tom Hart. He's done a remarkable job with this business.

The Diversified segment was down 4% organically. The Neuro business was down 11% due to the continued decline of the LOE assets, and that decline was offset in part by another good quarter for our generics business, which was up 16%. That performance was aided by sales of authorized generics of our brands that lost exclusivity and by continued -- the continued ability of our generics team working closely with our supply chain folks to capitalize on shortages of products in the market.

For the avoidance of doubt, long-term you should not expect our GRX business to be a grower. Instead, think of it as a means for us to capture and preserve some of the economics of our brands that lose exclusivity, and as a way to leverage our manufacturing capabilities to periodically capitalize on market opportunities.

I want to spend a minute on our gross profit margin, as this is where you can see evidence of the work that we started back in 2016, to improve the efficiency of our supply chain. We've now wrapped that initiative into what we call our core program, cost optimization and revenue enhancement. In Q1 of 2019, we saw a 210 basis point improvement in our gross margin compared with Q1 of 2018. Part of that favorability has mixed for sure, but a meaningful part of the improvement flows from the work that Dennis Asharin, our Head of Global Manufacturing and his team are doing to reduce costs including by eliminating non-economic SKUs.

We expect to continue to improve our gross margins in 2020 and beyond. Within operating costs, total company adjusted selling, advertising and promotional expenses were up 6% on a constant currency basis. This reflects our allocation of additional promotional resources in certain of our businesses where we believe we can drive sustained growth, particularly the global B&L Vision Care and Consumer businesses and in Salix.

Total company adjusted G&A expense was 15% favorable, down on a constant currency basis. A meaningful component of this improvement is from the reduction of outside legal costs associated with cases that we settled or disposed of. Our General Counsel, Christina Ackermann, and her team have done a wonderful job of systematically dispatching legacy cases, and in doing so reducing our fees for outside legal counsel.

R&D was up 29% on a constant currency basis, normally with an expense you call that unfavorable, but I'm going to say that this is a good thing. We've been working to ensure that the projects that make up our development pipeline deserve to be there and that the allocation of our investment as between businesses is aligned with our view of opportunities for value creation. Sounds straightforward, but it took us a bit of time to ensure that we are investing our R&D dollars productively.

The net result of the things I've just talked about was that our reported adjusted EBITA for Q1 was up 6% versus Q1 of 2018. This is the only time in my remarks I'll mention EBITA. Main drivers were the 1% reported growth of revenue, the 210 basis point improvement in gross margins and the reduction of G&A expenses offset in part by the increased investment in R&D and increased advertising and promotional expenses to support brands and launch phase.

Adjusted EBITDA was up 2% that's 400 basis points less than adjusted EBITA, due to transactional FX gains of $27 million in Q1 of 2018. Looking at adjusted net income, reported ANI was up 15% on the 2% increase in adjusted EBITDA due to a decrease in the interest expense of $10 million compared with the prior year quarter and a lower effective tax rate on adjusted earnings in Q1 of 2019 versus Q1 to 2018.

All right. I've covered many of the highlights of the four segments, so I'm not going to step through slides 8, 9, 10 and 11, but will point out that the improvements in gross profit margin were seen across all four segments.

On Slide 12, the balance sheet summary, you see that by March 31 of 2019 the principal amount of our outstanding debt declined by $158 million from the year end 2018 as we used available cash to retire debt. We finished the quarter with $784 million of cash on hand.

On the Slide 13 in the cash flow summary, cash generated from operations was $413 million for the quarter, in line with our expectations. This amount was reduced a bit by increase in our investment in inventories during the quarter, including API and finished goods as we gear up and ramp up to support products and launch phase.

When thinking about the quarterly phasing of our cash from operations, recall that we stated that our interest expenses paid out disproportionately in Q2 and Q4. Approximately, one-third of our interest expense settles in each of Q2 and Q4, and one-sixth in Q1 and Q3. So bear that in mind when you're thinking about the quarterly phasing of cash generated from operations. You also see the roughly $190 million of cash that we paid to acquire certain assets of Synergy.

On to our updated guidance for the full year 2019 on Slide 14, we increased the ranges for both revenue and adjusted EBITDA guidance by $50 million. Other changes to our guidance include a reduction in our expected effective tax rate on adjusted earnings from roughly 10% to roughly 8%. The main driver of this was a discrete meaning non-recurring type item from a favorable tax ruling in the quarter.

The mix of pre-tax earnings by jurisdiction was also favorable. An important point, our effective tax rate on adjusted earnings is very sensitive to the mix of pre-tax earnings by tax jurisdiction and our tax rate especially in quarterly periods can be vigorous. While we are presently guiding to an effective tax rate on adjusted pre-tax earnings of roughly 8% for the full year 2019, that's due mainly to the discrete item. For modeling purposes, I'd stick with circa 10% for 2020 and beyond.

Our guidance for depreciation and stock-based comps change slightly, and we increased our guidance for contingent consideration, milestones and license agreements by $10 million. To the extent that we license rights to development assets in the future, this is where those upfront payments would show up.

Finally, we held our guidance range for gross margin at 71% to 72%, despite the 73.4% gross margin we posted in Q1. This tells you that we expect lesser gross margins over the balance of the year. But it's safe to assume that at this time, it's more likely that our margin will be in the upper part of that range.

Let's move on to the guidance bridge on Slide 15. First, as of today, changes in FX rates from the date of our prior guidance in February reduced our full year expectations for revenue by $30 million and for adjusted EBITDA by $5 million. Second, the changes in assumptions around LOE assets netted to zero and had no impact on our full year revenue or adjusted EBITDA guidance. Third, we've added the impact of TRULANCE into our full year guidance. We recorded $6 million of revenue for TRULANCE in Q1, and a good portion of those sales were to refill the channel as pipeline inventories were quite low at the time we acquired the Synergy assets.

For the full year, including the $6 million realized in Q1, we're expecting revenue of $55 million and no operating profit in 2019. We are essentially relaunching this brand and are committed to investing the promotional resources needed to establish momentum for TRULANCE. For our branded pharma product, TRULANCE currently has a relatively high cost of goods sold roughly 30% of net revenue. That's something we expect to improve upon in the future but not in 2019.

So with the promotional resources that we are committing, we are not expecting TRULANCE to be a contributor of profit in 2019. We would feel that the brand will be a meaningful contributor of reported revenue and profit in 2020 and beyond. We will exclude the results for TRULANCE on organic growth for the next year.

Finally, our base business. Our base business accounted for $25 million of the increased revenue guidance -- increase in the revenue guidance range, and $55 million of the increase to the adjusted EBITDA guidance range. The $55 million improvement in adjusted EBITDA from the base business was comprised of three pieces: the gross profit on the incremental $25 million of revenue; higher gross margins across the total business, albeit still within the guidance range for gross margin; and third, slightly lower expected SG&A cost.

That's it for me. Joe, back to you.

Joseph C. Papa -- Chairman of the Board & Chief Executive Officer

Thank you, Paul. Let's go through some of the highlights in our B&L International segment on Slide 16. First, this segment delivered its 10th consecutive quarter of organic growth up 8% and quarter one '19 was the highest quarter growth for the Bausch & Lomb international segments, since the Bausch & Lomb acquisition in 2013. Importantly, this growth was driven by increased unit volume across all reporting segments of the business. In the aggregate, the top 10 products in Bausch & Lomb International grew organically by 8% compared to the prior year quarter. In Global Consumer our eye vitamins, Ocuvite and PreserVision, along Lumify are the key growth drivers. Finally, e-commerce is becoming increasingly important channel for the products in our Global Consumer business as the Amazon data demonstrates with 89% growth compared to the first quarter 2018.

Turning to Slide 17, Lumify which generated $10 million in revenue in the quarter is exceeding expectations. Approximately, nine months on the market, Lumify is the number one product in the Redness Reliever category with approximately 28% market share which is reflected in the chart on the right. Lumify is also the number one physician recommended product in the Redness Reliever category, and we're getting great feedback from consumers, a recent home-use-study with over 300 participants found that 95% were satisfied with Lumify.

Turning now to the Vision Care on Slide 18, we reported 6% organic revenue growth in the international business driven primarily by China and Japan, and 17% organic revenue growth in the U.S. driven by market share gains outpacing competitors.

Moving to the Global Ophtho Rx on the right, our market access team is doing a great job less than a month after launching in the U.S. LOTEMAX SM already has greater than 40% commercial and Medicare Part D coverage. VYZULTA TRx weekly scripts grew by approximately 20% quarter-over-quarter as we show in the chart. And in terms of adherence, we have found that patients who start on VYZULTA are 34% more likely to stay on it than other branded agents.

On the Slide 19 for Salix update, organic revenue growth of 5% during the first quarter was primarily driven by XIFAXAN, and this was the 8th consecutive quarter of organic revenue growth. In addition to our internal development activities, we are expanding our GI business through acquisition and licensing deals. We completed the purchase of certain assets from Synergy Pharmaceuticals which provided a marketed product TRULANCE and a development candidate.

We entered into a license agreement with UCLA to develop and commercialize a novel compound for the treatment of NASH, and we have an exclusive license agreement to develop and commercialize a late stage investigational treatment for inflammatory bowel disease.

Moving to a XIFAXAN, which grew 11% in the first quarter, was fueled by IBS-D prescriptions which were up 18%. This is an important metric when you look at the graph on the right, which shows that 90% of the IBS-D market is still being treated with older antispasmodic or antidiarrheal products. In other words, 90% of the market in opportunities still remains, which means there are still significant growth opportunity for XIFAXAN in IBS-D or seeing that the IBS-D script growth. Finally, RELISTOR revenues grew by approximately 30% in the quarter versus the year ago.

Move over to Slide 20, as we mentioned earlier, we acquired TRULANCE from Synergy Pharmaceuticals during the first quarter. TRULANCE is a treatment for chronic idiopathic constipation and irritable bowel syndrome with constipation, with a number of competitive advantages including more patient friendly dosing and the lowest incidence of adverse reaction in the category. Salix now has an opportunity to establish the best in class IBS product portfolio on the market with the potential for leading products in both category XIFAXAN for IBS-D and TRULANCE for IBS-C.

We've also done an excellent job in increasing commercial coverage. In the first 30 days since the acquisition of TRULANCE, we have achieved the following: we added approximately 2.4 million covered lives across five regional plans; we increased the TRULANCE reach and frequency to call for high volume prescribers by more than 30%. And in the last four weeks data, TRx is about -- are up about 2.3% versus the previous four weeks.

With this in mind, we expect to generate approximately $55 million in TRULANCE revenue in 2019, and invest in the sales force advertising and promotion in R&D. To sum it up, our GI portfolio is well-positioned for growth and we believe TRULANCE has significant potential.

Moving on to Slide 20 (ph), Ortho Dermatologics. Let's start with some product highlights. First, SILIQ generated $5 million of U.S. sales in the first quarter and TRx scripts grew by more than 500% versus Q1 2018, albeit 2018 was early in the launch. ALTRENO which is the first formulation of tretinoin lotion for the treatment of acne had a great quarter with TRx scripts growing by more than three times in the first quarter versus the fourth quarter.

And in addition, we launched a new cash pay prescription model which is available through dermatology.com that offers improved and predictable fulfillment options for patients and prescribers. The initial feedback from healthcare providers is quite positive.

With organic revenue growth of 34% Global Solta, our medical aesthetics business delivered another strong quarter. Growth was driven by strong demand of Thermage FLX following the launch in Asia Pacific.

Finally, I want to provide an early read on BRYHALI which has experienced rapid uptake by dermatologists in the first four months since launch. The fact that we've been successful in changing prescribers trends in a highly generic sized market is very encouraging and speaks to the strength of the product attributes and our team in launching innovative new products that improve people's lives. And in terms of market access starting in June, BRYHALI will have approximately 50% commercial coverage which accounts for about approximately 90 million covered lives in the United States.

On the Slide 22, DUOBRII is now approved after a brief delay that we're planning to launch next month. We believe DUOBRII is well-positioned within a large and growing plaque psoriasis market, and has the potential to change how psoriasis is treated due to number of differentiating features. First, it's a unique combination; the first and only topical lotion combining halobetasol and tazarotene in one formulation. Second, DUOBRII provides an opportunity for a longer duration of use. Safety was established in a long-term study of up to 24 weeks of continuous use and up to 52 weeks of as needed use. Also DUOBRII has the potential to delay some patients from switching to more expensive biologic treatments, which could result in substantial healthcare savings.

Next is patient preference. More than 85% of psoriasis patients on therapy use a topical medication. Finally, expected coverage. We are laser focused on getting early access to commercial coverage and we are using the team's success with BRYHALI in setting aggressive goals. We expect to launch with approximate 30% of covered lives and expect that number would grow to around 75% of covered lives 12 months post launch. To sum it up, we believe DUOBRII has the potential to become a preferred treatment for adult plaque psoriasis patients based on efficacy, safety and affordability relative to other treatments.

On the Slide 23, I'm happy to report that all of the significant seven products have now been approved, and six of the seven have already been launched. Anticipated revenue growth is shown on the blue bar from approximately $75 million of revenue in 2017 to approximately $300 million in 2019. In the first quarter of 2019, the significant seven products' revenue increased by more than 125% versus the prior year quarter. We've also provided highlights in charts where you can see the progress each product is making in its respective market.

Slide 24 lays out our expectations for 2019. In summary, 2019 is off to a great start. Our new product launches, promising pipeline and focus on Project CORE have position the company to pivot to offence in 2019, and strong operational execution is leading us to raise our full year 2019 revenue and adjusted EBITDA guidance.

To review our expectations, we expect revenue to grow in 2019 versus 2018 at or above the midpoint of our guidance range and at current FX rates. Second, we expect to generate approximately $1.5 billion to $1.6 to billion of cash from operations, and we plan to use more than $1 billion of that cash to reduce debt and/or fund bolt-on acquisitions.

R&D investment is expected to increase by about 10% in 2019. Revenue generated by our Significant Seven product is expected to approximately double in 2019. Project CORE is expected to deliver more than $75 million of operating profit in 2019. And finally, we continue to expect a three-year CAGR from the midpoint of our 2019 guidance of 4% to 6% revenue growth and 5% to 8% adjusted EBITDA growth over the period from 2019 to 2022 on a constant currency basis and excluding TRULANCE.

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

Questions and Answers:

Operator

Yes. Thank you. We will now begin the question-and-answer session. (Operator Instructions) And the first question comes from Chris Schott with J.P. Morgan.

Chris Schott -- JP Morgan -- Analyst

Great. Thanks very much for the questions and congrats on the performance. I just had two questions really centered on gross margin. I guess, first of all, a little bit more color in terms of what drove the gross margin strength this quarter? And why we should be thinking about this kind of step down to that 71% to 72% range for the full year?

And the second question on gross margin as well as you mentioned, do you believe you can increase gross margins in 2020 and beyond? Just some more color in terms of the magnitude of gross margin improvement we can think about? And is this a business that over time could get to kind of mid-70s gross margins or are we talking about more modest improvements than that? Thanks so much.

Paul S. Herendeen -- Executive Vice President & Chief Financial Officer

Yes. Good morning, Chris. It's Paul. I'll take those questions. I mean, you know, much like I've mentioned, the variability of our effective, global effective tax rate, a lot of this has to do with mix, but I called out specifically that there was a fair amount of improvement that was associated with our Project CORE that involves eliminating SKUs that are kind of far below the line.

In terms of profitability, you know that over the period, the last couple of years now, we made a real effort and made a lot of progress in reducing our investment in -- overall investment in inventories which leads to lesser write-off, which leads to lesser scrap and such, and we just saw a very large impact of that flowing through in Q1 of this year.

You know, the reason why I called out that you know we expect it to be lower over the balance of the year is we expect it to be lower because we have a lot better visibility into what we expect on mix to be over the balance of 2019, and we didn't want people to get out ahead of themselves with respect to the assumption on gross profit margin in the full year 2019.

You and I have know each other long time, a lot of folks on the online, anytime you look it at a 90-day period comparing it back to another 90-day period, it's helpful, but the longer the period you look at the better, and at this stage we're guiding to 71% to 72%. And as I said in my remarks, probably in the top part of that because we got off to a very strong start.

Your question about, can this continue on to '20 -- into 2020 and beyond and where's the ceiling, there are certainly opportunities for us to continue improving. I think that we back -- well, it's been a while now, we back -- awhile back said we could probably get a couple of hundred basis points of improvement in our gross margin related to improvements in efficiency over a period of time. As I say, a wise man once said that you can forecast on the amount and time, but not both. We will continue to go through that process. It is a never ending process. Dennis Asharin and his team are on this. Joe, myself and a handful of others meet on this once a month. So, we think, we can continue to get improvement from improvements in efficiency.

Last safety tip on this, FX plays a role here. It plays a role that's not what drove us this quarter versus the prior year quarter, but it plays a role. We are a global company, we manufacture in a number of different currencies where the inputs are denominated in those currencies, and then we sell elsewhere based on local currency. So there is an impact with respect to how this gets recognized through our P&L regarding FX. But important points are we are making progress, we expect to continue to make progress. And don't get out ahead of yourself based on Q1. It was fortunate and I think we'll be in the upper end of that range for 2019.

Operator, next question.

Operator

Yes. Thank you. The next question comes from Gregg Gilbert with SunTrust.

Gregg Gilbert -- SunTrust -- Analyst

Thanks. First, Paul, on that FX comment, can you just factor or let us know what you're factoring in for the revenue guidance impact due to FX this year? That's a housekeeping question. The strategic question I have for you guys is, is about the Bausch division. There's a pretty striking difference between your company's valuation and that for other eye care comps, and obviously there are a lot of variables that affect that. But my question is are you willing to consider a separation of the B&L segment, if evaluation disconnect persists over time? And if you are willing to consider, can you walk us through the mechanics in the time that would be involved, so that we can envision something potentially tangible beyond just your willingness to consider it? Thanks.

Paul S. Herendeen -- Executive Vice President & Chief Financial Officer

Hey, Gregg. Good morning. It's Paul. I'll start with the easy one. Yes, the FX change that we saw from what we originally provided guidance in February was $30 million. You see it's on the bridge on Slide 15 of our deck. That number has been a little volatile over the course of last, yes, I call a week to 10 days. It moves around quite a bit. So we try to run it as of the last available day. It was -- it's minus 30 as we're sitting here now. I hope that answers the question.

Joe, you want to start off on the Alcon share question?

Joseph C. Papa -- Chairman of the Board & Chief Executive Officer

Sure. I think on the Alcon question, I think since Paul and I joined Gregg that we've always been looking to -- seeking to maximize shareholder value for our shareholders. We think that the Alcon business in the IPO shines a bright light on the value. They're trading at 20 times plus EBITDA, and obviously Bausch & Lomb, our eye care business represents our largest business segment.

So we do think it shines a bright light on this as to what happens for specifically in our business. I think what we're focused on right now is being laser focused on just increasing the value of this business, and as you saw with the quarter, significant growth, our highest growth for this business since the acquisition in 2013. And I think our goal always going to be over the long-term to maximize shareholder value. But I never really going to get into the specifics on any other options other than say we are today laser focused on just driving the value of this business over the near-term and long-term in terms of our total Bausch Health business, but specifically our Bausch & Lomb franchise.

Paul S. Herendeen -- Executive Vice President & Chief Financial Officer

You know, if I might, Joe, I want to follow-on on that because there are a lot of questions out there, you know now that there's some information out on Alcon, and trying to compare that to our B&L International segment. And I'd encourage you to do that. As Joe said, it does appear to be somewhat of a valuation disconnect between the way people think about our business versus the way they think about Alcon. There are reasons for that. And that's, as I say, this is why there are markets people value things in a different way.

If I just point out, we -- our segment presentation, and you look at our -- in the quarter for example our adjusted -- I'm going to go EBITA. I said I wouldn't say EBITA again, but I'm going to. EBITA as a percentage of revenue was circa 27% in the quarter. And comparing that to I believe that the last full year that Alcon reported, I think, they were something like 17%.

Now those numbers are not 100% comparable because they necessarily have corporate allocations and things that you have to have in place to be a stand-alone company. And what I would suggest as a financial analyst myself, I look at our business, and I say, you know, there's probably $20 million -- if you're looking at the quarter now, there is probably $20 million -- low $20 million type G&A that ought to be allocated to this business if we were stand-alone, beyond what we see in our quarterly -- in our quarterly results for the segment is probably $50 million of our unallocated -- well total R&D. So total R&D would be more like the '18 that you see plus another $15 million (ph). And if you put those two things in place to say we have an EBITA margin in our business of about 20%.

I think we called it out on the call earlier today, our business is growing nicely now that we've put a very solid team in place, and we think that the results for this segment may be a little bit under appreciated. This is a very, very good business. Yes, last time, as well continue on because we get the question a lot is people say, well, gee, what about that International Rx revenue that flows in there.

I will tell you that the net margin -- my net margin, so when you get down to EBITA as a percentage of revenue for that business is very similar to the balance of that B&L International segment results. And the second part about it is, I would say that the durability duration of those revenue streams if we continue as we have so far to invest behind them in terms of R&D has very similar economic characteristics to the balance of that business. So we like this segment. We like it a lot. And it's good for us that there's a viable comp out there that people can look at and say, well, how does this stack up relative to another competitor. So, thanks for the question.

Operator, next question.

Operator

Yes. Thank you. (Operator Instructions) And the next question comes from Umer Raffat with Evercore.

Umer Raffat -- Evercore ISI -- Analyst

Hi. Thanks so much for taking my question. Joe, just to clarify something you said earlier, and then I get to my question. Are you saying no to the idea of split or is it something you're not ready to address just yet?

And my question was back to your comment on volume-based growth, I guess one thing that I'm trying to reconcile is, in the Bausch division, the gross margin is up 250 bps year-over-year. So there's an implication, there's a pricing component to that. And yet you said it's all volume-based growth. So I'm just trying to reconcile the two especially also because a lot of growth came in the Ophtho Rx segment?

Joseph C. Papa -- Chairman of the Board & Chief Executive Officer

Okay. So on the first part of your question, I'm not trying to suggest anything specific into it other than that we are committed to maximizing shareholder value over the long-term and we will take a look at whatever we can do to deal with that question. On the specific question of Bausch & Lomb, our total growth in Bausch & Lomb was 8%, of which 7% was volume and 1% was price. So my commentary is, clearly the majority of the growth in our Bausch & Lomb franchise is driven by the volume at 7% of the total 8%. Does that answer that question?

Paul S. Herendeen -- Executive Vice President & Chief Financial Officer

Well, it's Paul, Umer. Let me come on, because that business is, that segment is comprised of the five different sub-segments. And yes when you look at -- clearly, when you look at Ophtho Rx, it was up 16%, and roughly the same internationally and within the U.S. Yes, we did get some price in the U.S., but the scale of that relative to the entire segment, it doesn't dwarf it. Joe, it's exactly right, and the way I articulated in my prepared remarks, it's 7% volume, 1% price across that segment.

Umer Raffat -- Evercore ISI -- Analyst

Thank you very much.

Paul S. Herendeen -- Executive Vice President & Chief Financial Officer

Operator, next question.

Operator

Yes. Next question comes from Louise Chen with Cantor.

Louise Chen -- Cantor Fitzgerald -- Analyst

Hi. Congratulations on the quarter, and thanks for taking my questions here. So first question I have was, do you have any update on your cash pay model in the derm business? And how that's progressed relative to your expectations? Any numbers you can put behind it would be great. And then my second question here is on MT-1303, the kind of trials it would take to get this drug approved where you are with those? And then how does your mechanism of action compared to ILs and JACKs, because there's a lot in development for INI? Thank you.

Joseph C. Papa -- Chairman of the Board & Chief Executive Officer

Okay. We're going to try to get each one of those. I'm going to start with cash pay derm model. First, I'm not going to share in a specific quantitative numbers other than what I would absolutely refer everyone to as go to dermatology.com, and you'll see exactly what we're doing. We think that what is the problem? The problem out there today in dermatology is that there's uncertainty over prior authorizations. There are expensive co-pays for patients. There's variable generic formulations.

And what we think we can do with our cash pay model is in one place ensure that patients get a predictable product, they get a predictable price point and they get predictable access, and we've -- if you look at it you'll see a product like ALTRENO. Our newest product is priced at $115 and versus what some of the co-pays are for generic formulations threat known. We think we're very well priced and we've got a great opportunity.

The initial feedback from the physicians, dermatologists has been exceptional. We really like what we're doing there in terms of getting a very predictable response. But I think it's probably little bit early to go into any specific numbers, but I would refer if you go to dermatology.com.

On the second part of your question, on the Mitsubishi Tanabe product, we are very early on that, but we do have a plan in place to look at what this opportunity is. We are making sure that as we look at the profile with this product, we do think there is an opportunity in a very inflammatory bowel disease, a very big opportunity there. We're looking at Crohn's using ulcerative colitis as two opportunities there. There was some initial data already in this category, but one that we think there's a chance here specifically an ulcerative colitis as an example that we think there maybe the S1P class products will give a good response based on at least the data we've seen, and specifically our product has a unique long half life. We believe it could provide a differentiated dosing opportunity especially in the maintenance in a remission setting. So look for us to have more comments on that as we bring forward that development program. Did I get all the questions.

Louise Chen -- Cantor Fitzgerald -- Analyst

Thank you.

Paul S. Herendeen -- Executive Vice President & Chief Financial Officer

Operator, next question.

Operator

Yes, thank you. And it comes from David Amsellem with Piper Jaffray.

David Amsellem -- Piper Jaffray -- Analyst

Hey, thanks. So just on TRULANCE, Joe, you said in the past that you're looking for, I guess, parity with lenses in terms of payer access. Can you talk about where you are now and where you expect to be later this year, and then how we should think about the gross to net on that product?

And then secondly, just thinking about overall strategy and acquisitions, are you looking at adding an EBITDA generating asset or assets, and to the extent that you are -- is that something where you would consider issuing equity or using the acquisition of a cash generating asset to issue equity, and potentially accelerate your deleveraging somewhat. Help us understand your thought process there? Thanks.

Joseph C. Papa -- Chairman of the Board & Chief Executive Officer

Sure. On the first question on payer access, we actually -- we like the position we are in. We think the most important thing to do is what we did in this first quarter already is driving additional regional plans to enroll additional players -- I'm sorry, additional patients into the marketplace by working with these regional plans.

As I mentioned on the call, we've already in the first 30 days added 2.4 million lives. But the real thing that we're doing right now on the access is to make sure that we'd have a good pull through model on the access. That's one of the things that we're looking for in terms of driving not only the access but just making sure that we pull through that program as we talk to physicians. The important way we're going to do that is improve reach and frequency. And as I mentioned on the call that's already happening just really in the first 30 days in terms of driving to reach frequency.

On the M&A side, I think we've had a lot of conversations on M&A and use of equity. I don't think we can ever rule out anything, but I think right now, we are focused on driving the EBITDA of our company to help us deliver the business, and we think that's the best way to overall delever -- drive EBITDA and that's what we're focus to doing. We think TRULANCE is a good example where we are going to do exactly that we acquired it for $190 million approximately. We will now develop that product grow at significantly from where it is today, and I think it's a classic textbook case of how we think in the long-term it will add to the value of Salix business and more importantly to help us delever.

Operator, our next question.

Operator

Yes. Thank you. And next comes from Dave Risinger with Morgan Stanley.

Paul S. Herendeen -- Executive Vice President & Chief Financial Officer

Dave?

Dave Risinger -- Morgan Stanley & Co. -- Analyst

Yes. Thanks. Sorry about that I am in transit. I have two questions. First, can you talk about the outlook for the LOTEMAX franchise? Obviously, you have a compelling line extension that was recently approved but you also face partial generic competition. It would be great to get your perspective on the revenue outlook for that franchise. And then second, if you could remind us about your free cash flow expectations for 2019? Thank you.

Joseph C. Papa -- Chairman of the Board & Chief Executive Officer

Okay. First on the LOTEMAX SM, we're delighted with what's happening already with the teams out there promoting the product within the 30 plus days of the approval. We already have, as I mentioned on the call, plus 40% commercial coverage, plus 40% Part D coverage which is quite extraordinary but the market access team and the business team led by Joe Gordon have done a really remarkable thing of trying to work with existing payers to make sure that we had access for the product, and that physicians understood the benefits of this product for patients.

As it would relate to the specifics of the LOTEMAX generics (inaudible) generic, we have not seen that launch yet. It is a little bit earlier than we expected to be clear, but yet it's to our knowledge it has -- I've not seen it in the marketplace yet. Should it come to the market, we will have our own authorized generic, but as of this time we have not yet seen it in the marketplace. So I think that was the LOTEMAX portion of the question.

Paul, do you want take the cash flow?

Paul S. Herendeen -- Executive Vice President & Chief Financial Officer

Yes, sure. And Dave where we started, I guess, was must mean last quarter with (inaudible) providing a range of expectations for cash generated from operations. Yes, that's a GAAP number, so it's after everything and we guided to our expectations for the year of about $1.5 billion to $1.6 billion. We also include within our guidance that kind of cash items that would degrade that or degrade, would be deducted from that number to arrive at a free cash flow number. And that those numbers, that's basically the CapEx plus contingent consideration milestones and license agreements restructuring and other that aggregate about $385 million based on our guidance today. So we have $1.5 billion to $1.6 billion minus that number. Point out that we did already also, we're thinking about free cash flow available for other things. We did deploy that $190 million of cash to do the Synergy, the acquisition of the assets of Synergy earlier this year, something I would -- one of my favorite phrase, I do that 100 out of 100 times.

Okay, operator, next question please.

Operator

Yes, thank you. It comes from Gary Nachman with BMO.

Gary Nachman -- BMO Capital Markets -- Analyst

Hi. Good morning. First, as you launch DUOBRII, how do you anticipate reimbursement and uptake will be relative to some of your other recent derm launches? Will you add any new reps to just reallocate the detailing efforts of the current derm team? And then Paul, how much flexibility do you have with expenses? Seems like you're scaling back SG&A a little bit relative to your initial expectations. Thanks.

Joseph C. Papa -- Chairman of the Board & Chief Executive Officer

Sure. So, let me start with DUOBRII. We are very excited about, we think, the opportunity for DUOBRII. We think actually it has an opportunity to really change the treatment paradigm because of the ability to use a high potency corticosteroid plus a retinoid. Together, it get -- there is a synergistic effect that actually even better than if you use it to imply them separately to the same skin. So we know we've got a very unique formulation that has some very unique qualifications, and we are really excited about what that means for patients in terms of improving the lives of patients. Because as I said in the comments, we know 85% of patients would prefer or use a topical dermatologic, that's why we think it's a great situation.

Specifically, as I've mentioned in the call, I want to give you the specific numbers. We said that we will launch soon next month at 30% of covered lives, and we expect that number to grow to about 75% of covered lives one year into the launch. On the question of adding reps, this is a thing that we already added the reps in 2018. So we are well-positioned for psoriasis and we believe that the actual incremental cost of selling is going to be minimal for the launch of DUOBRII. We think we've already got that under hand -- under way. Paul, do you want to take the SG&A portion?

Paul S. Herendeen -- Executive Vice President & Chief Financial Officer

Yes, sure. Gary, I hope I didn't give the impression we're scaling back or cutting back or doing anything, it's just a reflection of -- we guided to at the beginning of the year in February, we said $2.45 billion for a total of adjusted SG&A expense. We did not change that guidance, but sitting here at the end of Q1, we feel like for the balance of the year, we maybe -- maybe we'll be a little on the lower side of that versus the upper side of that. A lot of that is -- as the year plays out with the passenger time you get better clarity as to where you're spending, what you're spending, et cetera. And just we feel a little bit better about being perhaps a shade below that than a shade above that. We're not cutting back.

Operator, next question.

Operator

Yes, thank you. And it comes from David Steinberg with Jefferies.

David Steinberg -- Jefferies -- Analyst

Thank you. In terms of legal challenges, the companies have a lot of cases either dismissed or settled with favorable terms over the last couple years. Now just curious as you look at your portfolio challenges ahead, which are the ones that are most concerning to you that are riskiest? What sort of exposure might you have? And is there some sort of timeline that can give us in terms of resolution?

And then back to TRULANCE, you've obviously been pretty healthy first year guidance. Just curious if you would offer anything in terms of peak sales potential? And do you see TRULANCE as a product that's going to grow the market or will be more taking share from Amitiza and Linzess?

And then finally, in terms of marketing tactics, you know, Synergy had some very memorable television ads that the product didn't do that well. Are you also going to do some DTC for TRULANCE? Thanks.

Joseph C. Papa -- Chairman of the Board & Chief Executive Officer

Okay. So I'm going to try to get all of those. On the question -- first, on the legal challenges, first of all, Christina Ackermann and the legal team have just done an outstanding job in terms of resolving this litigation. If you think about some of the questions in front of us going back a couple of years ago just since the first quarter 2018 to-date, they resolved 80 individual cases, either resolve themselves, et cetera. And just even of that 80, there's actually 10 that were done just in the first quarter of 2019. So it's a great work there. Obviously, one of the most important cases that came and got resolved was an arbitration with Johnson & Johnson and ourselves on the question of Shower-to-Shower. Christina and the team have just done an outstanding job of resolving that.

On the question -- the second question was peak sales, potentially I'm not going to give any specific peak sales number, but we clearly think we can move from that 4% market share we have today that we illustrated in the graph to significantly multiples of that in terms of what's going to happen. And we do expect to grow the market. We don't view this as being something that we will simply be taking share. We do believe the market will grow as we have new therapies for treating IBS-C, especially we think there is an opportunity for growth.

And the final question of the direct-to-consumer, right now we are engaged primarily in winning the battle in the doctor's office. We want to be able to talk about why we have a product that has some significant dosing benefits for patients and that you can dose that with or without food. It's a once a day product versus one of the products being a twice a day product. And importantly it's got one of the best adverse side effect reaction, adverse reaction side effect profiles in these products. So we believe we can focus there, focus with physicians in the near-term, and the question of whether or not we do anything beyond that in terms of direct consumers, I think we'll just wait and see what happens there. But right now we're focused primarily on winning the battle in the physician office.

Operator, next question is probably our last question, please.

Operator

Yes, thank you. And that comes Irina Koffler with Mizuho.

Irina Koffler -- Mizuho Securities -- Analyst

Hi. Thanks for taking the question. Just wanted to touch base on the $300 million guidance for the Significant Seven. I know the DUOBRII has been pushed back to June launch. So you know maybe you can comment on which products are doing stronger than expected to get you to that number? And how confident you are in that number?

Paul S. Herendeen -- Executive Vice President & Chief Financial Officer

Sure. Well, first of all we are focused on all the Significant Seven. You're absolutely right. We did raise guidance for the year, despite the fact that we did have a short delay, if I could use the word short delay. But I will say that clearly the -- with DUOBRII, the clear opportunity we see our very strong performance in our Lumify products. We see strong performance in RELISTOR as being the key as to what we are doing already this year. But not notwithstanding that we are excited about all the seven products having them all approved, this is something we put forward in 2017. And now it have them all approved and soon to launch the DUOBRII with a label that we think is unsurpassed.

There is no product out there with a label like DUOBRII for the treatment of psoriasis, that is a high potency corticosteroid. We think that's very important for patients. We're really excited about that over the long term. So that really is where I would say that Significant Seven are going for us. We're excited, we look forward to it.

With that, let me wrap up the call. We look forward to seeing many of you at the conferences over the next six weeks. Thank you, everyone. Have a great day. Thank you for joining us.

Operator

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Duration: 59 minutes

Call participants:

Art Shannon -- Senior Vice President, Investor Relations and Global Communications

Joseph C. Papa -- Chairman of the Board & Chief Executive Officer

Paul S. Herendeen -- Executive Vice President & Chief Financial Officer

Chris Schott -- JP Morgan -- Analyst

Gregg Gilbert -- SunTrust -- Analyst

Umer Raffat -- Evercore ISI -- Analyst

Louise Chen -- Cantor Fitzgerald -- Analyst

David Amsellem -- Piper Jaffray -- Analyst

Dave Risinger -- Morgan Stanley & Co. -- Analyst

Gary Nachman -- BMO Capital Markets -- Analyst

David Steinberg -- Jefferies -- Analyst

Irina Koffler -- Mizuho Securities -- Analyst

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