Bausch Health Companies Inc. Q3 FY2025 Earnings Call

Greetings, and welcome to the Bausch Health Third Quarter 2025 Earnings Conference Call. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Garen Sarafian, Vice President, Investor Relations. Garen, please go ahead.

Good afternoon, and welcome to Bausch Health's Third Quarter 2025 Earnings Conference Call. Participating in today's call are Thomas Appio, Chief Executive Officer of Bausch Health; and JJ Charhon, Chief Financial Officer. Before we begin, I would like to remind you that our presentation today contains forward-looking information. We ask you to take a moment to read the forward-looking statements disclaimer at the beginning of the pages that accompany this presentation as it contains important information. Our actual results may vary materially from those expressed or implied in our forward-looking statements, and you should not place undue reliance on any forward-looking statements. Please refer to our SEC filings and our filings with the Canadian Securities Administrators for a list of some of the risk factors that could cause our actual results to differ materially from our expectations. Those documents, including the full cautionary statements are also available on Bausch Health's Investor Relations website. We use non-GAAP financial measures to help investors understand our operating performance. Non-GAAP financial measures may not be comparable to similarly titled measures used by other companies and should be considered along with but not as an alternative to, measures calculated in accordance with GAAP. You will find reconciliations of our historic non-GAAP measures in the appendix of the pages that accompany this presentation, which are available on Bausch Health's Investor Relations website. Finally, the financial guidance in this presentation is effective as of today only. We do not undertake any obligation to update guidance. Our discussion today, Wednesday, October 29, will focus on Bausch Health excluding Bausch + Lomb. However, we will briefly comment on Bausch + Lomb's results announced this morning. We will refer to year-over-year comparisons with the same period last year, unless otherwise noted. With that, I would like to turn the call over to our CEO, Tom Appio. Tom?

Thank you, Garen, and welcome to everyone joining our earnings call today. In the third quarter, Bausch Health, excluding Bausch + Lomb, delivered our 10th consecutive quarter of revenue and adjusted EBITDA growth, consistent with our strong performance this year. Our teams continue to execute with discipline and focus, driving operational and financial momentum across the business. I will start by providing some highlights from our third quarter results. In the third quarter, Bausch Health, excluding Bausch + Lomb delivered year-over-year revenue growth of 7% on a reported basis and 5% on an organic basis. We achieved 7% adjusted EBITDA growth for Bausch Health, excluding Bausch + Lomb, which included an $81 million charge to acquire R&D. Excluding this charge, our adjusted EBITDA grew 18%. We reduced our debt by approximately $600 million using cash on hand and as a result of our strong performance in the first nine months of the year, we are raising full year guidance for revenue, adjusted EBITDA and adjusted cash flow from operations for Bausch Health, excluding Bausch + Lomb. I am pleased with how our teams have navigated through a dynamic macro backdrop embodying the culture of accountability and urgency that defines Bausch Health. Across our global platform, we saw traction in many areas. Consolidated Bausch Health as well as Bausch Health, excluding Bausch + Lomb, both achieved year-over-year revenue growth of 7% on a reported basis and 5% on an organic basis during the quarter, showcasing the consistent strong performance across the enterprise. Focusing on Bausch Health, excluding Bausch + Lomb at a segment level, we saw excellent double-digit growth in our Solta and Salix businesses. Solta saw a 25% growth on a reported basis and 24% on an organic basis while Salix delivered 12% growth on a reported basis and 11% growth on an organic basis, two key growth areas that continue to deliver outstanding results. At the product level, we continue to see healthy performance across our diverse portfolio with notable results in our hepatology, dermatology and neurology offerings. We saw triple-digit growth for Cabtreo and Ryaltris as well as double-digit growth for Xifaxan and Thermage. Overall, we continue to demonstrate strong operational performance in the third quarter, and we are well positioned to execute on our strategic priorities as we close out this year and move forward to 2026. With that, I will pass it over to JJ to discuss our financial results in more detail before I conclude our call with BHC's progress against our key strategic priorities. JJ?

Thank you, Tom. Let's first turn to our consolidated performance, starting with our non-GAAP financial results for the third quarter, which you will find starting on Page 9. Revenue was $2.681 billion, up 7% on a reported basis and 5% on an organic basis compared to the same period a year ago. Adjusted gross margin was 72.7%, 40 basis points lower year-over-year. Adjusted operating expenses were $1.024 billion, an increase of $41 million compared to the same period last year. Adjusted EBITDA was $986 million, an increase of $77 million or 8% year-over-year. Finally, adjusted operating cash flow was $508 million. Moving now to the performance of Bausch Health, excluding Bausch + Lomb for the third quarter starting on Page 11. The third quarter marked another period of strong performance. As Tom mentioned, Bausch Health, excluding Bausch + Lomb, achieved its 10th quarter of consecutive year-over-year revenue and adjusted EBITDA growth. Revenue was $1.4 billion, up 7% on a reported basis and 5% on an organic basis when compared to the third quarter of 2024. Adjusted EBITDA was $773 million, up 7% versus the prior year and included a charge of in-process R&D of $81 million related to our acquisition of DURECT. Excluding that, our adjusted EBITDA increased operationally 18% year-over-year, which was outstanding. Finally, adjusted operating cash flow of $347 million was only 1% up versus the third quarter of 2024 due to timing in working capital. Moving now to our third quarter performance by segment, starting with Salix on Page 12. Revenues were $716 million, an increase of $74 million, up 12% on a reported basis and 11% on an organic basis compared to the same period last year. Salix strong performance in Q3 was primarily driven by two factors. First, our continued Xifaxan volume growth. And second, some one-time net pricing favorability associated with our Medicaid and 340B channel exits. More specifically, Xifaxan revenue grew 16% in the third quarter, with volume up 9%. The AI-driven customer insights engine has been a significant contributor to the overall and new patient script growth, which were, respectively, 9% and 11%, a remarkable accomplishment for a drug, which has been on the market for its OHE indication for the last 15 years. Separately, Trulance volume grew 5% in Q3, which was more than offset by unfavorable net pricing headwinds in the quarter. Finally, Relistor continues to face a challenging payer coverage environment, yet we remain optimistic that the brand will soon return to growth. Now moving to the International segment. Revenues were $286 million, a decrease of 2% on a reported basis and 4% on an organic basis compared to the third quarter of last year. Performance by geography was mixed. EMEA led the segment with a 12% increase on a reported basis. Canada and Lat Am, on the other hand, contracted respectively 8% and 17%. In Canada, the performance of our promoted portfolio grew 21%, which was more than offset by the reduction of our LOE portfolio, which benefited in Q3 of 2024 from the nonrecurrence of Wellbutrin orders due to generic stock outs. Lat Am's performance, on the other hand, was primarily due to continued market softness in Mexico. Now moving to Page 14 for a review of our Solta Medical segments. Revenues were $140 million, an increase of 25% on a reported basis and 24% on an organic basis compared to the same period last year. Solta's performance was primarily driven by the Asia Pacific region, which continues to contribute approximately 80% of global Solta revenue. Within the APAC region, South Korea, again outperformed all other markets with an impressive 96% growth year-over-year. China, on the other hand, grew only 3% in Q3. This was primarily attributable to aesthetics consumers adopting a cautious behavior given the uncertainty surrounding the macroeconomic environment. Outside of Asia, on another positive note, we are encouraged by our double-digit growth in the U.S., EMEA and Canada following our commercial investments in these geographies. Turning now to our diversified segments, which you will find on Page 15. Revenues were $258 million, a decrease of 4% on a reported basis and 6% on an organic basis compared to the same period last year. The diversified segment's performance was largely driven by our neurology business. This quarter, year-over-year growth in neurology was impacted by the expected nonrecurrence of prior year orders from temporary generic supplier shortages for Cardizem in Q3 of last year. Separately, the performance of our dermatology segment was driven by Cabtreo and Jublia, which grew revenue, respectively, 186% and 11%. Finally, Bausch + Lomb revenues were $1.3 billion, up 7% on a reported basis and 6% on an organic basis compared to the same period last year. Before wrapping up with our financial priorities, let's review our full year guidance, which you will find on Page 19. Our outstanding performance for the first nine months with revenue and adjusted EBITDA, excluding acquired IP R&D growing respectively, 6% and 14% has put us in a position where we will raise guidance across all our three metrics: revenue, adjusted EBITDA and adjusted operating cash flow. The new guidance for the full year is now as follows: Revenue is now expected to be between $5 billion and $5.1 billion. The midpoint of that range has been increased by $25 million and translates to a 4% increase year-over-year. Our adjusted EBITDA outlook is now expected to be between $2.7 billion and $2.75 billion, excluding the impact of core IP R&D. The midpoint of that range is now increased by $50 million and represents a 7% increase versus 2024. Adjusted operating cash flow is now expected to be between $975 million and $1.025 billion bringing up the midpoint of that range by $150 million. Before I turn it over to Tom for his wrap up, let me review our financial priorities, which remain unchanged. First, increasing the value of Bausch Health operational assets, whether it is our acquisition of DURECT or the operational performance during the first months of the year, continuing to execute our innovation and profitable growth agenda remains top of mind for all leaders of Bausch Health. Second, evaluating all options for unlocking value for all stakeholders. The $7.9 billion refinancing transaction we closed earlier this year has provided us with expanded optionalities for maximizing the value of our Bausch Health and Bausch + Lomb assets. We're now assessing all initiatives for driving shareholder value creation. And third, continuing to optimize our capital structure. As we indicated earlier, we retired over $600 million in senior unsecured notes and have eliminated in October our high-cost accounts receivables facility. Moving forward, we will continue to look at all options to improve our maturity profile, provided, of course, it is in the best long-term interest of the company. In short, we are proud of the progress we have made in the last nine months and look forward to closing out 2025 on a strong note, as evidenced by our improved full year guidance. I will now hand it back to Tom.

Thank you, JJ. We made progress in the third quarter on multiple fronts in support of our five strategic priorities: people, growth, efficiency, innovation and unlocking value. These remain central to our culture, lay the foundation for our strategy and guide our vision for the future. Additionally, we are growing the business with the discipline required to achieve our financial targets, taking all capital allocation priorities into account, including deleveraging. With that in mind, I'd like to take a few minutes to highlight the progress we are seeing against these priorities. Xifaxan growth continued to accelerate through 2025. In Q3, the growth was broad-based, driven by both volume and price and across all indications. Our largest indication for Xifaxan, overt hepatic encephalopathy, OHA had an 8.2% increase in total prescription volume in Q3 over prior years. IBS-D increased 15.4% over the prior year. This growth was driven by innovation in marketing and operational excellence that is core within our U.S. pharmaceutical commercial engine. Starting with marketing. In Q3, we doubled our media investment in high-return addressable and connected TV, launching a new 'I Wish I Knew' campaign for OHA. Providing important educational information directly to patients and caregivers on the impact that cirrhosis can have on the brain, which is an important driver of patient action often resulting in prescription given that Xifaxan is the only product approved to reduce the recurrence of OHA and prevent rehospitalization. Direct-to-consumer advertising combined with continuous improvement and enhanced capabilities in our AI customer insight engine enabled us to directly target and activate patients, caregivers and healthcare professionals in Q3. Our laser focus on driving new patient starts resulted in 71,000 new patients being started on Xifaxan in Q3, an increase of 14% in Q3 over the prior year. Year-to-date, 196,000 new patients have been prescribed Xifaxan. This quarter marks the seventh consecutive quarter of top-line organic revenue growth in our Salix business, and we will continue to maximize its growth. Turning to our dermatology business. In January 2024, we launched Cabtreo, the first and only triple combination in one topical application for acne. The launch has progressed well. Earlier this year, Cabtreo became the #1 prescribed topical branded acne product in new brand patient starts. 10,000 HCPs have prescribed Cabtreo from launch to date with 105,000 new patients prescribed Cabtreo year-to-date, up 69% over the prior year. Turning to our aesthetics business. Solta, we have made excellent progress driving new opportunities for growth in this business. Solta is a global leader in medical aesthetics that operates a portfolio of trusted brands with a leading presence in South Korea and China. While each market is unique, we see significant white space across the region and expect to further strengthen our reach across our footprint. During the third quarter, Solta delivered exceptional results with another quarter of double-digit growth in our leading aesthetics portfolio. Revenue grew by 25% on a reported basis across multiple regions, led by South Korea, which nearly doubled year-over-year. This growth was supported by robust domestic demand complemented by high levels of medical aesthetics-related tourism to the region in recent years. Beyond the strength in the Asia Pacific region, we achieved double-digit growth in the U.S. and European markets. We remain optimistic about Solta's premium positioning as a driver of future growth and are encouraged by another quarter of solid growth outside the Asia Pacific region. Building on this momentum, earlier this year, we received medical device licensing clearance for Thermage in Canada as the fourth generation of radio frequency technology. The Thermage platform has been relied upon for over 20 years by providers and patients. We also reached a key milestone. Our Thermage nonsurgical treatment technology has now been used to perform more than 5 million skin tightening and smoothing treatments worldwide. Additionally, in Korea, Thermage has now surpassed the 1,000 unit installed base milestone, which is a significant achievement. These successes underscore our belief in Solta's growth potential and may position us to capitalize on the opportunities ahead. We launched Fraxel FTX this past April, beginning the rollout of our leading skin rejuvenation treatment for dermatologists, plastic surgeons and other licensed aesthetics professionals across the United States with global expansion planned in the pipeline. While it is still early days, we are pleased with Fraxel momentum in the U.S. This expands our Solta portfolio and presence in key growth geographies and we anticipate it will contribute to the strength and breadth of our aesthetics business. In summary, Solta had a terrific quarter, and we continue to invest in our clinical programs and R&D innovation to deliver long-term growth. Underscoring our commitment to innovation, we closed our acquisition of DURECT Corporation on September 11, 2025, and the addition of DURECT complements our existing portfolio, enhances our R&D pipeline and is consistent with Bausch's efforts to focus on areas of strength for innovation to drive future growth. Since then, we have been working seamlessly integrating DURECT into the Bausch team. Our portfolio now includes DURECT lead asset larsucosterol, a novel epigenetic modulator with FDA breakthrough therapy designation for treatment of alcohol-associated hepatitis or AH in Bausch Health's hepatology pipeline. Currently, there are no approved therapies indicated to treat AH, and patients must rely on supportive care such as corticosteroids which are often inadequate for long-term treatment, resulting in about 30% mortality within 90 days of hospitalization. Our registrational Phase III program is currently planned to evaluate the safety and efficacy of larsucosterol for the treatment of patients with severe AH. It is important to recognize that this is a global opportunity, and we are initially pursuing the U.S. market to replicate the region's success in Phase II. Our team is working diligently to finalize the Phase III protocol with a goal to initiate the study by early 2026. We are excited about the addition of larsucosterol to our R&D portfolio and look forward to updating you through the development and commercialization process. DURECT is an important addition to our hepatology portfolio that supports our innovation and growth priorities while also leveraging Bausch Health's existing expertise in development and commercialization of assets. Now turning to RED-C which we believe could be a next-generation treatment to delay and prevent the occurrence of overt hepatic encephalopathy. We remain on track with our two global Phase III studies, and we expect to see initial data readouts by early 2026. Our hope is that RED-C may offer this patient population a therapy to slow disease progression and provide a meaningful clinical benefit addressing a significant unmet need and bringing a novel therapy to cirrhotic patients on a global scale. Bausch has a history treating liver disease and providing patients with innovative treatment solutions, which we hope to continue and expand upon with DURECT and RED-C. In summary, we had another standout quarter. I want to thank our teams around the world for their dedication and hard work in driving these results. Our focus on disciplined execution against our strategic priorities and operational excellence will enable us to continue to deliver tangible results and long-term value for shareholders. With that, we will now turn to questions. Operator, please open the line for Q&A.

The first question today is from Leszek Sulewski from Truist Securities.

First one, it appears the revenue growth for Xifaxan is outpacing the script growth. So first, can you touch on the disconnect there? Is it backed by a greater focus on commercial plans and direct-to-consumer initiatives? And then second, can you talk to which channel is mostly driving the overall script growth? Is it the primary care side? And how durable is this growth profile as we kind of look out for the end of the life cycle management for the asset? And then I have a follow-up.

Les, this is JJ. I’ll address your pricing question first. As I mentioned in my prepared remarks, Xifaxan experienced a one-time increase related to the gross to net accrual typically reflected on the balance sheet due to the inventory held by our distributors following our exit from 340B and Medicaid. The weighted average of that gross to net has shifted, which contributed to an apparent increase in pricing. Generally, Xifaxan's pricing grows in the mid-single digits year-over-year, so you can expect that trend to continue. On the volume side, we are seeing balanced growth across all channels. New patient starts remain strong, which we are pleased about. Additionally, our AI-driven system that helps us optimize our call points is yielding benefits as we work on fostering script growth overall.

Yes. Les, I want to add that from a channel perspective, the total TRx growth was 9% in the quarter. Non-retail extended units grew by 20%. Looking at total extended unit growth, it's 11%. The new-to-brand metric, which we are closely monitoring, is at 14%. This indicates a significant influx of new-to-brand patients for Xifaxan in the third quarter, and our primary focus this year has been to drive new-to-brand growth. Our investments in direct-to-consumer marketing and our artificial intelligence engine are targeted toward this goal. Do you have a follow-up?

Yes. That is helpful. Okay. So as we're getting ready for CMS to disclose the final pricing from IRA price negotiations. Perhaps maybe give us a little bit of a sense of where Xifaxan lands and the script trends for tied to Medicare Part D. And any sort of commentary that you could provide, how receptive has CMS been to your challenges, specifically given OHEs and orphan indication and the LOE component to the assets?

Yes, Les. So what I'll say is that the negotiations, as I've said on previous calls were ongoing. The discussions have been fruitful and a good exchange of information between the company and CMS. As I said on previous calls, we did not think that we should have been on the CMS list, but we were and our market access team has worked really hard working with CMS. So negotiations have concluded. We are expecting that CMS will publish their agreed pricing on November 30, 2025. In terms of the overall impact, I'll pass that to JJ.

So as we mentioned during our previous call, the CMS impact was combined with a number of mitigation strategies across all of our portfolio to reduce the impact that this would have on our financials. And while the impact obviously on Xifaxan is significant, 30% of our volume goes through Medicare Part D. The only indication I would provide at this stage is we still are assessing the final impact on our business moving forward is that when you look at our business across all segments, including the CMS impact, it's probably fair to assume that the average EBITDA over the next two years will not be materially different than what we're providing in the outlook and the revised guidance. And I just want to clarify what I mean by that. If you take EBITDA in '26, '27, you take the average of those two numbers. You shouldn't have a materially different number than what we have for the outlook of '25.

Your next question today is coming from Umer Raffat from Evercore ISI.

Congrats on the quarter. This is JP for Umer Raffat. First question, regarding MFN, are you planning or negotiating anything related to manufacturing in the U.S.? What is your exposure there?

Yes, I can take that question. As you know, we have our footprint around the world when it comes to manufacturing is regionally based. So where we produce our products is where we sell in the U.S., of course, Xifaxan comes out of Canada. Right now, the way our manufacturing footprint plays out. There is no plan at this time. However, we are open to continuing to take a look at it as new products come into the portfolio.

Let me just add a couple of elements to that for Xifaxan specifically, it's a single active ingredient product. And so therefore, country of origin is considered to be Italy. For all the other products is typically in U.S. pharma coming mostly from Canada. Both EU trade agreements currently and obviously, the EUMCA excludes former products from those tariffs. So at this point in time, there is no material tariff that are imposed on our fund flow or the flow of our products. Obviously, that could change in the future, but that's where we are right now.

Operator, any more questions?

The next question is coming from Jason Gerberry from Bank of America.

This is Chi on for Jason. I have a couple. Maybe the first one is on the revised guidance. So you saw strength across multiple pharma sets this quarter, but yet you're only taking up the lower bound of the top line guidance by 1% and 50 bps at the midpoint. Can you just talk about that? Are you seeing one-timers in 3Q that you want to expect to carry forward in 4Q? I know you've just talked about the gross to net dynamic with Xifaxan. But are you seeing one-time elsewhere? What about Jublia and some of the other legacy brands in neuro and dermatology? And I have a couple of follow-ups after that.

Yes. So just to reiterate, we got some one-timers in Q3 in the form of an adjustment of our gross-to-net rebates associated with our inventory in the channel. And we had anticipated a good proportion of that. And the fourth quarter is roughly in line with our prior expectations. I think on the size of our business is not a material change, but still reflects, I think, the positive trend that we're seeing across the portfolio. As you can see, our increase in guidance is greater for EBITDA and cash flow, which reflects really a change in assumptions about how we're thinking about our free cash flow conversion.

And my second question is about the P&L. This quarter's SG&A spending is below the average rate over the past five quarters. Is there any seasonality affecting the SG&A spend this quarter? How should we consider the SG&A run rate moving forward? Should we use the second quarter balance or the third quarter balance as a better indicator for the future run rate?

Yes. 3Q is unusually low. There's been some changes to accruals that we processed in the quarter that are nonrecurring. So I would certainly look at the first couple of quarters in a better indicator of our SG&A spending.

And then just another one for me on the pipeline. You mentioned you're going to have Phase III results for RED-C early next year. Are you planning a concurrent readout for both Phase II and early 2026? And I think I heard the commentary framing that the data will be early initial. I just want to confirm this is the final Phase III top line that will have the final results in early 2026, and once you have the results, do you expect you need more data before you can go to regulate this potential filing should the study be positive?

Yes, I can answer those for you. As you know, we have two global Phase III studies that are fully enrolled. We decided to have the readout of both trials together. Considering the patient populations and geographies involved, we thought it best to combine them and share the results in the first quarter. This will be our final readout for this very important program.

Do you have any expectation or how would you frame what would be a successful outcome of the trial? Is it just needing the primary endpoint? Or is there more to it?

When I look at RED-C, it's a prevention trial, and there's a lot of important information there, including the primary and significant secondary endpoints. It's too early to comment on those. However, as I mentioned before, this program involves a large number of U.S. adults with cirrhosis who have never had OHA, presenting a potentially substantial opportunity for us. We will see what the data indicates as we await the results.

Next question is coming from Dennis Ding from Jefferies.

Congrats on the quarter. The I follow up with IRA that what would you think about the dynamics for the commercial spillover, and by the way, I'm Liwen Wang for Dennis Ding.

Just could you be more specific about what your question is?

The IRA. The Xifaxan, like the commercial spillover.

Yes. The only thing I would say, Liwen, is that this impact or this renegotiation really only affects 2027. It doesn't change the commercial dynamics per se; it just alters the discount that will be provided to the volume of the drug going to CMS for the Medicare Part D program.

Got you. And can I follow up with what do you think about the erosion curve with the generic for 2028 plus?

Go ahead. What we have guided in the past is that you should assume a typical erosion curve for multiple generic entry in 2028. So nothing unusual, I would expect. But obviously, it's all speculative at this stage.

Next question today is coming from Michael Nedelcovych from TD Cowen.

I have a couple actually. The first one just a couple of points of clarification. In response to an earlier question, did I hear correctly that you suggested 2026 and 2027 EBITDA is expected to be flattish versus 2025?

No. What I said is that if you combine '26 and '27 together, the average of those two years would be similar to 2025.

Okay. Okay. And that's across the business. That's not specific to the IRA impact?

Correct.

Got it. And if I may, one more question on Xifaxan and it's a follow-on. Do you know what proportion of prescribers of Xifaxan that use it to treat hepatic encephalopathy are hepatologists versus gastroenterologists? And how might that split change for rifaximin SSD if RED-C is successful and that product is launched for AG prevention?

Yes, I don't have the specific split. We look at it in terms of gastroenterology and hepatology, which is why we refer to the franchise as gastroenterology. I can provide the exact split after the call. When we examine the opportunity, it's important to note that this is a different product related to our program with RED-C, which we call SSD. Looking at the patient population, there are approximately 650,000 adults in the U.S. with cirrhosis who are treated with OHA, and 1.9 million with cirrhosis who have never had OHA. This is how the opportunity presents itself to us.

Got it. And if I may, one more question on RED-C. When we get the initial top line data, what is the likelihood that we also see the all-cause mortality data? Would that be mature as well? Or might we at least expect an initial data cut?

Yes. When we look at the initial data, as I said on the previous question, the primary endpoint and then there's a very important secondary endpoints. So we'll be looking once we get the data, providing it in totality, both from primary and secondary.

Our next question today is coming from Doug Miehm from RBC Capital Markets.

Yes. Just with respect to those accruals, would you be able to expand on those that impacted this quarter? I know you indicated that we should use Q1 and Q2 as a guideline for SG&A. But how did they specifically arise?

It's just estimates of liability that we were thinking of incurring associated to prior fiscal that we had to adjust in the third quarter. They kind of roughly offset with the IP R&D that were recorded, obviously, as a result of the DURECT acquisition. So that's why I think Q1 and Q2 is a little bit cleaner from a run rate perspective.

Okay. And then with respect to capital allocation, as you think about the next couple of years, you've given helpful guidance with respect to, I believe, that the EBITDA, '26, '27, the average versus this year, et cetera, et cetera. But can you speak to cash flow in those two years as well and how that cash flow is going to be apportioned or used to pay down debt? And I'll leave it there.

Yes, we will give more detailed guidance on cash flow related to 2026 when we release our fourth-quarter results. We aimed to give some directional insight into how 2026 and 2027 will perform due to CMS and other factors in our portfolio. Our capital allocation strategy remains unchanged: first, we prioritize servicing our debt and reducing leverage; second, we reinvest in the business as it aligns with our strategy; and last, if there are excess funds, we might consider returning capital to shareholders. However, our primary focus is on the first and second priorities.

Next question is coming from Michael Freeman from Raymond James.

JJ, I wonder if you could guess through the thought process that led to Bausch Health's decision to cease participation in the 340B program in the Medicaid drug rebate program.

Yes, Mike, I can address that question. We continually assess ways to optimize our sales channel across all markets, including the U.S. After our evaluation, we concluded that it would be in the best interest of the company and patients to exit Medicaid and the 340B channel for all products marketed in the U.S. as of October 1. We decided to enhance our patient assistance program to ensure that care remains accessible, allowing eligible Medicaid patients to access a wide range of Bausch Health medicines at no cost, according to the program terms. The benefits for patients compared to Medicaid include an improved patient assistance program with no out-of-pocket costs and 90 days of treatment, while Medicaid only offers 30 days for each prescription. We believe this approach will significantly improve the patient experience and also benefit the company.

And just following on that. I wonder if you could describe the patient benefits. Well, I wonder if you could describe benefits of the company and any benefits beyond that sort of one-time we saw with accruals.

As I said, we're always looking at different sales channels and how to optimize them. And there are benefits as we've looked at. I'm not going to get into the specifics. It's early days since October 1 and how each of these benefits flow through and what it will look like.

We have consistently stated that there are two main ways to reduce the company's debt. The first is the free cash flow generated by operations, which will likely remain at a similar level for the next few years until we lose exclusivity on Xifaxan. This must be complemented by one of three sources: a new equity raise, which would be highly dilutive at our current share price and therefore unlikely to happen unless absolutely necessary; capturing some of the remaining discount on our debt, which has already traded back up and now has minimal discount left; or proceeds from asset sales, either from BHC or B+L. The B+L equity stake makes the most sense as it is not tied to any EBITDA generation for BHC, making it the most likely solution for our deleveraging needs in the near future.

We reached the end of our question-and-answer session and our earnings call. I'd like to turn the floor over back to our CEO, Tom Appio, for closing remarks.

Okay. Well, thank you all for joining the call today and for your continued interest and support of the company. We remain committed to executing against our strategic priorities and focus on unlocking value. We appreciate your ongoing engagement and look forward to sharing further updates with you on the progress to close the year. Thank you, and have a good evening.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.