Bausch Health Companies Inc. (BHC) Earnings Call Transcript & Summary

Okay. Good afternoon, everybody. I'm Chris Schott from JP Morgan and very happy to be hosting Bausch today. We're going to be going through a fireside chat format. And from the company, we have Joe Papa, company's Chairman and CEO; Paul Herendeen, CFO; as well as Scott Hirsch, Chief Business Officer. So I thought we're going to do the fireside here. We're going to go across the hall for the breakout.

But maybe just to kick off, Joe, maybe a bigger picture question here. 2019, busy year for the company. Just walk through some of the highlights as we think back on last year for providers?

Sure, Chris. First of all, pleasure to be here. Happy New Year, everyone. 2019 was a good year for us in terms of -- busier, as you absolutely said. It was just a year ago that we kicked off the -- our campaign for pivot to offense. And that's really what 2019 was all about for us. In terms of -- as we approach pivot to offense, it was how could we grow organically. And indeed, we've now shown 7 consecutive quarters of organic growth. So clearly, that's a big part of what we talked about often. The other part of it, though, was how could we drive long-term shareholder value? And we had some success in doing that. But importantly, also, where were the opportunities for us to bolt on some products that we felt could help grow our core businesses, both in the Bausch + Lomb eye health business but also in our Salix gastroenterology business. And all of that came together very nicely. I think we did about approximately 6 different bolt-on transactions when we acquired the TRULANCE product, the dolcanatide product firms. That was clearly one. We acquired amiselimod. So a number of different products, we were able to bolt-on, which we think gives -- absolutely aligns with our story about pivot to offense and what we tried to accomplish. And so we're really excited about what 2019 was all about, pivot to offense. And now as we look to the future, we're all about being an eye health company, a 20/20 Vision.

There we go. I like that. So on your 20/20 Vision, maybe just talk about within each of the divisions, what we should be most focused on as we head into this year for the company?

Sure. For us, when it comes to 20/20 Vision, it's really more about what we've talked about in the past, continuing to invest in the business and grow organically is clearly front and center of what we're trying to accomplish. Number two, it's always going to be about our new products. It's -- we always have the phrase, "What's it all about?" It's about new products, new products, new products, continuing to invest in those new products, both from an R&D point of view to get them to the marketplace but also the success in them. We're really excited for 2020. We're going to launch in the United States, our silicone hydrogel -- daily silicone hydrogel product. We think that's going to be an important advance for us relative to the marketplace. It's one of the fastest-growing parts of the market. We don't -- we have a monthly there but we don't have a daily. We're going to launch that daily. We think that's a big opportunity for us. Other things that we're looking at, clearly, continued success in VYZULTA. A product we have in the derm business called DUOBRII, which we think is a game changer when it comes to our ability with DUOBRII to approach the psoriasis patients with a new way of treating their psoriasis. Heretofore, if you had a psoriasis, you often used a high-potency corticosteroid, but you had a certain limitation about how long you can use the product. With DUOBRII, we now have a product that allows you to treat to clear. That's a major change. And importantly, managed care is absolutely looking at that and saying, "We get it." We can take the cost of treating a biologic patient from ballpark $50,000, $60,000 a year down to less than 1 -- on order of magnitude of that. So that's clearly, we think, a big, big opportunity for us in 2020. And we're really excited about. And clearly, it's going to be the continued strong growth of our XIFAXAN, our largest product, we think is a great opportunity for as we go after the IBS-D category. Interesting statistic is that in IBS-D, there's about 12 million prescriptions written annually for the treatment of IBS-D, and therefore, antispasmodics, antidiarrheals, things that just mask the symptoms. We've got a way to treat that patient with IBS-D with XIFAXAN that we think could potentially, through an episodic treatment of a couple of weeks, cure the patient. That's really, we think, really exciting, getting a lot more opportunity for our XIFAXAN product.

Great. Great. And maybe a question for Paul. You put out 3-year CAGRs, revenue 4% to 6%, EBITDA 5% to 8%. Just walk through how Bausch is going to be able to achieve those targets and level of confidence in that type of growth for the business.

Yes, sure. And look, this is a really, really good question because after we had our Q3 call, people are starting to, obviously, focus on what year 2020 looks like relative to 2019. So people -- it's a very, very timely question. First, let me set the stage. Beginning part of this year, back in February, when we provided guidance for '19, we said midpoint of our guidance ranges. For revenue and profit, we said we could grow revenue 4% to 6% CAGR over 3 years and then adjusted EBITDA 5% to 8% over 3 years. Those numbers were -- middle of the range was $8.4 billion for revenue, $3.425 billion for adjusted EBITDA. Why did we do that? Well, we originally started providing longer-term revenue and profit guidance because we wanted people to have some guidelines as to kind of where we were trending, both with respect to revenue and profit. Because back several years ago, there was a pretty wide divergence of where analysts had us, whether they were too high, too low. And now with all the information that we had out there, we said, "Look, there's a lot of information. Let's make sure we provide some guidelines." So first, let me answer the question. We have that guidance out there. We obviously are committed to that guidance. Now how do you get there, particularly thinking about like what does 2020 look like? They say, well, 2 points. One, it ain't linear. It is not linear. And part of that is you think about 2020 relative to 2019, we talked about on our Q3 call, there's a couple of things, there are a little bit of headwinds for us in 2020 that we'll work our way through. We, of course, expect to grow. But I expect the growth in 2020 will be below that trajectory. But then we'd see an acceleration in '21 v '20, and then '22 v '21. So where does that come from? And Joe has touched on some of this in his opening remarks, it's all about new products. We've got a number of products that are recently launched that are still in significant growth phases. And those are -- I can -- I'll try to tick them all off. If I miss one, somebody will elbow me, BRYHALI, DUOBRII, SILIQ, RELISTOR, Daily SiHy, LUMIFY, VYZULTA, I think I got all the ones that are launched and in growth phase. So those are in growth phase. But then in addition to that, you have a number of other franchises that are growing quite nicely. For example, our largest franchise is XIFAXAN. XIFAXAN has had spectacular growth. And that's not by accident. It's fundamental, driven by excellence in execution in our Salix unit. And it's grown nicely and we expect XIFAXAN to continue to be able to grow. Again, thinking about '19, '20, '21, '22, some good growth there. We've added TRULANCE into the mix, also awesome. Unbelievably, even within our Bausch + Lomb business, generally that's a business that can grow. And we've said this fairly consistently kind of a mid-single-digit grower over the long haul. When you start to strip away the unfortunate enduring impact of these LOE assets, it's kind of good news, bad news. We got the revenue, we got the cash flow. It's all good, except it sets up for a bad comp from a growth perspective. As you start to put those in the rearview and we are doing that in 2020, the underlying performance, the growth performance of many of our key franchises will come out. And that's why we provided that guidance.

Makes sense. I think you mentioned 2020 a year of growth. Is that -- should we think about revenue and EBITDA growth is, I know, you don't give specific numbers, but...

Good try there, Chris, but I'm not going to provide guidance today. But I do want to just emphasize on '20 because we did provide a lot of this information on our Q3 call, if you didn't listen. It's the -- transcripts available and all. But yes, we have some challenges from a growth perspective in 2020, really good results. It's kind of more of a function of doing better in '19, challenging a little bit in '20 as we work our way through those final LOEs, particularly APRISO, talked about the drop off of Glumetza and some other items. So as you get past that, I expect 2020 going to grow, going to be lower and then accelerating '21, accelerating '22.

Great. Maybe one last question on the 3-year target. Since you've given that, any areas you'd highlight where the business is running particularly ahead of expectations or particularly behind expectations?

Yes. And I'm going to actually go backwards, and say, yes, and address that's a thinking about things that are ahead or things that are behind. And instead of saying as of like today, sitting here today or were back in February when we refreshed that -- the CAGR guidance is -- when Joe and I got here, if you went back and looked and said, one, XIFAXAN, first of all, has done much better than I think the market expected it to do, and honestly a little bit better than what we were expecting there. Secondarily, our Vision Care business, our global Vision Care business at first, aided by just the rock-solid performance from Tom Appio and the team that run that -- the international part of Vision Care. That was rock solid, but then on top of that, we have a fellow named Joe Gordon, who runs it in the U.S. who brought that back from a place where it was kind of drifting to being a real growth driver for us in the U.S. It's soon to be hopefully with -- knock on wood, with the launch of the Daily SiHy, we expect to be able to continue that. So those 2 are certainly ahead. And there are others as well. The majority of our business plan performed as we thought. And of course, the one that we love to talk about, but we don't really love to talk about is that unfortunately, it's taken much longer for that derm business, the medical derm business to rebase itself. But I think we find ourselves here in 2019, again, I said on the Q3 call, we kind of think we found the base for that legacy derm business. And now with the new assets, that business flips from a declining mode to a growth mode. This is all really good stuff.

Yes, absolutely. Leverage is obviously still a key topic for the story. Just remind us kind of post this recent settlement where we stand with leverage. And how we should think about the company prioritizing its cash flow going forward.

Sure. I mean, well, first of all -- and thanks for bringing up that set settlement because we think that was an important step for us. It was the -- I'm sorry, that was not the last, it was the largest remaining legacy liability that we needed to come to grips within. We believe that our legal team did a fantastic job of maximizing our position in that. And we're delighted, I should say, to take that and say, it was an unknown, make it a known and then secondarily, to finance that. It did set us back. I mean, it was $1.21 billion, we are funding that. We did fund it through the issuance of debt. It is -- that's a broadly 3/10 or so of a turn. So it takes us a step backwards. I think we're in the high 6s kind of on a pro forma basis, pro forma for that settlement. And so yes, we continue to need to prioritize use of our free cash flow to reduce our debt. But again, back to that settlement, that was the right thing for our company to do, and we're fortunate to be able to put that in the rearview.

What is an ideal level of leverage for the business, given the assets you have and the diversified portfolio?

Yes. To quote Captain Miller from Private Ryan, "Anywhere but here." It's -- when you're levered in the high 6s, that's too high for your business. We need to actively work to bring that down. And of course, the ways we do that are prioritizing free cash flow to reduce debt. But for the settlement, we would've been making great progress, I think, on that front, and we'll expect to continue to do that next year by prioritizing free cash flow, and the second and best way is grow that operating earnings.

Yes. The only thing I'd add is that, Paul, Will, the team did a phenomenal job and just giving us freedom to operate. So yes, we have the higher leverage than we'd like, we acknowledge that. But we're going to continue to work it down. But importantly, with what Paul has done and Will has done, the freedom to operate allows us to go ahead and make some investment, increase our R&D, things that we know are important to growing the position for the long term. And that's what really it's all about for us, driving long-term shareholder value.

Great. And on that point of investment, just talk a little bit about the biz-dev approach. We saw some, obviously, activity in 2019. It's balanced against, obviously, a delevering kind of priority. So what's the focus right now? What's the opportunity set that you see in the market? Scott is going to get that, yes.

Sure. Yes. So thanks, Chris. I think as Joe said, everyone in this room knows how to make a DCF, say what they want and that's by changing their cost of capital. And that's really what this company has done over the last year or 2. And our last unsecured issuance was at 5.25%, it's the lowest rate this company has ever issued notes at. And what that really provides us is an opportunity to go out there and source commercial accretion and pipeline value, without being dilutive to the equity. And this year, I think we've done exactly that on a number of products and in their own right, some of these products would be attractive market cap companies if they were in that position. But as Joe mentioned, the first move we made in our offensive acquisition in 2019 was the acquisition of the synergy assets, TRULANCE and dolcanatide. TRULANCE was a completely derisked commercial asset that fit right in our GI business in the IBS category. XIFAXAN was already in the IBS category, the sale point, the physicians, the sales force, the prescribers were all very much synergistic and overlapping. And 3 quarters in, we're looking at TRx growth of over 25%. Dolcanatide was the first new chemical entity sourced into Bausch. It's already completed a Phase II in a large subset of patients in opioid-induced constipation, and we're looking at it in a number of GI conditions. And then as Joe mentioned today with our press release, amiselimod. So amiselimod is an S1P modulator. The S1P modulators have traded in this category. Some of you may remember, ozanimod and Receptos sold for over $7 billion. We have not publicly said how much we paid for amiselimod, but it was immaterial financially to us. So certainly not in that price range. And we announced today that following a cardiovascular study, the class has known cardiovascular risk, but following a large FDA-sanctioned and approved 190-patient cardiovascular study, we saw no QT elongation. So we have an S1P modulator with preclinical and clinical protocols in a number of autoimmune conditions that range from Crohn's, ulcerative colitis, lupus, MS, NASH, NAFLD, psoriasis. And I think we're excited about the opportunity to bring that to market in different autoimmune conditions. And then lastly, one I'll highlight is NOV03, which we recently licensed. And NOV03 is for -- is a nonaqueous eye drop for the treatment of dry eye. Dry eye is a very large market, both in the U.S. and internationally. And what we have is a nonantibiotic treatment. So a product that actually works to draw the lipid layer to the surface of the eye. And the onset of action is very impressive here. We've already completed 1 Phase II crossover Phase III with stat sig in signal. And potentially, we can see that in 2 more studies starting this year for a dry eye drug in the near future. So I think from a BD perspective, we've actively engaged in a number of different products this year. In their own right, these would be attractive sort of companies if we could get them there. And I think we've all -- we've done it for under $250 million. So very attractive purchase points for these assets.

And maybe I'll just add one thing to what Scott said because he's absolutely right. We are very efficient in acquiring them, but importantly, they give us some opportunities to take some of our businesses global. Clearly, the Bausch + Lomb business is a global business, but the amiselimod is a global opportunity for our Salix business. So that's another example. And with what we've done with our Solta business, we also have a global opportunity in our dermatology business. So we feel really good about what that means for the elements of growth for the future of what we're trying to bring this business in terms of being a global business for opportunities.

Do you have -- do you see opportunities for more commercial-stage assets? And do you have the financial flexibility to pursue those if they are in the market?

Okay. So my answer to that is, clearly, we do see opportunities out there. We clearly will continue to look at them. Obviously, we have to be smart as we look at these assets based on our leverage ratio. But we're going to continue to look at these assets because we do think that within the footprint of our eye health business, we've got the most integrated eye care company in the world, not barring -- there's other good players out there to be clear, but we have the prescription business. We have the surgical business. We have the contact lens business. We have the over-the-counter business. We have a multi-purpose solution business. So we've got a really integrated platform. If there's products out there that make sense, we're going to look at them and try to determine how we could make best fit in.

Let me say, I want to add to that, I think. So Synergy was trading at almost $1 billion enterprise value at one point, and we were able to acquire the assets for over 80% discount to that. Amiselimod, as I said, the S1P classes have traded for billions of dollars. We found the asset stand-alone without a sponsor in Japan. It takes work to go out there and find assets that aren't overpriced, but we do the work. And we find them. And I think we've been able to prove that we can go out there and source assets for very good value.

Just tripping a little bit. How important is it for you to be a diversified company with a number of divisions that you currently have? And I guess, question is, should we think about at some point, a different corporate structure as leverage comes down or is part of how you want to run the business, you want to have a broad, diversified kind of business that you have today?

Sure. So I think, first and foremost, we feel very fortunate. We have good assets, and they are global businesses, the global business opportunities outside, number one. Number two, we are building them so that they can be independently strong businesses so that we are prepared to make them independently strong and that's one of the comments we had about our 20/20 Vision. And also, we think that there are businesses that have very durable characteristics. I would say that could they function separately? The answer is absolutely, yes, that is true. We do like the fact by putting them together, especially in the United States where you have market access questions, we do think that there is value in working together across the business, especially with market access questions, but they could absolutely stand-alone is the answer to the question.

Yes. So it really, at some point, it's a valuation discussion and..

Absolutely clear. I think we feel that you'd expect as management of the company that we are significantly undervalued. And certainly, when you look at the Bausch + Lomb peer companies where they trade, they're trading at much higher multiples than we trade. So clearly, we do think that there's an opportunity for improved valuation, and we'll continue to look at that. But as it stands today, the businesses are together and we could get good value for that in terms of the overall durability of our franchises. But at the same point, we recognize that sometimes one has to consider other alternatives to realize that value.

Okay. Pivoting to new launches. Maybe just an update on the new launch portfolio and maybe specifically DUOBRII, just how that launch has been going and what we should be focused on in 2020?

Sure. We're really pleased with DUOBRII. DUOBRII as we launched the product, we're seeing a number of characteristics that suggest a very strong launch. First and foremost, if you look at the total prescription performance, it's one of the best dermatology launches ever in terms of actual number of prescriptions that have been written in the first 6 months of the product. So clearly, that's a positive. The second thing I'd say about DUOBRII is that we do look at the number of dermatologists that have actually prescribed it. And about 2/3 of dermatologists have already prescribed it, and it's only now 6 months into the marketplace. So clearly, we're moving in the right direction. The final area that I want to make sure I highlight is that -- is this coverage for market access is an important part of the U.S. business. We went from about 30% coverage when we launched it in August. September, we were up to like 38%, 43% by October. We did our earnings in November and it was -- I think it was 57%. I'm delighted to say today that we're up to 63% coverage in market access for the United States. That is, I think, a really positive leading indicator of where we're going with this product. And we said all along that we felt by June, July of 2020, we'd be somewhere around that 70% to 75% coverage. So if you look at the prescribers, we are clearly getting the prescribers on the derm side. We're seeing the prescriptions. We're seeing the refill, we're seeing the market access coverage. So across the board, we're very enthusiastic about what the opportunity is with DUOBRII predominantly because we can help these patients who have psoriasis and for the first time, give them a topical product with the high-potency corticosteroid that they can treat to clear rather than being limited to a certain duration of time.

Makes sense. And then timing-wise, just with that coverage you mentioned. So by second half of 2020, should we start to be thinking about normalized gross to nets for that product?

Yes. I think it's a very accurate representation. The simplistic way to think about this is, it's as the -- as you get the increasing coverage in the marketplace, you need to discount and coupon less. As you discount and coupon less, gross to net gets more favorable. So the answer is, yes, is your question -- to the question.

Okay. And then just a final question, last 2 minutes here. On the SiHy opportunity. Maybe just talk a little bit about where capacity is? And how you're thinking about the U.S. rollout of that line of products?

Sure. So we launched our silicone hydrogel daily contact lens in Japan. We did that last year. It was -- it's been a good launch for us. But you always learn things when you launch a new product, very simply stated, when you're making a monthly lens, and you need 12 lenses a year to go to 365 lenses, obviously, you need more capacity. So we've been putting together the capacity both in the United States but also in Ireland. In order to do that, we've been able to build out capacity. We feel absolutely prepared that as we approach the U.S. launch later in 2020. And then European launch in early mid-2021, that we'll be prepared to have the capacity based on the expertise we get in making these lenses. So we're in great shape relative to that capacity expansion. It has taken a significant amount of capital, but we plan for it. And we're prepared to make that investment in order to make sure that we get a great lens, and we're very excited. Bausch + Lomb has always been known for really good optics, really good comfort and fit. We believe that our silicone hydrogel lens will do exactly that on a daily basis.

Great. We see there's been a lot of great progress in the year. So we'll continue the discussion across the hall in the breakout. But thank you.

Thank you, Chris. Thank you for the questions, everyone.