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

Hello. This webcast presentation is for Bank of America clients only. If you are a member or representative of the media or press, please disconnect now. And now I would like to turn the call over to the moderator. Thank you, and have a good day.

Thank you, operator. And thank you, everybody, for joining us for our next company fireside chat. I'm pleased to be joined by Bausch Health Company and CEO, Joe Papa. Bausch, those of you very familiar with the company, I'm sure, but Bausch is known for its eye care business, it's GI business and in -- its dermatology business, that are some of the key growth drivers of the business. And so pleased to be joined by Joe. The company recently reported 1Q update, provided some commentary regarding the impacts of COVID-19 and so from -- we're going to jump into Q&A, but certainly have some follow-ups as it pertains to that and some of the company's key growth drivers. So Joe, first off, thanks for joining us. And I think you have a couple of prepared remarks, so then we can jump in the Q&A after that.

Thank you, Jason. Pleasure to be here to have a chance to talk with you on the phone. For all those that know Bausch Health, we obviously, are continuing to transform our company. We've now had 9 consecutive quarters of organic growth, which we're delighted to show. Obviously, we're led by, as you said, Jason, our Bausch + Lomb and Salix business. Bausch + Lomb and Salix currently account for approximately 79% of our combined business. So clearly, those are the big growth drivers. Bausch + Lomb have now had, I believe, the number is 14 consecutive quarters of organic growth. Very pleased to report about that. And also our Salix business led by XIFAXAN, our largest product. XIFAXAN, in the most recent quarter, showed a 23% growth. So very pleased to see that kind of growth for our business. Importantly, we are going to continue to make progress, and we've had a chance to bolt-on some additional products to our portfolio. A great example is our TRULANCE product, which we bolted on last year, approximately 1 year ago in March. That business has done extraordinary for us. It was, in the recent quarter, up 51.6% from a prescription level. So very strong growth as we've put together what we arguably would say is a best-in-class product for IBS-D with XIFAXAN and a best-in-class product for IBS-C with TRULANCE. Very excited about what it means for our future. And one other comment I'll make, as just a general statement, we have also continued to move our debt and pushed that debt out. So that -- and paid down the debt, we paid down over $8 billion of debt since I joined in 2016. We recognize, though, that we still have significant amount of debt, and we're continuing to look to pay down the debt and/or activities that we did yesterday, for example, we refinanced approximately $1.5 billion of debt with a maturity of 8.75 years at a rate of 6.25%. So clearly, we're making good progress in reducing our overall debt and interest payments and also moving out the debt to give us the freedom to operate and make sure we can continue our transformation of our company to drive shareholder value creation.

Great. So maybe, Joe, just to start, I've got a couple more general kind of corporate strategy type questions. I'm just wondering how you think right now about the current mix of your business units for the company. And I ask the question, harkening back to the fourth quarter call, it did sound as though the company management was at least willing to open the door to the discussion around possible separation of some units within the business and/or considerations of equity raise to bring in assets that might drive not only accretion, but growth. Now obviously, some things have changed since the fourth quarter update. But as you step back and sort of reflect upon your time at Bausch and thinking about how to optimize the business mix, where are you at with those considerations at the moment?

Sure. First and foremost, since I joined in 2016, approximately 4 years ago, what we focused on is we acknowledged that the company needed to make some investments, and we needed to reduce our debt. As I said before, we paid down approximately $8-plus billion of debt in the last 4 years. Number two, we also acknowledge that we needed to turn around the company and transform the company into growing businesses. As I said, with B + L, we've now been able to show that 14 consecutive quarters and the Salix business continues to grow. And as a company, I think we have now 9 quarters of organic growth. So we're starting to make those turns and showing it. And that's despite a loss of exclusivity for approximately $1-plus billion of products that we've lost exclusivity on and lost those sales. So I think we've been making great progress there. But I will be clear, and to your point, we, absolutely, realize that we still have a significant amount of debt. We still have a significant amount of leverage. And I would say that, as we said at the fourth quarter call, and I've said at previous conferences, that from the day I joined, we've been, absolutely, open to evaluate any alternatives to drive shareholder value creation. So for example, we divested about $3.8 billion of assets, the proceeds that we received to pay down debt as one example. That's something we've done in the past. We clearly have to continue to think about those things given the debt situation we have still today. Number two, we believe that if you do the sum of the parts of our business, especially the Bausch + Lomb business, we're not currently receiving that value as we are currently configured. So if we need to think about alternatives to the Bausch + Lomb business valuation, for example, we're going to look at those things as well, potentially at spin-offs, other things, to drive shareholder value. So I think for me, the summary comment is that we think we've made great progress in starting to grow the Bausch + Lomb business, grow the Salix business. But we will look at all the alternatives for looking at things like spin-offs of parts of the business if we don't believe we're current -- the market is currently reflecting the value of our totality of the Bausch Health Care business.

Got it. Great. And I guess there are a couple of examples of the sum-of-the-part argument. Allergan was a company that was -- went back and forth and contemplated that before being acquired by AbbVie, Pfizer, really separated from its Upjohn business and took a haircut from a valuation standpoint in the market as the Upjohn business drove a lot of profit, but probably, I think investors realized that perhaps the 2 pieces weren't as valuable together. Have you looked at those examples? I'm just wondering as you think about that, and maybe it's -- I'm making more of it than it already is. But I'm just sort of curious, what examples do you see out there that give, may be reason for optimism that there could be a favorable pathway here?

Well, I think as a student of the industry, I'm a pharmacist by my training. I've been in this business, pharmaceutical and health care business for 37 years. I've seen a lot of different iterations of corporate decisions, corporate structures. And I think everyone is going to be slightly different, to be clear. But the reality is, if some of the parts don't seem to make sense or don't seem to be capturing the full value of a business, especially a business like our Bausch + Lomb business, which has very solid mid-single-digit organic growth. It has a consumer business that is very, very strong. It's got a diversity of business in terms of being in the medical devices, the pharmaceuticals, the over-the-counter, the multipurpose solutions, the prescription business. We would argue that we have one of the most integrated eye health businesses in the world, as an example, versus some of the other players that are great players, but they may not have all the components that we have. So we look at that very closely. We think about that relative to the value creation for that. And as I said, I certainly believe that the market will increasingly appreciate the value of that Bausch + Lomb business. If it does not, then we certainly will look at any alternatives to realize that value creation for our shareholders.

And last question just for me on this topic. But do you see the International Rx business, which is not really an eye care business, but it's more of pharmaceutical businesses that -- is that necessary to kind of coexist with the eye care businesses, given the eye care businesses do drive a significant amount of revenue from international sources ex-U.S.?

Yes. So it's a fair question. I mean it can go either way. It could be part of it, to be clear. And part of the reason I say that is that because of the size of our totality of our business, the Bausch + Lomb businesses are true -- only true organic global business that we have. So it fit perfectly. For example, there was no sense of having multiple heads of a country, one for the international business, one for the eye health business. So we said we'll be more efficient in how we think about regional structures and activities along those lines by doing things like that in terms of not having to recreate infrastructure in several different levels like a finance team, things like that. So we've tried to be very efficient with our approach. Obviously, when you have a lot of debt, it forces you to be efficient, to be smart, about how you manage the business. And I think that's what our overriding premises be, be smart, focus on things that are giving you the maximum return on investment for shareholders. And that's how we'll run the business today and going forward in the future. But it doesn't have to be part of the same business, I would concur with your comments.

Okay. Just shifting gears to COVID-19. And there was a fair amount of investor anticipation into your quarter update just given businesses like Solta, and your IOL business has some exposure to the dynamics of COVID-19. But as we think about 2020 guidance update in both extreme ends of your guidance range, what are some of the key kind of factors that drive you either to the low end or to the high end of the planning range?

Sure. Let me back up a little bit and get to your answer. We were very fortunate in that we -- because we have a global business, because we have a significant business in Asia, we were able to get some early insights into what was happening back in January, February, that helped us to think about how to approach the business. Because of that, we had the time to build what we did to try to think about the different scenarios for the business and what was happening in each business, what was happening to think about the progress that we'd make and the return to normal, whatever that new normal was. So we actually developed 4 different scenarios. The majority of the scenarios depended upon our knowledge from what was happening in China, what was happening in Europe, how was China returning to business, for example. That helped us to model and craft out our 4 different scenarios. And those scenarios played an important role in thinking about the upper range and the lower range of guidance as we thought about where we were going with the forecast for 2020 and into the outer years, to be clear. Our view, we had to make sure 5 things happen. We had to make sure our employees were safe. We had to make sure our supply chain was up and running. We had to make sure we continue to move forward with our R&D programs. We had to make sure that the commercial teams had a way to reach their customers, the doctors. And then finally, we wanted to make sure we had the financial stability. So we did 5 different workstreams. We've built that into our 4 different scenarios and put together a model that we think helps us to make decisions. There were some tradeoffs, to be clear. We did make a decision because of some of the revenue shortfalls that we expected because of COVID. That was understandable, I think. People understand that. But what we did in terms of responding to COVID was make sure that we looked at our SG&A. We reduced our SG&A by approximately $200 million in 2020. We reduced R&D by about $25 million in 2020. We reduced our CapEx by about $25 million. All geared towards understanding that some of the activities on revenue shortfall were going to happen because of COVID, how do we position our company for both short-term viability and long-term growth. We made those decisions to make sure that we were doing what we thought was the right decision for our shareholders.

Got it. Is it fair to say that -- I mean, there are a couple of businesses that maybe are more clearly impacted like Dental and Solta and Ophthalmologic Surgical. Are those kind of the key swing factors in your mind in terms of this year, in terms of how those go? And that -- what you guys, I think, have called a gradual second half improvement in uptick?

Yes, I think you've hit them all. I mean -- and I'm going to differentiate slightly because I think you hit them, but the dentistry business is a small business for us, admittedly. But if you're not in to get your teeth cleaned for the months of March, April, May, June, for example, then you're not going to get them done twice in the months from July through December. It's just -- it's a lost business. On the other hand, on the Surgical business, it's a different situation. If you had cataracts before the COVID situation, you still have cataracts, we -- you are still going to need to get the cataracts replaced with IOLs, intraocular lenses. So that's going to be demand that is backlogged. We do not expect that demand backlog to be all taken care of in 2020. We think it will start turning around the second half of the year, the third quarter and the fourth quarter, we'll work through some of the backlog. But some of the backlog clearly will go into 2021, as an example. The other one, I don't recall if you mentioned it, but it's related, is our Global Ophthalmology prescription business. And the reason they related to the Surgical business is that many of our ophthalmology prescription products are either used for pre- or post-surgery. Therefore, if the surgeries haven't occurred, you're going to have an impact on some of the Ophthalmology business. On the other hand, we also have in our ophthalmology products for glaucoma, no impact expected on those chronic medications. So I think you've hit most of them. To be clear, the dermatology business is the only other business that I would have put in that mix, and that's either -- both from the Solta aesthetics portion as well as med derm as less and less people have utilized the dermatologists during the months of March, April and May. I do expect that to start coming back, especially as children go back to school.

Great. And Joe, what do you think are ultimately the long-term implications of COVID for the industry and for your business? And do you have a sense that we're fundamentally changing the way that we do business in this industry? And I'm just kind of curious how you think this could have a persistent effect even as we try to get back to normal.

Sure. So I think that the companies are going to adapt to a new normal of COVID, the answer, I believe, is yes, certainly until we get ourselves -- get a vaccine or something that reduces the concerns of consumers and patients about visiting hospitals, visiting doctors' offices. Our expectation, and we try to lay out those assumptions is that we do expect, from an assumption point of view, that there could be a potential resurgence in the second half of the year, but we would not see the same severe social restrictions, cancellations of elective or deferral of elective surgery during a second resurgence. We believe because of our ability to do better testing, we'll be able to isolate and quarantine individuals as they become infected -- affected if that happens in the second resurgence of the virus in the second half of 2020. Not predicting it's going to happen, we just think it wouldn't have the same amount of deferred elective surgeries as an example. Back to the industry's response, I clearly believe the industry is going to be prepared, and we certainly are very prepared for incremental amounts of e-commerce occurring in the industry. That's mostly for our consumer-oriented products, potentially for Vision Care, for multipurpose solution, for over-the-counter products, to be clear. We also expect more TeleHealth business. One example I can cite is from previously to COVID, I looked at some of the billings of doctors and less than 1% of their billings were done through TeleHealth. As the COVID crisis has developed, as we sit here, we're finding that some plans may have 15%, 20% of their billings from physicians in TeleHealth. That's a change in how physicians are managing their patients. We believe the companies that do the best will be those companies that are prepared for that change. Obviously, one example of how we're preparing for it is our Dermatology.com, which we think is an exciting way for us to move forward in the dermatology space, and look to us to do other things in other -- our ophthalmology business and also our gastroenterology business to try to help physicians as they change to the new normal that they're facing as well, certainly in the mid to near term.

Got it. Okay. And shifting to your longer term 2022 guidance, XIFAXAN, I assume, is an important component of that growth. And can you talk about how much runway you think you have for growth of this product? It would seem that the HE indication is pretty well penetrated, whereas the IBS indication is presumably the growth driver, at least in our model. So I don't know if you'd agree with that assessment. And then pre COVID at least, the scripts were soft, I think, relative to the full year guide, and I know that 1Q seasonality was cited as a potential factor. But I'm wondering if you can sort of address the growth outlook for XIFAXAN once you get to a more normalized market condition.

Sure. Well, first of all, we're -- in general, we're incredibly pleased with the performance of our Salix business and XIFAXAN, in particular. Just I mean, going back to the data, we saw a 23% growth in XIFAXAN in the first quarter. So we are very pleased with that. It was about 6% price, 17% volume growth. Half that volume growth was attributable to true growth in both the prescriptions and also the size of the prescriptions. To your comment, we know during the quarter that the growth in XIFAXAN from a prescription level was about 6%, but the actual extended units or tablets that we sold of XIFAXAN was up closer to about 6.5%. The difference being that more of the volume was shifting towards hepatic encephalopathy, where they have more tablets per prescription. And also many patients, because of their concerns over COVID, were seeking not to get just 30-day supply, but 60- and 90-day supply. So that, we think, is what's happened in -- to some degree, in the first quarter. But overall, very pleased with the growth. On the general question, though, do we see IBS-D still as a significant growth? The answer to that is, absolutely, yes. We still believe we could do better, though, in hepatic encephalopathy in terms of adherence data. We've seen additional studies come out. There was a recent study by Teva that showed the ability to significantly reduce rehospitalizations if patients stay on their medication. And clearly, given the concerns over COVID, people are taking their medication and adhering and complying to the product much more strictly because of their desire to stay out of hospitals because of COVID. So I do think there's more to do in hepatic encephalopathy, to be clear. Look to us to do more publications of data, look to us to do more in managed care and health economics to continue to support hepatic encephalopathy and to share that data. But to your second comment about IBS-D, is there upside? Absolutely correct. We see about 12 million prescriptions annually in the United States for drugs that are antispasmodics like BENTYL, dicyclomine or antidiarrheals like Lomotil. Those products simply mask the symptoms of the IBS-D. We believe with XIFAXAN, we have an opportunity through episodic treatment to give patients not just masking symptoms, but long-term duration of treatment for those patients with IBS-D. That's where we think there is a significant upside. A lot of patients out there, a lot of prescriptions that we think we have potentially a better solution for some of the patients with XIFAXAN through episodic treatment with minimal adverse events.

And I apologize if I missed this, but are you still holding to your full year XIFAXAN growth outlook, which I think was for 10% or 12%?

Yes. We obviously have commented that the growth for our Salix business, our XIFAXAN business, has been impacted by COVID-19. We still think there's significant long-term potential to return to that kind of growth for XIFAXAN, for Salix business. But in 2020, we are going to be impacted by the growth -- sorry, the growth will be impacted by COVID-19. So that was part of our reforecast of our 2020 numbers.

Okay. So you haven't given a new number, but just saying that you don't expect what the old number was. Is that fair?

Yes. For -- specific to XIFAXAN, we haven't given out specific numbers, you are correct. But we are obviously, as you know, bringing down our total expected guidance from -- revenue guidance from the $7.8 billion to $8.2 billion, so the midpoint of $8 billion is the way I would phrase it.

Yes. Okay. And on the intellectual property front, we've seen now another settlement with Sandoz. And I was a little surprised to see Sandoz get similar terms in terms of date of market entry as Teva, which made me wonder does Teva not possess 180-days first-to-file marketing exclusivity, although Teva got an authorized generic provision, so maybe they got a little bit better terms. But can you address that? And your outlook for your ability to settle with some of the other companies at similar terms?

Sure. So first and foremost, we're very pleased with the settlement. We've settled with the world's largest generic company, Teva, for 2028. And we settled with what is arguably the third largest generic company, Sandoz, for 2028. We think that speaks absolute volumes about our intellectual property and the strength of that intellectual property and therefore, as I said, we feel very good about it. I don't want to comment specifically about the 180-day exclusivity for Teva. I think you should ask Teva that particular question. But I think the fact that Teva is potentially not launching until 2028, which is a significant amount of delay from their initial filing, probably answers the question, but I would not try to answer the question for Teva. I'd let Teva make that comment about whether or not they think they have the 180-day exclusivity.

Yes. Okay. Shifting gears to the SiHy daily launch. This is a launch you guys are seemingly pretty comparably excited about. And can you talk a little bit more -- could we peel away the onion in terms of what underpins that confidence? Arguably, as a late mover in a market where, I'd say, historically, you've been the #4 in terms of market share. Are you fighting for new fits? Are you seeing this as a switch market? Does this cannibalize other parts of your business? So understanding that Si-Hy is going to give you a mix benefit because of the pricing, but wondering if you can talk a little bit more about some of those key details.

Sure. So a couple of comments. First and foremost, just to be clear, we are -- we lagged the market. We're #4 in the United States, that is correct. But in the rest -- in many parts of Asia, we're the fastest-growing parts of contact lens business, we are a leader. We're a leader in China. We're a leader in India. We're a leader in Thailand. As the places that have significant populations that are rapidly growing, we are leaders in the [indiscernible] business, in the contact lens business. Number two, though, to your point, we are trailing some of the other players coming into the Si-Hy business. But the U.S. by definition trails Europe, Japan, Asia Pacific in terms of the use of the silicone hydrogel products. So it's still earlier in the U.S. in terms of the opportunity, and the U.S. is growing faster than the other geographies around the world in terms of the acceptance of the SiHy daily product. So we still think there is an opportunity there. But the final area I think I'd point to in terms of our enthusiasm is that our team, led by Joe Gordon and John Ferris, have done an outstanding job in delivering on the U.S. capabilities. For example, our Ultra product, which is also a silicon hydrogel, but not a daily, is up 20% last year -- 20-plus percent last year. Our Biotrue, which is a hydrogel lens, is up plus 20% last year. So we think that the team that has given us this type of growth and also taking share from the competitors is also going to be the same team that launch our silicone hydrogel. And we do expect some competitive positioning advantages, to be clear. I don't want to go through that at this time because of competitive reasons. But just remind you that what is Bausch + Lomb been known for? Obviously, a strong team with good relationships with doctors. Number two, we've always been known for optics, comfort and fit. And clearly, finally, we're going into a growth market. So there's a lot of upside opportunity that we expect for silicone hydrogel that will give us opportunities to grow the business.

And we've been hearing, I guess, anecdotally, at least that J&J is getting more competitive in China. Can you comment at all what you're seeing? It's obviously, a little bit of a challenging market for us to analyze given what's the level of disclosure around that. But are you seeing any impact at all from J&J getting a stronger presence in China?

So I take all of our competitors very serious, of course. I think J&J, Alcon are great competitors. Cooper is a great competitor. So I take them all very serious. But I feel very good about our team's capabilities in China and how we're dealing in China with all of our vendors. Our position in the e-commerce [end channel], our position with all the retail stores, we think, is very strong. So we're going to continue to compete there. We're pleased with our performance. And I probably don't want to make any specific comments about J&J, they can certainly talk about their capabilities. But we like our capabilities, our ability to compete, as I said, all throughout Asia, United States, Europe, we're continuing to compete on a very effective basis. And I think you've seen some of our historical slides on our ability to gain share, for example, in the United States over the last 2.5 years, led by a really strong team here as well as a strong team in Asia.

One last question just from the audience. It's just a random. What is the potential exposure of Canadian stock drop securities litigation, if any?

So I'm not going to give a specific number. I'm going to say the majority of the stock drop suit was in the United States and we have resolved that, as you know. There are still some Canadian lawsuits and there are still things that we need to continue to work to resolve. But we believe we've taken care of the majority of this issue with our U.S. class action settlement. There still are some opt-outs, to be clear, in the United States, there's still a Canadian situation, but we think we've taken care of the majority. We think it was the right decision. It hurt us relative to our debt pay downs for a cost of about a year of debt pay downs, about $1.2 billion. But we think it was the right long-term decision to get it behind us, to move forward and to continue to transform our company.

Got it. Great. Well, we're up against our time, Joe. So I want to thank you for taking some time to join us and share with us your latest thoughts on the company developments. So thank you very much.

Thank you very much for the questions, Jason.

All right. Thanks so much. And operator, with that, I think we can wrap the call.