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

Great. So good afternoon, everyone, and thank you for joining us for the Bausch session. This is Dave Risinger. I cover both major and specialty pharmaceuticals. And it's a pleasure for me to welcome both Joe Papa, Chairman and CEO; and also Paul Herendeen, CFO. And we're on a bit of a tight time slot here. I did want to read this disclaimer very quickly. But I'm pleased to also highlight that Bausch has posted slides on its website. That management will be referring to you as some new disclosures. And so I just need to mention that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. If you're a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley site at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative. And with that, let me turn it over to the Bausch management team.

Thank you, David. This is Joe Papa. Happy to have a chance to talk with you -- with everyone today. Thank you for joining us. As David said, myself and Paul Herendeen will have some comments today. Before I begin, I want to just remind everyone that our presentation today contains forward-looking information. We'd ask that you take a moment to read the forward-looking statement legend at the beginning of our presentation as it contains important information. Let me just give you a quick objectives on what I'm trying to accomplish today. Number one, I want to update the third quarter 2020 business recovery. Specifically, we talk about as the business recovers from COVID impact that happened in March, April, May, we want to give you a sense of where we are today in the third quarter. We had some great data. It's early, but some really interesting data. I'd like to share with you. Number two, we want to provide additional insights on our August 2020 announcement to spin-off Bausch Health. That amount is going to build on what we said in August 6, and we'll talk about the objectives of the internal organization design and timing and the capitalization structure and timing. And then finally, I want to give you a brief review of our 2 highly attractive businesses, and talk about those businesses as we spin-off Baush + Lomb, a pure eye health company, and then also talk about the remaining Bausch Healthcare business, that's a diversified pharmaceutical company is, what I want to share with you. We have posted some slides, as David said. I'm going to refer to a number of those slides by page number. If you're able to look at those slides, it may be helpful to you, but you can certainly look at it later. Let me start today with the update on the third quarter 2020 business recovery. We think we're seeing some early, but promising signs of recovery from COVID. The challenges we saw in COVID for March, April and early June, we are now seeing some recovery. And I'm going to refer you to Slide #4, and start with some key data points on the promoted products where we are focusing our attention and the business recovery. Let me start with the U.S. Baush + Lomb Vision Care business. If you look on Page 4 of the materials we provided, and you look at the top left hand, you'll see the U.S. vision business was up 26% in the first quarter of 2020 versus a year ago. However, we clearly saw a decline starting in mid-March, April, May and into June of approximately about 33% during that time period on average. Since that time, July, August, we are seeing a recovery that is in progress. Average weekly results there, versus a year ago, are now up about 8% on average. So clearly, the business went through a trough due to COVID and is now seeing a recovery. If you look at the top right-hand side of that page, you'll see some data about the Stellaris Elite procedures in the United States for the performance of those since the beginning of 2020. The Stellaris Elite is a medical device that tracks the number of surgeries, both retinal and cataract surgery and sends that to us. We use this as a marker of the overall eye surgery business and what's happening by -- it's not anywhere complete in its data, but it gives us a good indication of what's happening around the United States. What you see here is that if you compare pre-COVID, so that January through early March time frame. And then you see the dramatic drop-off that occurred, something like a 90-plus percent drop-off in the performance of procedures, elective cataract and retinal procedures. And then importantly, starting in May, you see it climbed back up. And we're now back to about 95% of where we were pre-COVID. It gives you, once again, some sense of the recovery that we are experiencing in the medical device area or -- as I said, a marker for surgery. On the question of LUMIFY, bottom right-hand side, you'll see what was happening in terms of the growth of that product. Very nice upward trajectory of the growth, until we hit approximately that March time frame, saw a dramatic decline due to COVID. But once again, after we exited that time frame in early April, May, we found ourselves seeing a nice upward trajectory again, once again, returning to pre-COVID levels. So very excited about that. And then, finally, on the bottom left-hand side of the page, I want to talk about VYZULTA. VYZULTA, since the launch in the 2018 time frame, very nice trajectory. And as you can see, very limited negative impact due to COVID, even during that February through July 2020. So very nice trajectory with VYZULTA, nice upward trend. You can see VYZULTA, up about 50% versus last year, so good performance. And that's in a market that is down for glaucoma trim at about 3%. So it's very clear that we are gaining market share in our glaucoma space with VYZULTA. We're very excited about what that means for the future. Now this data I've gone through is mostly U.S. data, but we have a similar data, similar expectation around the world. But I will caution you all that the global response is variable. In some parts of the world, we're seeing a nice rebound in China. However, Latin America is in the height of COVID, so less impact there. So it gives you some sense of what's happening from a variable point of view around the world. The next page, I wanted to talk about Page 5 looks at our largest product, Salix, and gives you some indication on the top of that page, what's happening with XIFAXAN year-over-year. Once again, you can see early in the year, very nice growth, mid-single-digit growth for XIFAXAN and prescriptions. Then, a rapid decline as a result of COVID. And predominantly, that was our IBS-D indication. The XIFAXAN indication was still relatively stable as a chronic med, IBS-D fell off. But as you look to July, August and early September, we are seeing some weekly increases in prescription levels versus a year ago, such that we're going back in a trajectory. And what we try to do to help the investor understand our business is like, what is happening in the first 10 weeks of the second quarter that was dramatically impacted by COVID versus where are we in the first 10 weeks of the third quarter? And you can see, on the right-hand side of the top of the page, about a 5% increase. So clearly, we are seeing some recovery occur with what we're seeing with XIFAXAN versus third quarter versus second quarter. And I can go into that even in a little more detail because one of the things we knew was that IBS-D, which is more episodic, more reliant on new patients. In the first 10 weeks of the third quarter, IBS-D is now up about 20-plus percent versus the second quarter. So it gives you some indication that the more episodic treatment with XIFAXAN and IBS-D is also rebounding. The other area that I wanted to touch on was TRULANCE. You can see from the TRULANCE TRx trend, a very nice growth since our acquisition of this product. We acquired it in March of 2019. We, at the time of the acquisition, said, there's 3 things we want to do. Number one, we wanted to improve market access. Number two, we want to increase reach and frequency of our promotion. And we wanted to pair up with XIFAXAN, and we're seeing those results pay big dividends to our shareholders in terms of the acceptance of what we're seeing with TRULANCE, up 50% year-over-year. And once again, I remind you that market is only up 3%. So you're seeing clear gains in market share with our TRULANCE performance in a market that's up about 3%. TRULANCE is clearly gaining share in a very rapid fashion. And then finally, on the RELISTOR data, bottom right-hand side of Page 5, you can see the first 10 weeks of 2020 first second quarter versus the first 10 weeks, third quarter, up about 4%. If I subsegment that out even further and put in the oral data, I can tell you that the oral promoted product, where we focus our efforts, are up even about 7.5% versus the second quarter. So you're seeing very good growth, very good recovery underway, albeit very early in the process, but gives us the important indicators of the future. Going to Page 6. There you can see some other activities with our JUBLIA product. Once again, comparing second quarter, first 10 weeks with third quarter, up 50%. And also, if you compare the TRxs and the new patient starts called NBRX, both of them up -- new patients up about 50%. Total prescription is up about 21%. So clearly, JUBLIA going in the right direction. Our Thermage slope of business, led by the successful launch of Thermage FLX, also on Page 6, top right-hand corner, you can see, once again, strong growth in that business. Going back to 2019, some declines in April of 2020 as we hit the peak of the COVID problem. But now in the July, August time frame, once again, growth year-over-year growth of about 40% in the July time frame. Growth over 100% in the August time frame. So seeing some nice turnaround in our Thermage business relative to revenue change year-over-year. And then finally, I want to just touch base on DUOBRII. DUOBRII is our new launch for treatment of psoriasis. We think it's a very exciting product that will make a difference in patients' lives by reducing or delaying the need for biologics. You can see in the orange line there, got off to a great start in 2020. Then when COVID hit, because it's predominantly for new patients, we got hit significantly during that time. But you are seeing that versus the new patient starts, versus products like Enstilar and Otezla, it is battling its way back, and we're now probably picking up about 1/3 of those new patient starts compared with Enstilar and Otezla. So we're making progress there. Still a lot more to do in our dermatology business to be clear in terms of what we're looking at in the future there, but battling our way back in that road to recovery with our dermatology business. I'm going to turn it over to Paul Herendeen in just a second, but I want to make a few comments before I do that as we update on the spin. Since we announced the August 6, we've had a chance to talk to many investors. I would say that many of the investors support our strategy to spin out B + L and to unlock shareholder value. There have been a number of questions on timing. One question on timing is why now? And let me just make a couple of comments there. You all know that when Paul and I joined this company, Bausch Health had a lot of debt. We had over $32 billion of debt. We had to pay down some of the debt that was part of it. We paid down over $8 billion of debt before we could go down this pathway. The other thing we felt we needed to do before we can go down this pathway is resolved some of the legacy legal issues, like the class action lawsuits, the SEC, Philidor investigation, the Salix class action, Allergan case. We got those resolved in terms of settling many of these items. There's still more things we're doing here, but a lot of these legacy issues are now behind us. We felt now is the time to consider this. We also felt we had to make some investments to grow organically. That was underway. It has been. We've been able to show, prior to COVID, 9 consecutive quarters of organic growth. We invested in incremental sales force, R&D, growth in the pipeline. We invested in the CapEx required to launch the daily SiHy. So anecdotally, things are going in the right way. And now we felt it's the right time to start the B + L process and unlock the spin. We thought that would unlock shareholder value. And we think Bausch compare very favorably with the likes of an Alcon or Cooper. Paul described some of the steps we're taking now going forward. But we absolutely think now is the time to start. It's going to take some time to be clear. But let me turn it over to Paul, who's going to talk about the actual spin in some of the process.

Thanks, Joe. I'll spend just a few minutes talking about our plans to spin out in our eye health business, and I'm going to be referring mainly to Slides 8 and 9. So if you have that opened, there you go. Our motivations to separating the companies -- into 2 companies are quite simple, and Joe has really covered this. But first, we believe the underlying value of our company is considerably greater than the way we trade in the capital markets today. We believe that by separating into a global and diversified pharma company and a fully integrated pure-play eye health company, we'll narrow that gap. Second, we believe that separating the 2 companies will improve the prospects for value creation in both businesses through enhanced focus, leading to more efficient and effective allocation of capital. Now typically, gating factors and spinning out of business would be, how quickly can you stand up the -- to be spun entity, that you need time for preparation of financial statements and SEC filings. And you want to provide time for a new management team to gel prior to the spin. Now these things are well within our control. Those processes are in motion, and we intend to complete those elements as soon as possible. The complicating factors, Joe just referenced for BHC, is the degree of our financial leverage today. And that leverage, of course, has been exacerbated by the COVID-19 pandemic. With our primary goal being to deliver value to current BHC shareholders, spinning off the Eye Health business to unlock value will only work if post-spin, the financial markets see attractive opportunities for value growth in both entities. A factor in how the markets will value each entity will be in the pro forma leverage of both of those entities. Both must be properly capitalized such that they retain the financial flexibility, access to capital and the freedom to operate. Now after our announcement back in August, several people questioned how, given our leverage, we could actually spin-off the Eye Health business. And while there are a number of alternatives for any separation, here's one way we may proceed, and I'll call this the plain vanilla strawman. At the time of our spin, we could stand up the Eye Health business, and we could raise debt capital, let's say, roughly 4x its trailing adjusted EBITDA, which would include the impact of the synergies and we could use those proceeds to pay a dividend back to BHC. BHC would use that cash to prepay debt. At the same time, BHC would sell roughly 20% of the equity of the Eye Health business in an IPO, and use those net proceeds to prepay additional BHC debt. Now the Eye Health business would, by definition, in this example, be levered roughly 4x. Under this scenario, BHC, post-spin, would have roughly the same leverage as it would pre-spin. Let me explain. Levering the Eye Health business at 4x would clearly increase leverage at BHC, but the deployment of the net IPO proceeds would approximately offset that increase. Importantly, for this scenario to work, the post-spin BHC leverage needs to be five handle, say approximately 5.5x trailing adjusted EBITDA. And that means that pre-spin, because I explained -- excuse me, BHC Holdco leverage would need to be roughly 5.5x to facilitate the spin. The best ways we can get there are, as we've talked in the past, be a prioritization of our cash flow to debt reduction, and of course, especially coming out of the COVID situation, the expansion of operating earnings. Another path could be the potential sale of assets commanding high multiples. Regardless, the timing of when the spin of Eye Health will make sense for all stakeholders of BHC is difficult to predict. But we are doing everything we can to develop the spin as an actionable means of delivering value to shareholders. To be clear, developing the spin alternative does not eliminate any other paths and we, of course, continue to actively pursue all available options for unlocking shareholder value. Back to you, Joe.

Thank you, Paul. If I go to Page 10, what we wanted to do in the remaining pages, so I'm not going to go through them in a lot of detail. We'll just go through very briefly. But what we wanted to basically do in this last section of the presentation, I just say we view that we have 2 great business, 2 highly attractive business. We have the B&L business, which is a pure-play eye health business, driven by megatrends. And we would say, arguably the most integrated Eye Health business. And what I mean by that, we are in the surgical business. We're in the prescription business, the consumer business, the vision correction, the multi-purpose solution. We think we have one of the most integrated Eye Health businesses. And certainly, the business has critical mass with $3.7 billion of revenue. So we clearly believe that is a strong business. And as I said before, one that compares very favorably with the likes of an Alcon or Cooper. And we think that, that is a strong business with $3.7 billion of revenue. So clearly, that's one business. I want to mention of the remaining Bausch Healthcare business. That is going to be a diversified pharmaceutical business, with leading positions in gastroenterology, dermatology, aesthetics, neurology and have a significant international pharma component, but we have leading positions in each of those businesses. So those are the 2 business segments. On Page 10, I'll give you just a quick overview of B + L. That, clearly, with what Paul said about dissynergies and what's in the presentation, can help you think about not only the revenue side, but taking that down to the EBITDA line. Gives you some sense of where we are as a business. The next page, Page 11, and the following pages, we'll just go through each individual business segment. The global consumer, example, we'd look at it $1.4 billion, a 4% CAGR. And what's going to rely on is the increasing key driver of the incidence of macular degeneration and the increasing prevalence of dry eye, as 2 of the examples of things that will drive future success with global consumer. Next, Page 12, looks at Global Vision Care. You see $848 million pro forma revenue. Outperforming the markets with about a 7% compound annual growth rate for 2017 to 2019. So we are clearly growing that business relative to market share as well. And I remind you that we're fortunate. We have a very strong position in Asia, which is one of the faster-growing parts of the world population. So we're very fortunate what that means to us in terms of having a leading position in countries like China, Thailand, India, Japan, very strong position there. So it gives you some sense to that. And importantly, that business is going to be supplemented with our launch of silicon hydrogel product around the world. We've launched so far in the United States and Japan. We're excited about what that means for our future. Page 13 goes through the global ophthalmology prescription business 2017 to 2019 compound annual growth rate of about 6% on a $761 million. You can see from that, it's mostly U.S. and Canada, where the primary part of that vision is today. And then finally, the Global Surgical business, about $700 million business growing about 4%. And you can see a pretty diverse part of the global mapping there in terms of our footprint around the world. So that gives you some sense on the Baush + Lomb. I'm not going to spend much time on BHC remaining business, other than to say what I said before. The diversified pharmaceutical company, leading positions in gastroenterology, aesthetics, dermatology, neurology and international pharma. It is a large business at $4.9 billion. So clearly, we think it's a business that has a lot of opportunity for future growth. David, that actually concludes what we wanted to cover on the presentations for everyone today. Happy to turn back to you if there's any specific questions for myself or Paul to address. Be happy to address questions.

Great. Thanks so much, and thank you for the comprehensive update. It's very helpful. So I guess, first, with respect to the leverage figures, so this is -- I'm going to try to find the slide number, it looks like Slide 8 that Paul was referring to, just so that we understand. Paul, could you remind us what Bausch Health leverages today? And whether that's net debt on trailing EBITDA? Or how -- when you talk about for example, Baush + Lomb leverage targeting 4x at the time of the spin, what's the numerator? And what's the denominator?

Yes. Sure.

Not the numbers. Not the exact figures, but the -- I just don't know if you're looking at trailing EBITDA, forward EBITDA, et cetera?

Yes. It is trailing EBITDA. It does need to be adjusted for the dissynergies. We provided today in our materials help for parties that were trying to model by outlining the magnitude of the -- excuse me, dissynergies and where they reside. It would be -- net debt, I would point out that people that are looking at our balance sheet today, we do have some cash still on our balance sheet. As of June 30, it has hived off and needed to settle the legal actions and so watch out. I mean we, typically, carry somewhere around -- in the aggregate, around $800-odd million of cash in the system, but it would be net debt over adjusted EBITDA, which would be TTM, trailing 12 months, as adjusted for dissynergies. Does that answer, David?

Yes, that does. And what were the figures as of the end of June for the company?

Yes. And I confess, I don't have my due deck. It was like $24.3 billion or $24.4 billion. And help me -- I was going to pull up the number from our...

Yes, that was $23.733 billion on the net debt for -- total debt was $24.6 billion as of June 30, 2020.

Yes. $24.6 billion, and it takes trailing 12 months as of June 30, adjusted EBITDA was $3.275 million. A different way to think about it, David, because as I referenced, we, like any other company, has had its businesses impacted in meaningful ways by COVID-19. If you sort of use our guidance for calendar 2020, and guesstimate that we'll be somewhere just fully -- somewhere below $24 billion of net debt at the end of the year, we're levered in the low 70s as of the end of this year. Clearly, as I just articulated, a level that would be too high to effect the spin using this plain vanilla approach. I hope that answers?