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

So thanks, everyone, for joining us. A special thanks for Joe taking the time today in the virtual world. We really appreciate it. We're looking forward to being able to give real hugs in Boston next year. So knock on wood that everything will go our way, and we'll be doing it. Joined on this call by Georgi, but also my other colleague, Stacy, is on a different call, and that constitutes our team. So Joe, I know you had some introductory remarks or believing you have some introductory remarks. So why don't we turn it over to you first, and then we'll get into the Q&A.

Sure. Well, first of all, thank you very much for inviting us. Happy to be here today. Last week, we had a chance to report on our earnings for the fourth quarter and our 2021 guidance. Overall, I want to say a couple of things. Number one, we are seeing business recovery in progress based on where we exited 2020. We exited 2020 with good momentum coming into 2021. That's, we think, is probably the most important comment. But if you think about some of the specifics of what happened to us, clearly, COVID was the story in 2020, but notwithstanding COVID, we exceeded $8 billion of revenue. And our fourth quarter, importantly, our fourth quarter revenue of $2.213 billion was almost identical to the $2.224 billion that we achieved in the fourth quarter of 2019. So we're back -- we're coming back, I guess, is the important point I wanted to say from a revenue point of view. And indeed, our cash flow was very strong. For a company like Bausch Health, having strong cash flow is important. We had $394 million of cash flow in the fourth quarter, which was up versus the 2019 pre-COVID levels. And then finally, even EBITDA, fourth quarter, $911 million, being up versus the fourth quarter of 2019. All that meant to really talk about some of the things that we look at in terms of the recovery in progress and then the momentum. Beyond the momentum, though, one of the things that I would say that was important to us is that as we enter the 2021 time frame, we took some steps in 2020 that I think are the right things to do during a downturn. What do I mean by that? Number one, we increased market share in some of our key brands: VYZULTA up 40 basis points; LOTEMAX, up 160 basis; PROLENSA, up 180 basis points; XIFAXAN, up 80 basis points; TRULANCE, up 170 basis points. I won't go through all of them, they were in our earnings. But I think it's just an important part of the message of what we tried to focus on during 2020 was grow our market share, so that when the market does recover, we're going to be in a better location, a better spot for us to go forward with good momentum. The other important point that I hope I can comment on relative to what we said in earnings is that we see some real strong tailwinds for us in terms of catalysts for the 2021 and beyond. The easy example is our surgical business in Bausch + Lomb. Cataract surgery, as an example, we pick up volume there, both through our intraocular lens, but also the procedures that we do on our Stellaris Elite. We know that cataract surgery in the United States and around the world were delayed in 2020 because of COVID. And unfortunately, if you had cataract before COVID and didn't get them taken care of in 2020, you still have them, and that's going to create a backlog of delayed cataract surgeries. We think that will -- United States, about 650,000 delayed cataract surgeries that's going to create a tailwind for us in 2021 and beyond. So I think those are some of the important things that we think about for 2021 and beyond. And then importantly, we've got some really good R&D catalysts that also, I think, are important. Now we've got a readout of a Phase III study in our NOV03 product for dry eye disease. Ken, as you know, a very, very large category. We think we've got a product, based on the Phase II data, that shows relief of both signs and symptoms of dry eye disease. With that, really excited. Look forward to getting that data in the next several months. But I just wanted to do that quick review and happy to open up for any questions you have.

Great. Okay. Thanks, Joe. I appreciate it. I'm going to go a little -- start off with a little bit of a long-winded one.

Sure.

Dealing with another company -- and I don't have many -- much experience with this, but dealing with another company that went through a situation where they felt that there was trapped value, one of the biggest issues for them was they had divisions that they thought would be a good idea to sell and put in different hands and -- but the process that they were going through as they were thinking about things was you couldn't control the price of your divisions, you couldn't control the timing of selling your divisions. So what -- as my familiarity with the thought process was a spin, put the control back in the hands of the company. So if you wanted to unlock the trapped value, if you put a spin time frame in to those 2 areas or 3 areas or whatever areas that you would have that you wanted to try to unlock, it now is back in management and Board's control of executing on trying to unlock the value. But between putting that time frame in of when it is accomplished, there's still this open area of now maybe there's a little bit more control in terms of selling assets. Obviously, you can't necessarily control the price, you can just say no to price, but you can now maybe put a little bit more control into the timing of it all. And so my understanding, again, back at the decision of a spin from another organization was, look, if this is not potentially the most value-creating, what could be the most value-creating is now controlling the ability to maybe sell some assets pre and cleaning it up that way and really untrapping the value. So I just went through a long preamble about my understanding of maybe how this process works. Now we're at your process. And you have now put spin on the table, and obviously, it's going to be affected. But can you talk about between now and spin, maybe more control back into the organization to sell some assets pre that? And maybe how investors should be considering that as they look at the totality of the company now versus where it may spin and value that can be created pre-spin? Is there any way you can help us with that?

Sure. I think if you have a potential opportunity and strategic planning for companies because I think you phrased it very well in terms of what people think about in terms of capital allocation. So if you ever want to change your role, you've got an opportunity. No, I think you said it very well. I think the issue that we believe is the best way to unlock the value that we believe is in this company for shareholders is to spin the B&L business because, as you said, we have control over that. We know that we are going to have the financial reporting segmentation available in the first -- with first quarter results, so that will be done. We'll report that out in May. So that part will be done. We believe we will complete all the necessary requirements to spin out B&L by the third quarter of 2021. So once again, we have control over that, and we'll be able to do those types of things. So those are the things that I think are the key requirements. To your point, what we're trying to do, the biggest opportunity for us is to unlock the value, which we think this spin will do. There are other ways to do it, to be clear, if we were to be able to monetize an asset and divest an asset, that could also accelerate the shareholder value creation. To be clear, that is something that I mentioned on previous earnings calls. I said as we announced the spin in August, we also announced we brought on some advisers to help us. The combination of the advisers coming on, the commentary that we made about the spin created some inbound calls we received, both from us and the company as well to our advisers about potential other ways to create shareholder value. Those are things that were absolutely going to be part of our discussion. What I said on the call -- this past call that I hope I can say again because it's important is that we think the best value creation unlocking is to spin B&L, to be clear. But we know the leverage is an important issue for us. So we think that we can divest some assets that could help accelerate that timing. What -- since I joined, we've divested about $3.8 billion of assets, proceeds we received. We did them at an approximate EBITDA multiple of 11x, but the big prize is to spin B&L to unlock that value. If there are asset divestitures that someone comes to us and says, we'd like to buy asset A, whatever that may be, and we're willing to pay blank. And we think that, that's a good deal, we're going to listen. We're going to absolutely going to go forward with those types of things. But what I want to say to that is and what I tried to say in the call is that I don't need to do a perfect asset divestitures at a multiple of ex EBITDA. What I want to do is do good asset divestitures that give us fair EBITDA multiple if they will help me to unlock the bigger value creation of the spin and B&L. So to me, that's the mindset of what we're trying to accomplish and how we're approaching this. We don't have to do a perfect divestiture. If we do one, that's good, but it helps us to accelerate the timing for B&L. That's something that we will look at, and we look at very seriously. And I think some of the investors looked at our most recent 10-K, and they saw words about some assets that we are truly, at this point, holding for assets to sell. So clearly, there are things that we're looking at, and I won't go into any details right now because, obviously, we're in the middle of those discussions, but there are clearly things that we're looking at there.

And when you think about how investors look at the company, is this one of the biggest areas of you think disconnect? Obviously, nothing has been done yet. Is this an area that you think is confusing to investors that they don't appreciate that there could be unlocking even pre-spin? Or do you think that there's now a general appreciation? Or do we just need to sit and wait and see how this is accomplished? I'm trying to gauge your level of confidence in kind of that maybe pre-spin value creation process.

Well, I do think that there's a growing appreciation for it. I think as we started this back in August, and we talked about some of the multiples of the peer companies that B&L compared with, I mean, I won't go through exactly the companies. But if you think about where Alcon was trading at 2020, EBITDA multiples of plus 30, I think Cooper EBITDA multiples for 2020 were at plus 25. I mean they were trading at some big numbers versus what we currently were trading at as overall Bausch Healthcare. So our view on things like that were let's unlock that value by spinning out the B&L, and we'll get the value for our shareholders. So quite simply what we said. We recognize the timing consideration, and we tried to put that in front of people. As we said, we'll be ready by the -- with all the necessary objectives that we are targeting for the third quarter of 2021. But the question still is, there is an issue that we have to work our way through on this question of leverage. I think that as we solve that leverage question, that, I think, will help unlock some of the value faster than perhaps others may have expected. And I think the way we're going to do that is, obviously, growing EBITDA, which is clearly number one. As we grow EBITDA, we'll increase cash. As we increase cash, we'll pay down debt. And just as you've talked about before, continuing to execute on the basics, I think, is the way you phrased it. Number two for me is we're going to be more efficient in working capital, and I think that's something that just the ability for us last year to pay down $900 million of debt in a COVID year, I think, was outstanding. And I think it's because the team did some really good cash management things along the way during 2020 to allow us to do that. And then -- so that was [ like basically ] a good example, working capital efficiency. And then finally, the divestitures, as you said, if -- I'll let others decide what they think certainly the sum of the parts are for our business, but we've got an aesthetics business that is doing extraordinarily well. It's growing at over -- our Solta business, I'm referring to, growing at over 30% a year over the last several years. And that business, at least what I see in aesthetics, are trading at multiples that are 20x. I mean crazy, good numbers for the aesthetics business. So that we are looking at those types of multiples and what's out there and potentially looking at what we can do to help unlock this value for our shareholders. I think it is that realization that if we could move up the timing by working diligently on these things, I think that would be good for our shareholders and good for all the stakeholders of Bausch Healthcare.

We want to talk about certainly talk about Global Solta and Thermage in a second. And this can be a yes or no answer to this question I'm going to ask you. I think public equity investors understandably look at certain divisions and are willing to ascribe only certain value for them. For whatever reasons they may be, they believe they're undifferentiated assets, they're more generic or whatever the issue may be about a division within a public company, it strikes us that private equity has clearly different motivation. Growth is less important, ROI is more important. So as we think about some of the other divisions besides a less exciting Global Solta, is the framework that I just said maybe from public equity investor, the arbitrage to a private equity investor, is that something also that maybe we don't fully appreciate? And it can be yes or no, I'd love for you to elaborate, but just hear some thoughts there.

I think there are clearly differences in how public markets and private equity look at the businesses, so I believe it's clearly yes. I think pros and cons on both of the approaches, but the thing that I think many people sometimes forget about Bausch Healthcare is how the business has been structured. First and foremost, we're a Canadian business in terms of headquartered in Canada, which gives us certain tax advantages in how our businesses are structured. So I think that that's clearly an important commentary on -- because what it is in the end, it generates more free cash in the point of view of our lower tax rate. So I do think there are some advantages in terms of our -- we generate significant cash through our business. So I think that's a part of the differences there from a private equity point of view versus the public markets in terms of that cash generation. There's more than that, of course, but I think that's a simple example.

No, that's helpful. I wanted to ask about management structure going forward. And for us, as we try to think about how the divisions may go and be split, just maybe where you stand in trying to figure out the go-forward, who's running? And is it -- should we be anticipating it will be folks that we are aware of from a Wall Street perspective? Or is it more kind of internal and we'll learn more about all the good leadership that you already have? Can you help us a little bit understand the management structure as we think about the spin?

Sure. Happy to. So one of the things that the Board and myself and our Head of HR have done here is really spend the time on succession planning. So we have a very good process on succession planning. And as part of that, we've had a chance when we do succession planning to also make sure different individuals that are going to be considered for future existing leadership roles get challenged with new opportunities. So we've done a good process with that. The overall comment I'll say is that we will have more to say about this in the first quarter results, which usually, we start at that first week of May for those results, where we'll -- number one, we will have the financial reporting of the new segment, the B&L segment, versus the remaining business segments. So that's clearly a step in the -- an important step in the right direction. But beyond that, I also expect to announce some of the leadership roles in individuals for the -- not for the entire organization, but for some of the key leadership names of individuals for the different businesses at that time. We have a process we're working through with the Board. We're looking at both internal though our organization from the succession planning and we're also going to look external for some of the roles simply as we think through where we have good people and good team members that we can elevate into roles. But importantly, some of those people have had a chance to names that you will have some familiarity with, they're leading businesses, they've been part of the business, the dialogue discussion for us over the last several years. So some of the people will be internal, to be clear. I think the majority of the people will be internal, but there may be some outside the company as well.

Okay. That's helpful. So I thought while we had -- have you, the boss, on the phone and you make the elegant argument about wanting to capture similar value as an Alcon or CooperVision, and we at Cowen make that argument as well. Maybe just give you a chance to discuss kind of why folks should view that spun or to be spun component of the business the same? Can you just talk about some of the attributes, maybe similar or different, that gives you the conviction that as spun, they really -- this really should be looked at in a similar light?

Yes. I think, first and foremost, in any business, it starts with the strength of the brands and to start with B&L as a corporation, B&L has been around for 100 and -- I think it's 165 years. So it's a kind of longevity that is unsurpassed in that sense. Number two, it always comes down to what the ability of the business has shown to grow growth rates and what we've shown up until COVID, I think we had up to, I think, 13, 14 consecutive quarters of organic growth with the B&L business. So I think that clearly, the growth side of the story is clearly true. Beyond that, one of the things that I think is really important is that we were able to achieve that growth at B&L from an organic basis, even in the face of a number of loss of exclusivity products that went generic. So we still were able to get organic growth despite the fact that we had loss of exclusivity on products like LOTEMAX, for example. So that, I think, is all part of the story of why we think there's a good opportunity in terms of demonstrated organic growth. Now I move to the next phase. What about the future? Because I think that's clearly the -- what people are looking at when they try to make expectations on where sales will be, revenue will be, where earnings will be. I think we've done a lot at B&L to enhance the pipeline of products. I'll start with the product that we're launching right now. The silicone hydrogel contact lens, daily contact lens, we call it INFUSE in the United States, ULTRA ONE Day outside of the U.S., and we're seeing great reception to that already. It's early, to be clear. But as we launch that, we're seeing that 94% of the patients say that they can wear the product all day, which is one of the problems with contact lenses, the ability to wear them all day. And that's because we paired up a great optics lens with the osmoprotectant and electrolytes that are part of the story to help relieve the contact lens dryness that we know is a significant problem with contact lens and silicone hydrogel, for that matter, all contact lenses. So we think we've got a good positioning there, opportunity for the product. We think we've got great survey data with the SiHy daily lens. And albeit very early, we're seeing great results so far in terms of 76% of these patients or 75% of it is are coming from other contact lenses to our product to try it because they think it's a product that can help them. It has great optics, to be clear. There's good comfort and all-day ability to wear it without their eyes feeling dry, I think, is an important part of why this product will be successful. But I think it's just one example of our pipeline. Beyond that, we've done a lot to build out our pipeline in the ophthalmology prescription business. And that's something that I think differentiates us. As I've said in a couple of different times, there is no doubt in my mind that the need for eye health is going to increase. We see what's happened. Myopia has gone from about 20% of the population in the United States up to about 40% of the population. Predominantly, we believe, based on the fact that children, especially young children, are spending more time on looking at screens, looking at -- playing video games, indoors versus being outdoors, and we think there's potentially a link there towards the increased incidence of myopia. And myopia is not important just because of the vision correction, it's important because it's a risk factor for things like macular degeneration, glaucoma, retinal detachment. So all those things are part of the need for eye health. But going into why B&L especially is good, we have an integrated approach to eye health. So what I mean with that is, yes, we have vision correction with the contact lenses. Yes, we have surgical. We also have a great consumer business in eye health. But importantly, we also have the prescription business. And we think that the more integrated approach we take to eye health, the better off we will be as a company in terms of allowing us to be able to show that when we go into the optometrist or ophthalmologist, we can help them with whatever they need. And as the ophthalmology practices and other optometrist practice get more and more rolled up, having this one point of contact, we think, is going to be an important part of an integrated approach to B&L. So I probably went out a little bit longer than I would like. But I think in terms of your answer, I think we've got a lot of reasons why we should be at the kind of multiples that our peers are at and perhaps because of our integrated approach, someday, hopefully, even better. But I think that we'll have to show that with time. We'll have to roll out potentially the infused product and show that. Capabilities will hopefully get the Phase III data on our NOV03 for dry eye disease. And if that is successful based on the Phase II results, we will have both signs and symptoms for dry eye disease, I think that will be a major, major opportunity for us at the company.

No, we want to give you time. I mean it's a critical aspect. Obviously, there's different ways of looking at valuation. But the durability, the international nature, the consumer nature of your business, it's -- to us, it's been underappreciated, which we sometimes ask why not the comparison to those that are afforded kind of better value. So I'm glad you took the time.

Ken, can I add -- let me just add one more statement on that because I do think it's an important statement that on -- when you think about just our business and you're thinking about from a U.S. perspective, I won't get an exact statistic right, but I believe only about 5% of our B&L business is affected by U.S. branded prescription pricing. So if some of our investors are concerned about what could happen with U.S. branded prescription pricing, B&L is a great place to be because less than 5% of B&L is impacted by U.S. branded prescription pricing, just as another example of why I think it's a really important part of the business.

Good. I know we're getting low on time, but you mentioned one area that's really interesting, and we agree with you, which is clearly Global Solta and Thermage. What we've seen historically in the aesthetic space, and you made the commentary that we did see ZELTIQ go for about 8x revenue -- 7 to 8x revenue. And clearly, that's a function of the belief in both the growth of a product and the duration of the product, i.e., it's different. It's not necessarily a prescription. It should have a much longer live to it and tail to it. So can you talk about, one, I'm showing multiples out there that maybe even you feel are low? Can you talk about that business and maybe what's underappreciated?

Sure. I mean this is part of our -- Solta is part of our remaining business. I think that's another part of the business that I don't think has gotten the clarity of how valuable some of these businesses are like Solta, like our international pharma business, like our Salix business and what we've been able to do. So I think that there's -- just like you asked the question on B&L, I can go on for hours about the remaining business as well. I'll keep the answer to your question of Solta and Thermage. But let me talk a little bit about remaining business and Solta, Thermage first. Solta has been an outstanding grower. It's done great. Over the last 8 quarters, I think, it's had a 30-plus percent growth rate, greater than 30% growth rate over those, I think, 7 of the 8 quarters. So clearly, very significant growth. Beyond that, what we -- I think, clearly, is part of it is that, certainly, over the last 4 quarters, as we spent a lot of time as we are today on screens, and I get a chance to see myself on a high-definition screen, it makes me say, I understand the Zoom culture and why people put more time and money into Zoom culture and into aesthetics in terms of looking at myself in a high-definition screen. But all kidding aside, I do think that, that mindset of people spending more money on the aesthetic side is clearly something that's happened over the last -- not just the last 12 months, but last 24 to 36 months, we've seen the aesthetics businesses for all other different competitors grow dramatically. And importantly, they also are cash businesses, which I think is an important part of how people are approaching the reimbursement, et cetera, that in a cash business, people are willing to pay high multiples for those types of business and one with our Thermage is just showing outstanding growth across it. The important factors, though, that I think are important for the future is, yes, it's a Zoom culture, but it's also willingness to spend more on the aesthetics. So we're seeing greater penetration into the marketplace in terms of just overall demand in places like Asia, places like the United States. And then the final one for us that we're just beginning to scratch to surface on is we think there's a significant European opportunity that, candidly, we just didn't have the resources in Europe before. We are now building those resources. We've been building them over the last 12 months. We think the European opportunity for Solta will also be very significant, which will just give another driver for growth for Solta in the future. And finally, of course, I mentioned on the call, but I'll mention here. We've also been investing in the R&D platform for Solta, we have the Clear + Brilliant touch laser U.S. launch coming out. So those are all designed to make it easier for the physician to do the aesthetic procedures and allow us to also grow those businesses. So -- but Solta is just 1 example. I mean I can go into the international pharma business also or Salix. But I think the large parts of the remaining business that were also underappreciated and we'll get better appreciation as we spin out the B&L business.

Okay. And I apologize, Georgi, I think you probably see the questions on the screen, and we're bumping up against the done time here. If you want to pick one, Georgi, is there one that you see particularly should be asked or did we kind of cover the landscape? And Joe, just to give you a heads up, we have only about a minute left. So whatever the question would be, maybe the answer needs to be, unfortunately, my fault, that pushed us here. Anything, Georgi, or do you feel like we covered it?

I think we covered most of your questions, and there's a couple that probably will take a lot longer to go over.

Well, I want to tell everyone that's listening, it's my fault. I'm computer-illiterate and so I can't do two things at once. I apologize.

I'm excited about the business and having a chance to talk about it, and I appreciated the questions you gave us.

Joe, I think you brought it to life. And I think everyone on the phone knows how we feel about the organization, you and the value here. And so we really appreciate taking the time and helping really further bring it to life for us. Thank you so much, and enjoy the rest of the conference.

Thank you very much. Thank you, everyone, for listening. Have a great day.

Take care.