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

Well, good afternoon, everyone, and welcome back to our last health care company presenter of this 3-day event. We're happy to have, as I say, last but not least, Bausch Healthcare and Paul Herendeen, who I think many of you know. Paul, we're going to do this without slides, the proverbial fireside chat. I think this is our third one. And actually, it was a year ago today just before the pandemics slammed into us that we saw you in Miami, and we had no idea what's about to happen.

Yes. That was -- I mean it seems like it was more than just a year ago. And first of all, we're delighted to be here. Even if I'm bad at cleanup and going last, it's great to have the opportunity to be part of this conference. And I just wish -- I wish I were in Miami.

You're being very good for the company and see you in the home office there. No, as I alluded to in just the green room for a moment before, because the spinoff is planned, I have fewer questions than normal on how the eye care business is doing and what its pipeline is and so forth because that will be for someone else's benefit. But you did highlight on the call the delayed surgeries in the U.S. I don't think you spoke to them OUS, but maybe you could speak to the percentage and then what that means -- how they'll feather in over the next year or 2.

Yes. Sure. And I want to cover a point here because you say it's almost like, for your purposes, you're not thinking about the eye health business, I think you should. I think you need to think -- continuously about the eye health business until we split because until we do, we're one company. We generate cash flow, and that cash flow we deploy to reduce test year at BHC and that in part is going to facilitate the spin at something in the future. So until we split, that's all important. And we love both of our businesses. Great question about kind of -- it's not on the pace of recovery, I think, in thinking about in the surgical business where, in the U.S., I mean, I think we estimated that -- I'll get the -- I have to refer to my notes. I think it was like 16% of cataract surgeries were delayed in the U.S., and it's a pretty good sized number, 600 -- let me look at my notes here, 650,000 surgeries that we estimate were delayed. And so in the U.S., that provides a tailwind for that surgical business, not just in '21 because you may or may not absorb all of those extra surgeries. There's always more people coming into the funnel. But outside the U.S., we estimate that, that number is kind of like 20% of surgeries were delayed even a little bit more than you saw in the U.S., and that, too, will be a tailwind for us. Importantly, right now, as we sit here today, that surgical business is about a 30% U.S., this is 70% OUS. And so while we are expecting in '21 and '22 a tailwind in the U.S., it's even more of an important helper for us in that international or OUS part of that surgical business. But let's not lose sight of that. The eye health business is a great business.

I'll keep an eye on eye care, Paul. I get the message. You love all your children equally. I thought with all the focus on expediting things or urgency or what have you, one thing that often gets lost in the shuffle is the degree of headwinds that you've been dealing with since, I guess, probably 2016 was peak earnings. 2020, I believe you lost about $100 million of EBITDA from generic LOEs that you -- or LOEs that you stepped into. I think it's about $100 million for this year, right?

Yes, for 2021. It's a real important point. But...

Well, I was just going to say, I didn't have a chance to go back and recap the entire -- you are running up -- down escalator or you -- you had a ground speed that was limited by your headwinds or whatever the metaphor is, can you recall what the 3- or 4-year cumulative that you had to be dealing with?

It was well over $1 billion. I mean I think I -- on the Q4 call, I said if you look over the last 3 years, the headwinds were kind of in the high 200s or low to mid-$300 million of growth drag on -- at revenue now associated with these LOE assets. A lot of those were in the neurology business, but certainly, not all of them. I mean it's an important driver in Optho Rx, with LOTEMAX, an important driver in Durham where we had just a number of those products face loss of exclusivity. And concept I talked about, David, on the call was, yes, looking back at -- in 2016, as we were looking at '17, '18, '19, '20 and beyond, you're just staring at this mountain of products that are going to lose exclusivity in a very short or a condensed period of time. And that's why we started reporting, and I'm glad we did, like kind of our estimate of what the growth drag would be in any particular year. So rather than talk about that, what I want to talk about is looking ahead, and again, I don't have my slide deck sitting here right in front of me, but the -- you do. The LOEs that we're looking at it in '21 v '20 are in the low 100s, I guess, $105 million or $106 million at revenue. And you say, well, that's a meaningful growth drag. I said, yes. But down from, let's call it, averaging around $300 million in each of the last 3 years, what I think that speaks to is that LOE growth drag was really masking the underlying ability of our base businesses to generate organic growth. As that LOE drag received as a challenge for us, you're going to start to see much more clearly the ability of our company across all of our base businesses to put good solid growth on the Board. Sorry, I don't want to get off the topic without covering didn't -- set aside, of course, the one everyone thinks about in 2028 for XIFAXAN. But if you set that aside, just looking out over the next 5 years, handful years, there's not a lot in the way of LOEs that are going to be anything other than an MD&A item as opposed to the really massive headwinds that we've seen for the past, well, 5 years now.

So if you think that -- this will be the last year, you'll have to call it out the way you do in a bridge.

I think once you start calling things out the bridge, you might as well just keep doing it. It's been helpful. I mean I think we've got a lot of good feedback from investors and a lot of checkmarks for providing transparency. I think it's a decent thing to provide as part of your guidance package.

All right. So all right. Let's actually refer to that LOE 2028. I guess the mission is to find alternative products with the same or similar molecule. I'll butcher it because I'm a generalist. But I think you call that a sickle cell. Can you talk about the clinical work that's being done, the scope of the market, what's your hopes there?

Well, you'd hope there -- an important point there was that the FDA did grant us Orphan status for rifaximin for sickle cell. And so for us, this is a, I'll call it, a relatively contained -- a project that if -- with success, you could, in a reasonable time frame, have a very, very interesting product on the market of sickle cell. Not going to make any proclamations about what -- hit kind of size that could be, but I'd say a very meaningful product, assuming everything works and we find the right space for the product in the marketplace. So that's a priority for us. We got some good news on development [ red sea ] for trying to get earlier in the treatment of people with hepatic encephalopathy. So we try to stop them from getting that first hospitalization and may have a pathway there with an enhanced version of rifaximin, that could be an important addition to our portfolio and is something that, one, it got me all the criteria. It's got to bring value to patients and physicians. It's got to be really value to the health care system. And we think that there's a prospect there. That's a very interesting alternative for us with a substance rifaximin that we know very well that we can put into a proprietary formulation that can demonstrate effectiveness for treatment that's not here before available. So really excited about that, but I want to keep going on the Salix pipeline and pipeline in general. It's incumbent on us as it has been from day 1 that we continue to flesh out our R&D pipeline and add things in whether it's in DI or whether it's in dermatology or, frankly, whether it's in neurology or whether it's in our eye health business, or in any one of our businesses today we continue to flesh out those portfolios such that each of the businesses, when you look at them you say, hey, when I get out to whatever date you're looking at, this business has a positive -- strongly positive terminal growth rate so that it continues to have value. The challenge that we -- our Salix business is -- the vaccine is a very large asset. It has great growth prospects. Now all the way up through -- it's extending out in 2028. And so when you get to that date, it's a big deal that you have this revenue that goes away. I know Mark, it's a lovely to think about -- you need a fashion and say, what are you going to do to actually replace that and say, I wish it were a simplistic formulation -- form to saying, well, here, we're going to add X, Y and Z, and we're going to stage it that we never be continue to roll off of 2027. But the point of the story is what we need is we need to know that in 2028, we've got a great portfolio that is positioned to grow and capitalize our competitive positioning in the GI space for Salix. And I think between here and there, it's our job, and I expect we'll succeed in going ahead and doing that.

Okay. You're right, I do have your presentation handy. I'm going to have to know your company better than I ever have because it is becoming -- well, we're losing the eye care -- that plan. Could you talk about new product pipeline in the derm space, which kind of haven't drilled down into? But there are a number of things enumerated in your deck.

Yes. I mean the derm space is funny because that is the area where we have had pretty good productivity of getting products out into the marketplace over the period that I've been here. We continue to have great capabilities. Actually a group that we have out in California that does most of the development work in the derm space. I think that right now, we just launched our ARAZLO. Right now, we've got IDP-120 for acne, which is just complete -- Phase III is completed at our primary end points, and we're looking for what's next there. We've got another active combination. First Phase III is completed and where they evaluate where we go from there. I think we have the capacity to continue to develop our products and get them out into the marketplace. The main portion of the derm is the commercial model because that space has been one that's been impacted more so than any other space that I'm aware of in the branded -- U.S. branded prescription pharma business. And it's a question of how do you go about doing that. And that really is not reflecting sort of the pipeline, more how are you going to play in derm. And I know that we're -- we continue to look for ways that we can reconfigure that business and capitalize on what we have, which is a portfolio of products already in the market, a portfolio of products coming to market, a really good set of individuals and people that work in that business. And we have watched that business really break down and reset itself. And now is the opportunity for us to reposition that and bring it back into a growth mode. And in large part, that's more around how we reconfigure the commercial side to adapt that model to the realities of just setting in a mid-term business with our type of product portfolio.

Solta, which has been getting a lot of attention, seems to be highly regarded and highly valued, in part because it's, I guess, the cash business, not a reimbursement business. Is that part of the secret or going forward in the dermatological pharma space, too?

Well, the secret being cash pay?

Yes, yes.

Yes. I mean yes. I mean if you go back to the old pharma model, I said in one of our breakout sessions earlier, like if you took our product portfolio today and went back 10 years and had it in the derm space, it'd be a terrific, terrific portfolio with lots of revenue and extremely profitable, et cetera. But today, with the pressure from payers, and that pressure just continues to increase, saying I'm flat, not going to pay for that. I'm just not willing to pay, that you need to look for other ways that you can bring good products to bear or bring good products to the marketplace in a way that when physicians write it, they know that the patients can go out and get it. We've shown in a couple of instances that we are willing to go forward with a cash pay model. Say, if you want this product, you're going to pay $75 of cash, and here's is how to go now getting that. That's a new model. And you've got to be sure that economically that works, and I think we're starting to prove that out. And to the extent that we can further advance that model, I think you're going to see that we're going to, one, that business is going to be solidly profitable. And two, it's going to have growth prospects as we look forward. I want to just say on Solta, because it does get a lot of attention. Solta is a great story. It's run by a terrific guy, one of my favorite guys in our company, Tom Hart. And that business just continues to grow dramatically, and that's basically on the back of some really good technology with the Thermage FLX platform. And that is a razor blade type business. You get the systems out there. And then you have the consumables, the FLX tips and we've got a long way to go with that business. I mean that is predominantly Asia Pac-focused business. We have done very well in placing machines there. We have ramped up dramatically in the FLX consumables in Asia Pac. Boy, we're not done in Asia PAc in terms of replacement of equipment. We're just getting starting in Western Europe. The U.S. business has gained a lot of traction over the course of the last several years. That business is just very, very well-positioned for today.

I really haven't had a chance to challenge that with the physicians on that. It was a relatively small part of following you historically. I think the company only pay about $200 million, $250 million mark. And then the revenues were coming down for 2 or 3 years. But I have no idea. I took my off the ball. What happened? Is it a new device?

Well, it's an easy question. It shows you the value of management. And like you say, that business, if you went back to 2016, when I first joined, if you looked at it, it was a business, you'd say, I'm not sure what -- like you're looking and saying, oh, all the things we've got, here's this little thing that's pointed in the wrong direction. And honestly, and I think we've disclosed this. I'm sure we've disclosed this publicly. We will be public now is we look to sell it. And there were not a lot of attractive bids for the business, and the bids that did come in, we kind of looked and said, this business has not been managed. And by the way, that was a theme within our company. We had a lot of business units. So we're not especially well-managed. So this business in up and manage. So Tom Appio , who runs our B&L outside the U.S., is a guy who win a lot of contacts, and he went out and he said, I've got this fellow Tom Hart. And we should put him incharge, it wasn't putting Tom in charge, but it was pretty putting Tom in charge -- Tom Hart, but it was also then supporting him with the kind of investment that he needed both in building out a sales and marketing as a structure, but incredibly importantly, like stabilizing the manufacturing, build out -- digitally out the R&D and ensuring that, that business is invested in a way that they had a chance to succeed. But all that starts with having a great leader like Tom Hart with great vision. And like I said, you didn't notice it a few years ago because you wouldn't notice it, it's important to notice it when it started to grow like a bad weed based on the real good work of Hart's team.

Can I just get a little bit more commentary because I'd like to run with that. You said that it was a common theme of not having well-managed units back in the day. Is that because it was just set up for M&A or -- that's the only thing that first comes to mind?

Well, all I can tell you is, I mean, you watch the outside as I did before I got here and said, the company was built on a series of acquisitions. And as an outsider looking in, whenever anybody asked me about Valeant, I often said it's -- you've got all these businesses you put together. Some are very attractive businesses. But I didn't see from the outside that there was any story about how you put them all together and then optimize and get -- and maximize the value of each one of those businesses. And all I could see from my position coming in was we had an eye health business with -- Vision Care business with contact lenses where the whole market was going to daily silicone hydrogel lenses, and there wasn't one in development in 2016. I mean how can that be? So I -- so we did set about doing that. But I think the other way you feel about it is in the United States, our Vision Care business was declining quarter after quarter after quarter when Joe took the reigns back in the early part of 2016, towards the latter part of 2016, another Joe Gordon came in charge of that business, and I'll tell you what, it took him a while to find his feet, and it took us a while to support him with the kind of investment he needed. So once Joe Gordon got used to it there, you started to see -- we started to call out on our quarterly calls quarter after quarter of organic growth in the U.S. And like -- I mean, the U.S. Vision Care business for the last several quarters, even in the [indiscernible]. And it's just a testament to that team. So all I'm saying there is I'm comparing what are we doing with the assets we own versus what does the prior regime do. And I'd submit, we're fundamentally growing the value of those assets by appropriately investing and providing resources where they're able to prove productivity in terms of increased revenue, increased profit, increased cash flow, where I'm not sure what the fellows were doing before, I wasn't here, but I know what we're doing.

Okay. Fair. I like that. So one thing before we leave Solta, and again, it's been called out a few times lately. But as I thought about it, preparing for this call, it seemed to me that the same logic that applies to eye care applies to Solta and perhaps more so that if it's valued at even fancier revenue or earnings multiple, there's a -- whatever the opposite of gravitational pull at work there.

Yes. I see where you're going here, David, and I would submit that, yes, I mean I think outsiders looking in at our company because we are a collection of a variety of assets. We try to be transparent. We try to show you as much we can. But you don't see Solta in isolation and understand what it could be. I would submit that equity investors and debt investors, we are looking at the value of that asset don't value what it's worth in its sum of the parts. That entity went from being one that was worth a little bit to -- in this environment and the type of business it is and in a way it's tracking and the opportunities in funded, it's a very valuable business. No question about it.

So you highlighted back in August that there would be dissynergies. Could you give a sense of how much work and money and effort, blood, sweat and tears went into putting these things together, I presume getting synergies, I presume sharing IT and resources and management and R&D, and I don't know what else. So every time there might be something else that gets covered, there's going to be more dissynergies, there would be, right?

Well, there could be. I think the way we're looking at it today. And I think what you're referring back to is we kind of called out and said, look, if we separate with the assets we have today, our guesstimate at the time which we haven't changed, it was circa $150 million of aggregate dissynergies of which 60% or so would attach to the eye health business and the balance to RemainCo. That's a fact of life. I mean we share a lot of systems. We share -- I would submit that we are a pretty leanly managed organization generally. We are pretty proud of our efficiency and how we deploy capital. But when you split something in 2, as example, your IT system in 2, it's not half of what you spend in one company. It's a pretty big step-up that if you add those 2 things together, your goal is to make it not be the 1 plus 1 equals 2. It's 1 plus 1 equals 1.5, 1.6. But that's an example of where the synergy is unavoidable and in any material. And yes, a lot of blood, sweat and tears is going into the process of architecting what does each organization look like, building out organizations, but each is ready to rock and roll. Would it be the case that when we're ready to roll here, by the end of Q3 this year, is everything going to be perfect? No, but we'll be ready.

Okay. I've got a few more, but I'm going to turn to what's popping up on my screen here, compliance, and I'll read the first one of these, I think, verbatim. Do you plan to complete any refinancing in the market -- in the high-yield market before all the moving pieces of the strategic review fall into place?

Yes. I mean not going to just specifically state what our financing plans may be, but I just -- I'll answer it with the statement that says I think you will agree with me that as we've gone out to complete all of our debt financings, we've tried to do so at a point in time where all of the relevant facts were known to all of the parties so that everybody kind of knew what was the state of play. Right now, we have a lot of balls in the air. And so there's some uncertainty. But as those play out, I mean, we may welcome back and prior to separation, look to complete the financing. But again, not going to outline what our specific goals are right now. But please, I hope you'd agree. I hope the market would agree. Our intent is always to provide all of the information so that if you're able to go forward with our financial transaction, everybody knows exactly what's up.

I wonder where a rating agency would fit into that because that's not entirely within your control. But once the game plan is laid out, an investor in a new bond, I guess, I want to know how the agencies come out on the RemainCo.

Sure. And as you know, I mean, our relationship with the rating agencies, I think, is quite good. And that's -- it's quite good because we endeavor to meet with them frequently, at least quarterly, and keep them apprised of what our plans are. And of course, we have confidentiality with them. So they know that, at the most, what our plans are, and we can evaluate what they're thinking about our plans. And so yes, it's certainly an important consideration, but I think it without -- in off-line a third party, and I go back and say from just a perspective, it's like we want market participants to understand exactly what's upfront raising that capital.

Okay. Let me go back to -- so a question here about the vaccine concentration. When considering asset sales -- it's actually pretty sensible, I think. When considering the asset sales is the concentration of the vaccine at RemainCo part of your calculus?

Yes. I mean, of course. I mean, that actually would be an important part of RemainCo. We talked a little bit, I think, or a little earlier about how important it is. It's -- so sure. I mean you're looking -- you're looking at RemCo having just one asset that will date certain, lose exclusivity at the beginning of 2028. So as you look at the balance of the portfolio, what do you have? I think -- the way I think about this is there's going to come a day, 2028 sounds like it's quoting running one of the market participants from an earlier meeting. 2028 sounds like it's a long, long way. It's not. Right around the corner. It feels like it's right around the corner. And I would assure all parties -- when we look out and we look at -- we're thinking about RemCo. When you look out, you say, what you want to be is you want to have a vision of what RemCo looks like in 2028. And that's important, both from the perspective of RemCo and thinking about its value and its ability to do accrete value from an equity holders' perspective, and secondarily, having a capital structure at that moment in time that fits what that company becomes in 2028 with the loss of exclusivity of XIFAXAN. So yes, of course, it's part of the calculus when you think about potential divestitures of any asset.

Okay. I always like to ask of companies that have active investor dialogue and conferences. Any learnings from your recent conference presentations, your post quarter slate investor meetings? Do you think people are excited about something, misunderstanding something? What's your general sense?

Well, of course, I mean, this last quarter, we have -- we're welcoming 2 new Board members from Carl Icahn's Group. And so that's had a fair amount of attention. And people ask, how do you think about that? And I'll tell you the way I think about it is first, I think it's terrific that someone -- that an investment group of that caliber elected to take a stake -- the size of the stake they took in our company because they see the value in a very, very similar way to the way we see the value and the value for -- meaning the value today is still not what the value could be tomorrow. And I think that welcoming him on the Board, I'm always interested in the insights of smart people. I think we always we have a lot of very good investors that are concentrated in our shares. They've shared their thoughts, and we love to hear them because you can always learn something. I'd love to say that the situation we find ourselves in is one where it's oh so clear that this is the road that we should go down. The facts are, I don't think there is any single comparable transaction to what we're going through right now to try to unlock this value. And so the insights from any external parties are quite valid. We have some investors that are not public who we speak to, not publicly, I'm not going to call them out, that we speak to that, man, some of the advice that they provided to me has been very helpful in framing various ideas. And so that input all gets baked into. So there's been a lot of -- in the wake of the announcement of adding 2 new Board members, we had a lot of that. On a different -- from a different front, and this is -- I know this is a debt conference, we're going to talk about the equity value for a second. I think what's most interesting is I think that the folks that we've talked to most recently are really starting to come around to the idea that this eye health business, the one, David, you don't want to talk about, but I do. The eye health business is going to attract -- from an enterprise value perspective, is way more valuable than people were kind of giving us credit for 4, 5, 6 months ago. I think what we announced back in August of last year that we were going to stand up the eye health business and spin it out. People's reaction was, oh, okay, so here's their business, and they slapped, I'll call it a modest multiple on it, above our trading multiple, but a modest multiple on it. It said, well, that's what that's worth. Okay, but I don't see it. Like, I'll tell you what. The comparables for that business traded at a very high multiple, not going to call them. You can look at it. Traded at a very high multiple. And you start to ask the question -- I'm starting to get the feedback and said, why would our eye health business trade at something like the low end of the range? And the answer is it won't. And the reason why it won't is because our business is a darn good business. I almost swore there. It's a darn good business. That has great growth prospects. And it is somewhat unique, and it has all 4 legs of the stool. It's got a great consumer business, a Vision Care business, a surgical business and Optho Rx business, and it's positioned to go from #4 in a 4-player market globally to being a pretty interesting company. So why would that trade at the low end? And I think people are starting to come around to the idea that is -- huh, it probably won't trade at the low end.

Yes. Well, don't get me wrong. I work with Chris and helped tell the story on the entire separation and some of the value, it's just that we know we're going to "sell it for 3 or 4x," and that's all we're going to get. So even if you cure cancer, that's not for our account, unfortunately.

We just got to make sure that we also focus on that -- on -- I know we're running short on time, but focus on what RemCo looks like. Set the leverage side because we'll have to do it in a way that it can handle it. RemCo, damn good business. I swore there. I didn't mean to.

We're almost going to have to cut you off. But let me get this one last investor question, and that is, are the banks entitled to the asset sales and dividend from SpinCo?

Entitled, I don't know the specific answer to say is it mandatory. Just suffice it to say that if we're spinning -- excuse me, selling assets, it's highly likely that the net proceeds will be used to reduce debt. That's -- I'd have to go back and look to see the specific answer to that question. I apologize.

No worries at all. Paul, I think we've landed this right on the 35-minute mark. So maybe we'll have you back next year, but it'll be a different dialogue, I think.

Yes. And I hope it's in Miami.

Thank you, Paul, for your time always.

Thanks all.