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

Good day, everybody. Thank you for joining us for the Bank of America Annual Healthcare Conference. My name is Jason Gerberry. I am one of the analysts at BofA covering biopharma. So I cover specialty pharma and biotech, and I'm pleased to be introducing our next company presenter, Bausch Health, and CEO, Joe Papa. So Joe, Thanks for joining us. Hot off the heels of your 1Q update.

Thank you, Jason. Thank you, everybody. Pleasure to be here.

So not surprising, I think some of the questions that we've been fielding over the last week or so kind of mainly around the proposed intent to separate the businesses, unlock shareholder value. You had the 1Q update, you revised some of the capitalization targets. The markets reacted, how the markets reacted, right? We don't need to revisit that. But maybe can you just talk about, frame maybe what drove some of those changes in capitalization targets? Do you view those as firm targets now going forward into the 3Q separation? And then one technical question I get from some investors is, are those based on last 12 months EBITDA? Or are they going to be based on projected post sort of COVID-19 recovery EBITDA thresholds?

Sure. So let me have a chance to go back a little bit to August when we first talked about creating 2 great companies, the Bausch + Lomb pure play Eye Health business and then also the Bausch Pharma, which is a diversified global pharma business. And we -- to be clear, we will rebrand Bausch Pharma, but I'm referring to that as the remainder of the Bausch Pharma business at this time. It will be rebranded. On the question, though, our view is let's create 2 great companies. And as we thought about this issue about where we were going and trying to create these 2 great companies and unlock the value for our shareholders, we really said, let's look at each of these in more detail. So for example, on the remaining company Bausch Pharma, we said it's going to be a very strong cash generator with the ability to delever very quickly. It's going to enjoy an attractive tax rate, and by us thinking that we put those numbers out. We also wanted to make sure there was going to be no real material change since the November 2020 U.S. elections. And we do believe that's the case. We think the -- when you look at the CapEx and divided it, how much goes CapEx is required for the Bausch Pharma business, how much is in the B + L business, and looked at all of those questions, the ability to deliver high margin in Bausch Pharma. And we, importantly, think it can grow in that mid-single-digit rate. So all those things have been part of how we've thought through this. In addition, since November, we've been doing a lot of what I refer to as scenario planning to ensure that these targets are correct. And this probably is more of a forward-looking statement, so I'd refer you to our -- some of our forward-looking guidance. But I think what we've tried to say is we thought about the Bausch Pharma leverage and we recognize that we're today at about 7x levered, and we all know that, that's more than we'd like. And through the good work of Paul Herendeen, Will Woodfield and the entire team, we think that Bausch Pharma business can handle 6.5x to 6.7x the debt. And we are going to, we believe, be able to delever very quickly as a result of the things I just mentioned, the tax rate, the low CapEx, et cetera. Using some of the estimates that we have from the earnings material that we put out there, we expect Bausch Pharma leverage can improve or delever by about 0.75 turns per annum, or down to somewhere around 5x by -- in the next 2 years. So those are the things that -- those are rough numbers to be clear, and I refer you to the rest of materials there, but those are some of the things that we've tried to look at as we think about the deleveraging target. And yes, we are basing those off of a COVID recovery. Most of the COVID impact we saw was in the second quarter of 2020. So as we think about this, this is looking at the 2021 and going forward time frame based on our comments on them as well. I hope that answers that question.

Yes. No, that's great. And so in terms of process, right, you announced there's been some tweaks along the way in terms of structure and capitalization. You've got carve-out financials more recently to help investors think about the 2 businesses. Can you frame the milestones here? I know that post the third quarter call would be sort of time frame here. Third-party assessment evaluation, I think, has to happen. Does it happen prior to the separation? Is that just like something that you guys will have an internal look at? Just can you walk us through some of the milestones and time line here going forward?

Yes. Good question. We believe that we will have the necessary internal activities that are required to begin the process of separation after the third quarter of 2021. However, that's only part of the story. The other part of the story, of course, is this issue on our debt leverage. And how do we get to that 6.5x, 6.7x for Bausch Pharma and how do we get to less than 2.5x for the B + L business? Clearly, part of the question that you're asking, we still recognize there is some additional debt repayments that we need to make. We are clearly going to make those payments on a couple. Number one, our ability to grow EBITDA, first and foremost, that ability to grow EBITDA is going to be critical. As you know, we've already stated that we paid down $200 million of debt this year so far with another $200 million announced, but not yet paid back. So we're on track for $400 million already. We've talked about $8 billion for the full year 2021. So that all has to happen. The third thing for us is clearly how can we continue to improve working capital efficiency. We did it in this quarter as we take out dollars and working capital that will also allow us to pay down some debt. And then beyond that, we've talked about a couple of scenarios on the things that we could do relative to the issue of an actual divestment, we announced the divestment or certainly, the agreement to divest the Amoun business, our Egyptian business for gross proceeds of $740 million. We will take that -- whatever comes out of that from net will be used to pay down debt to be cleared. And then finally, there may be some other divestments that occur, but those items would be supplemented by the issue of a potential IPO. We talked about that during the earnings call. I won't go into details, that's always going to be timing and market conditions specific. But those are some of the things that we think will help us to solve the second part of the equation, which is just the overall leverage question and ensuring that we set up both these companies to be two great companies with an appropriate market capitalization and appropriate debt structure.

Your point about market conditions as it pertains to a potential IPO. What do you tell investors, what if, for whatever reason, in the second half of the year, market multiples are depressed for whatever reason, inflation, maybe the markets take a turn, how does that impact your process and your thinking about moving forward on the time line that you've articulated?

So we obviously have a plan to act, but if conditions are such that we cannot go forward at time A or B, we are obviously going to make the important decisions as we get further down the road. But what I've charged the team with doing is let's, as a company, be ready after the third quarter of 2021, realizing that at some point, conditions could be unfavorable, but most importantly, we want to be ready to move when the time is appropriate. But to absolutely realize that we are very -- we understand the need to make sure that we also decide we're also a tier of the leverage side of the equation in addition to the market conditions.

Great. I just want to let those know on the call, if you do want to submit a question either through Veracast or on instant messaging, I will get to those. I still have some of my own questions, but feel free to shoot me questions, and I'll definitely get to them. Maybe moving down the line. You -- top shareholders, put out a press release, talked about sort of the pathway and then the restricted payment basket is something that affords the spin free and clear of any of the lack of restrictive covenants with the debt. But can you talk about -- I think the restricted payment basket was roughly $13 billion, where that could be at time of spin? And I think there are some other baskets that I honestly, I don't -- I'm not a debt guy. So I don't understand some of those nuances, but maybe just the importance of that, framing that in terms of the process and where that could be by the time of spin. Joe, you're on mute.

I apologize as to how that happened. It's a great question, Jason. We've been very focused on this item right along since we've talked about this going back to August on this restricted payment basket. You are correct, there is a $13 billion restricted payment basket. But to be clear, there are other baskets that we have that will allow that to be higher than $13 billion basket. We did put in our latest Q -- 10-Q there on the basket. But there are other baskets we believe it will not be a constraint in our ability to move this process forward in the separation is the final problem some area I make.

What is the size inclusive of the other baskets?

Well, I'm probably not going to be able to go through all that at this time, but there are some other conditions that are allowed in the basket for restricted payments that will allow that to expand beyond that $13 billion number. And as I said, it's been something we spend a lot of time with. We've been very focused on it, and we are comfortable that there is -- based on the covenants and reading of covenants that there are some additional restricted payment allowances that will let us work forward, move forward on this.

Okay. One question I get is around RemainCo and some of the commentary on the last quarter call. And so I think there's absolutely 0 debate that it's going to be a high cash-generative business and going to allow you to debt delever in the first 5 or 6 years really with the patent runway that you have on XIFAXAN. I guess the question that a lot of investors get to is probably longer-term solvency of Bausch Health, and that's going to require them, I think, to get confidence with the pipeline, right, that the pipeline that you can turn over a card or -- and/or that you can, like most pharma companies, do a savvy license deal or an acquisition to find a product that can replace such an important product like XIFAXAN. So I guess that ultimately gets to the profile of the management team that you're going to put past with this, running this company? And is it going to be an R&D kind of focused individual? As you guys think about the profile of who you want to put in that seat, I'm just curious if you can comment.

Sure. Well, I think all the things you said are absolutely appropriate comments that we are making sure as we develop the scenarios that we had for each of the business, the various scenarios that we did put forth important amount of R&D dollars for the Bausch Pharma remaining business to make sure that some of the things that we've talked about previously. The XIFAXAN next-generation projects are going to be funded, number one. We think there's a novel formulation there and novel new indications like sickle cell disease. Like the opportunity that we see with delaying or reducing these complications of cirrhosis, that's what we refer to as our RED-C trial. And importantly, I'm delighted that we made earlier in the year, that the FDA gave us agreement to move forward with the reduction of cirrhosis symptoms without the need to do some additional work, we get right to Phase III based on the work we had already done with the acute hepatic encephalopathy. So we've got some great plans in place for sickle cell, reduction of cirrhosis and other SIBO trial. So we've got that financed as part of what we're planning for our OpEx. On the remaining part of your question, there is a Board process underway. The Board views the selection of leadership as the most -- one of the most important processes that's underway. They've looked at our succession process internally. And then now they're looking at internal and external candidates. That process is underway. We said that I expect to have an answer for that in due course. But to be more specific on that, I stated our expectation within 2 months, we'd have an answer to that question on that leadership of the Bausch Pharma company.

Yes. Okay. From a pharma pipeline perspective, is there any program that you're most optimistic about both in terms of size of market, but also probability of success based on support of data? I know that like -- you've launched the Significant Seven, but then you ran into COVID, derm is a tough category. So as we think about SILIQ, DUOBRII, BRYHALI like obviously, there's been some challenges there. We don't need to re-litigate those. I'm just kind of curious, forward-looking in terms of what you got and what you communicate to investors, RemainCo, what's most exciting?

I think it's that XIFAXAN reformulations that, we think, we have a novel reformulation. The example I give is sickle cell. What's really promising about sickle cell, albeit off of a limited number of patients that we showed that the use of rifaximin in that sickle cell population significantly reduce the needs for injectable opioids, which obviously is very favorable. It also reduces the number of vaso-occlusive crisis, obviously, very favorable. But what I think is the most exciting part of it is that we also saw a potential mechanism of action by reducing the circulating -- in the process, we used some of the circulating problem that -- and therefore, we have a pathway or mechanism of action of understanding that by reducing circulating neutrophils, you could potentially have a favorable outlook. And that's certainly an unmet medical need. So that is certainly an example that I think is an exciting pathway where we understand the potential mechanism of action as well as seek real patient benefits, whether it be a reduction of vaso-occlusive crisis or the ability to reduce the injectable or by reducing circulating activated neutrophils or CANs as they refer to them. So those are things -- that's certainly one of the ones that we're excited about. We do think that there is still an opportunity in dermatology to be clear, as we think about what we -- data we got just in the last months of the IDP-126 data. It's a triple product that reduces the number of lesions and acne dramatically. I think that number was 70%, if I recall correctly, and it did it within 14 days. So that's the -- some of the exciting things that we see in the remaining backdrop. Obviously, there's other growth factors that we currently see the growth at TRULANCE, for example, has been very strong, and we're seeing good managed care accept and response there for TRULANCE. But I think it's going to be a combination of XIFAXAN reformulation, novel reformulation, the ability for us to bring out new products in derm. And then, of course, what we're doing with the TRULANCE and existing products, XIFAXAN, et cetera.

Okay. And then just one question as it pertains to RemainCo and the creditors. And so once the separation occurs, then RemainCo would trade as is, how important to you like -- or what -- as you guys think about the capitalization and how that company will trade, and I guess, debt-to-equity ratios, things like that, is that an important -- what's the feedback been from credit investors, I guess, since this was announced? And I think the bonds maybe were weak on the 1Q announcement on some concerns. So maybe just if you can address that here, that would be helpful.

Sure. Good question. The issue we've thought about through this in terms of how the 2 businesses are trading. We want to make sure that we put an appropriate capital structure behind each business based on the ability of each business to make the right decision. So we built in sufficient, working capital, sufficient CapEx, efficient operating expense for each of the businesses as we thought about how we would separate these 2 businesses. So we've tried to think through that from a modeling point of view, and that's what we characterize that as we went forward. And that's how we got to the revised targets for the Bausch Pharma remaining business at 6.5x to 6.7x debt leverage, which is an improvement on where we are today at about 7x. We recognize we have too much debt, and we've been working to pay down. I think since I joined, we pay down over an equivalent of $9 billion of debt. So we recognize that. And the same comment for [ bond ], we know that the right answer is somewhere in that less than 2.5x turns on leverage, and that would include versus our peer companies in the Eye Health business, make us approximately correct and have a similar capital structure. So we've looked through all those things. In terms of how the market reacted on the question of the bonds, I think one of the things that we've tried to put some additional information into materials was this question about how quickly can we delever the overall business, as I said in the earlier comments, we think the Bausch Pharma remaining business would be able to delever at about 0.7x annually. So over the years, that's down about 1.5 turns. So we think that as the investors and the debt people look at our data, they'll have more of an appreciation for what we're trying to do, how we're trying to do it. But I want to assure everyone that we're not going to do this until we are confident that we've set up 2 big companies that go out there and can successfully compete in the marketplace and have an appropriate capital structure to be successful. So that's the way we viewed it, and we hope that we have a chance to share more information about these, people have a better understanding of what we have in our minds.

Okay. And thinking about B + L as a SpinCo, I guess, we've seen Alcon do the spin, right? And that was spun as a margin expansion story. I think when you provided the carve-outs, investors saw something that was like a 26%, 27% EBITDA margin, which would have been sort of high within the peer group. But I think you guys have talked about a low 20% EBITDA margin kind of reflecting about a 400 basis point hit on the dissynergies at the time of spin. So I guess how should investors think about that business stand-alone, its investment needs off of a low 20% EBITDA margin? Would it be a margin expansion story in your view? I know that you guys are really excited about SiHy and NOV03. So maybe if you can just talk about how you'll be positioning that story for investors.

Well, I look at a lot more to say about this as we get closer to the potential IPO and the spin and separation of these businesses -- dissipated. As we -- you see where the other eye health businesses are trading, we think there's a lot of upside opportunity unlocked value relative to where the other company in the pure-play eye health business are trading. But having said that, what I think is important is that we're entering in a very important new product life cycle story for Bausch + Lomb relative to, number one, we're introducing our SiHy daily lenses already. I shared comments on the call that in the United States where we are participating in the spherical SiHy daily lens, we're already in the markets, places where we're competing. We have about a 13% share, which is obviously, we think, very exciting. Japan, where we also have that product, we also have about, I think, it's about 7% share. So we think we're entering in a very important new product life cycle, SiHy, the only being one of the more important ones. But there's -- beyond that, we just recently reported data on a product for dry eye, we refer to as our NOV03, specifically, it's for meibomian gland dysfunction. Our view on that particular product is that it had great data on both signs and symptoms of meibomian gland dysfunction that leads to dry eye. We believe that's a very significant portion of the dry eye market. And what's probably the most promising there is that we found that, that particular product showed benefit, certainly at 57 days, which is the primary endpoint. But we also have a secondary endpoint at 15 days, and it was statistically significant for both signs and symptoms of meibomian gland dysfunction. We think that's really important benefit for patients who have unfortunately, this problem. So I think that's another part of the new product cycle that we're in. So great market in terms of the longevity of it. We're in a new product life cycle. And as we get these new product launches, not immediately, but as we get it, I do believe that, that's going to lead to the margin expansion story for us. Look, especially with the opportunity that we see for the SiHy deal as well as the product receival space.

So more new product-driven leverage than operational cost efficiency leverage?

Yes. I do think there will be some operational improvements over time, to be clear, just as you've set up a separate business with a focus on eye health, I do think we'll get more get some efficiency there. But I view it as more of a new product story launching these new products and what that will bring for the overall margin structure.

Okay. We've got a handful of questions from the field. So I'll just start to read off a couple for you. First is in the event of additional asset sales before the spin or if a strategic partner provides more capital in the spin transaction than currently contemplated with Bausch Pharma leverage be reduced below the current proposed leverage target?

Sure. So the question, as we looked at these new targets, the 6.5x to 6.7x, clearly, do I think that if we can be -- whether it's a divestment, another way of getting capital into it, do I think that we can improve on these starts? Of course. I don't want to make a comment to say specifically, we have a plan for that right now. But if there's an opportunity, of course, we would simply try to reduce the overall leverage there. But for us, right now, the most important thing for internally, if you think about running a company is to get your team ready and prepared to do this -- and separation sometime after the third quarter of 2021. So that's what we're working on right now. Obviously, though, we recognize this leverage issue is part of the constraint. So we're going to make sure we do whatever we can there to be successful with that portion as well as what we're doing with the -- all the internal things like the operating structures, the legal entities, things like that, that have to happen in a company. So yes, there's potential there, but certainly, we're going to be prepared to separate these companies sometime after that third quarter of 2021. Obviously, we've got a solid deleverage. We understand that.

So the other question is, would the company rather do an outright sale of B + L and pay off more debt or would stick to the current spin-off plan given the negative reaction from equity investors.

So our view on this question is that we are preparing to do the separation of these 2 companies, if there is an offer that makes more sense to our shareholders and all of our stakeholders. Of course, we're going to listen to any offer that makes sense. But right now, we have a pathway, as I stated, after the third quarter of 2021 to move this business forward. It's just 2 great businesses. So that's our plan. If there's an opportunity to do something either earlier or better or has a better return for all of our stakeholders, certainly, we're going to look at it. I think one of the comments I would offer is that in joint, we sold about $3.8 billion of asset proceeds. Of that $3.8 billion of asset proceeds, we realized something close to $3.5 billion to $3.6 billion of actual net proceeds. So we've been able to manage the tax implications of that of all those divestments. We have -- in addition to that, we have the Amoun transaction that has been announced for ballpark $740 million of gross proceeds. So we're not unwilling to -- or we are willing to certainly look at divestments that makes sense. But at this point, we've got to make sure that we are prepared for a spin of our company or separation of our -- of the 2 businesses to create 2 great businesses, and that's what we're planning for. We'll obviously react anything if other things happen in the marketplace.

And another question I've got is the Bausch + Lomb business gaining share in contact lens market, and I guess I assume that's in response to some of your competitors talking about gaining share and maybe would this process potentially be distracting at all to the organization? I assume that's sort of the implication, but you can feel that.

Yes. We -- up until COVID, we've had the Bausch + Lomb business, the team that's in place has had, I think it was 13 consecutive quarters of organic growth. A large part of that coming from some new leadership we put in place in the Bausch + Lomb business. And especially both internationally, what we reorganized that team, great leadership there. And then also in the U.S., we took some steps. But we've been growing our contact lens business very successfully. Now add to that, we also have the new SiHy daily. So we feel very good about our ability to continue to pick up share. Obviously, it's up everybody on the B + L team to ensure that we don't have distractions. We continue to stay focused on trying to help patients. And by doing that, we believe we'll do the right thing for the business and importantly, do the right thing for separating the businesses that have a eye health pure-play business that we think will give us focus and opportunities as being one of the most integrated eye health businesses out there and importantly, with new products that we think over the long term can help us on our margin structure. So we think it's a winning formula for the Eye Health business, look forward to having a chance to talk more about it as we go forward with the business separation.

Okay. And then on NOV03, I guess, my understanding and reading up on this product is that it replaces the lipid layer in tear film. So sort of works similarly to artificial tears, but has some pharmacological benefits in terms of how it works and the amount of, I guess, volume in the installation, maybe reduce visual blurriness. But I guess the question is, is this truly a disease-modifying? Does it get to the root cause of meibomian gland dysfunction? Does it dissolve the meibomian -- I guess, the duct plug, if you will? And will there be more data that will get to the -- that route from that debate? Or -- because right now, there's a debate, is this just a better artificial tear or not, which -- and the pricing for artificial tears is dramatically different than the branded drops?

Sure. So we've taken the approach on this particular product to really go out and look at the science of this. And I think the data that we have that we share, the summary data is very, very good. I remind you that we showed a statistical significant effect on meibomian gland dysfunction at both the 57 days, which was a primary endpoint and the secondary at 15 days. You know the data well from the competitor products that some were over $1 billion that takes several months of work. So we think we're going to be very helpful with the number of patients that unfortunately, have this disorder. And the data in the United States is about 16 million patients have this problem. So we'll give more data absolutely as the data comes out, but we think we've got a product that can truly make a significant difference to these patients. And importantly, it works fast. And I think that's -- that 15-day data, the initial clinical that we still have to get our second Phase III trial, but we think that's an important marker for being a very successful product for our patients that unfortunately have this problem. And as you know, it's a dry eye disease is a significant problem. So we'll have more data on kind of the mechanism of action as well as the actual results that will be forthcoming as the new science opportunities to present it allow.

All right. Well, great. We're out of our time. But Joe, thanks so much for joining us at the conference. This is really helpful. I appreciate your time, and I'll let you get to the rest of your schedule today.

Thank you very much, Jason, and for everybody for joining us.

Yes. Thanks, guys.