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

Okay. Great. Thanks, everyone. We're moving on now to the next presentation. I'm Frank Jarman, our high-yield health care analyst here at Goldman Sachs, and I'm very pleased to have Bausch Health here with us today. Today, from Bausch, we have Paul Herendeen, who is the Executive Vice President and CFO of the company for now. And maybe just to kick things off, we're going to spend 25 or 30 minutes discussing the story.

But to kick things off, I would like to ask you, Paul, and thank you for joining us. But I'd like to ask you, you recently announced plans to transition from the CFO role into a new senior advisory role at the company, starting, I believe, next month, and I wanted to better understand, given there's been a lot going on on the company of late. How do you think about -- how you came to that decision? How should we think about the role at your company going forward? And what are your thoughts on the transition overall?

Yes, sure. And first of all, Frank, thank you for having us. This is one of our go to LevFin conferences of the year, and the only thing I'd say is I wish we were in California, but perhaps, that's for another year. But thanks for asking that question upfront because I've been getting that question a lot from folks who are maybe reading into my decision to step down has something to do with where we are in the company with the separation or the spin. And that's just not the case. I'd say that many of the folks that are on the line, I think, I've known for a good long time. I've been a very active participant in the long time. I've been a very active participant in the LevFin space for a while. I've been sitting in a chair that looks a whole lot like this one for many years now. And I could tell you, it's an all consuming chair. It takes a lot of energy. And I turned 65 at the end of last year, and I had been thinking about stepping down for quite some time. And frankly, if it weren't for COVID, I probably would have stepped down earlier in 2020. But with the COVID situation, I really felt compelled to lock arms with my colleagues here and help the company work its way through. So short answer, or maybe that's a long answer, is this has nothing to do with the separation, the spin, et cetera. It had to do with my own personal time line. I'm really delighted that that Joe, when I approach him and said, "Gee, I'm thinking about this." He asked me and I was delighted to accept that I stay involved with the company. I stay involved with the company on a kind of a strategic and nonoperational role. And I'll say that, I think I still have a lot -- I have a lot in the tank and a lot to give. I just was not ready to not be doing that 24/7, and I'm thankful to Joe and the rest of the team. So my role here is going to be to help shepherd the company through this process of gearing up for and ultimately completing the separation. And then I think we got a lot of work to do, and I'm going to be happy after -- at the end of this month to roll up my sleeves and focus full-time on that activity.

Great. Sure, folks will be happy to hear that. Now maybe just shifting gears and focusing a little bit on the pharma business. As I think about the capital structure, if we go back to sort of the early stages of this transaction and the concept, you'd previously outlined leverage targets for the Bausch Pharmaco of around 5.5x. And more recently, you talked about that leverage target being 6.5 to 6.7x. And so wanted to get a better sense, what's changed in terms of your expectations around the Pharmaco's ability to absorb extra leverage? And as we think about the story going forward, are you comfortable that these are sort of the new capital structure plans here? Or are they still in flux? How are you thinking about the final determinations there?

Sure. A great question. And certainly, another 1 that's been on a lot of people's minds. I want to preface everything by saying, back when we spoke of lower levels of leverage for the Pharmaco, we are providing, what I'll call, an example of a path to the separation of the company's not the singular path forward, but a path. And I think there are 4 main drivers for us to execute the separation and end the spin, and they are B&L leverage, the size of the B&L equity raise, the passage of time and the Day 1 Pharmaco leverage. And I think as we've continued the preparation for the separation, we've changed our views of the leverage that we intend to put on B&L and the maximum Day 1 leverage at Pharmaco. Our objective is to unlock substantial value at BHC, which we would submit is not recognized in the equity markets today and we want to do that sooner than later. Yes, so that's -- so I actually -- I think it would be productive. Let me just go through the 4 levers. The leverage on B&L, we've determined that we want that to be less than 2.5x. We want B&L to start with leverage more consistent with other companies that are comparables, like especially the companies that in the eye health business, as that will enable the equity markets to value B&L in a way that they don't have to consider significant differences in the capital structure as between the comps and B&L. The size of the B&L IPO, that's a function of the equity value of B&L and the magnitude of the need for capital at Pharmaco to delever. With respect to time, I said earlier, it said sooner is better than later. And for the Pharmaco Day 1 leverage, we needed to determine an amount of leverage that we are confident the company can handle. You put all those things together, and we arrived at a maximum level of leverage for Pharmaco in the range of 6.5 to 6.7x. Now our work on separating the business has not only increased our confidence in the cash-generating properties of the company, but that, combined with our view that the company is expected to be a mid-single-digit grower at the revenue line, it will enjoy high operating margins, it will have an attractive tax rate, and it'll have low CapEx. And as such, we said this is going to be a very, very solid cash generator. It will convert a great deal of its operating earnings to cash. So as long as the Pharmaco is committed, as it will be, to prioritizing use of its free cash flow to reduce debt, then it's okay for it to carry a bit more leverage than we had initially talked about as one of the alternatives. I think one of the things I've called out is, if you go back to our Q1 deck and looked at that and go back to the transcript from the call, using estimates that can be easily derived from information that we provided on that call and in the deck, you could come up with estimates that if the Pharmaco starts its life at 6.5x leverage, it would have the ability to delever by more than 3 quarters of return per annum. And so you say, roughly 2 years down the road, it could be 5x levered or less, or in 4 years down the road is 3.5x or less. This company can handle that level of leverage. And as I said, I've said in a number of the discussions that we've had with folks, we all wish that, that leverage, that's Day 1 leverage, were lower. I wish I weren't leverage 7x today as total Co, but we believe that this is a solid path forward. And by setting a target that says, the Pharmaco is not going to be levered more than 6.5 to 6.7x, that kind of drives like when can we do this and give some -- I hope, some comfort to debt holders that there's -- there are bounds around which we'll work in order to be able to affect this transaction. I have no doubt it's the right transaction for our equity holders. Our challenge here is as it has always been, is to ensure that we take care of all of our stakeholders.

That's really helpful perspective. And I guess just as a follow-up there, you talked about the cash flow generation at the RemainCo and plans to potentially deleverage post the transaction. But as I think about it, there's an added layer of complexity here, which is you currently don't have a management team at the RemainCo. And so as you think about the search for a new management team, what kind of commitments are you looking for to ensure that free cash flow will indeed be prioritized for debt and not for either more equity favorable transactions or acquisitions or things like that down the road?

Sure. And I think -- first of all, our Board and the subcommittee of our Board have been -- this a very active process and one which -- I think, we all wish we had been in a position to be able to announce the management team for the Pharmaco at the same time as we announced the team for B&L. The fact is -- from my perspective, is that it's -- we need to have the right team. And I think you've hit on a couple of couple of points as to why we really need the right team here. So let's be clear, the CEO and the senior team that's going to take on this opportunity at Pharmaco, it has to be somebody that's comfortable operating in a leverage world. I dare say there are CEOs out there that just are not going to be comfortable operating in that world. And the big -- the biggest thing about that is, and you've seen this in the way we've managed BHC since Joe and myself got involved back in 2016 is we need a team that's going to be incredibly, incredibly judicious in the way it allocates capital. And that's allocating capital internally and potentially externally because there's a -- will be an absolute need to prioritize the use of free cash flow to reduce the debt on a rapid basis. And there's 2 ways that you can do that. One is you say I take all my free cash flow, and I use it to reduce that. The second way is by ensuring that you're maximizing the near-term operating profit, which is helpful to reduce the leverage as well. So that's why I'd say internally allocating capital capital, got to be really, really sharp on that. I think we have been, as a team at BHC, really good at that, whether it was in selling expense. We've made the right investments. At the same time, we stopped doing things that we didn't think were helpful to drive, not only a near term profitability, but long -- set us up for the long term. We prioritize as BHC the investment in R&D. That needs to be R&D investment that is incredibly efficient and effective, and that's absolutely double the case when it comes to the mid senior management team for the pharmaceutical company. So quite long, we did -- I apologize for that, Frank, and everybody and everybody listening, but filling these positions is really key for us and we want the right team and we're willing to take a little bit of a hit here for not announcing the team just to make sure that when we do make that call, it is going to be the right team. I think I've answered the question about ensuring that, first of all, prioritize the reduction of debt, and therefore, improving to leverage that. But that's part of job. We hope to get this done sooner than later. I know it's an important component. We have a lot of opportunities here, a lot of different ways this could play out. We want to configure the right team.

Great. Thank you for that perspective. Maybe just digging in, you've talked a lot about debt reduction just in the discussion so far. But I'd be curious, just philosophically, as you think about opportunities to reduce debt through this transaction and through cash flow going forward as well, how do you prioritize securities across the cap structure? How do you think about it in terms of looking at the loans versus the high coupon bonds? What's important to you with regards to thinking about debt take out going forward?

Sure. I mean I think that the philosophy that myself and Will Woodfield and the team here have employed really going back to early 2017 is we target the near-term maturities first. It's always been top of our list. It's -- it provides us with the runway to be able to continue to do business and help increase flexibility on the operational side. That hasn't changed, and it's probably not going to change. We're also a little bit fortunate that some of those near-term maturities at this stage are pretty healthy coupons. And so in targeting them we're also taking out some higher cost debt as well. So I think we'd likely stick to that. I want to point out that in the context of thinking about the separation, there is a fair amount of refinancing activity that will have to take place. But if you did -- just bear with me for a second. So you think about how this all comes together is, we get to the point where we can stand up the Spinco, you lever it up and we said less than 2.5x. That capital definitely comes back to what is -- what will be the Pharmaco. So that reduces debt. We talked about an equity raise of some scale at B&L, and depending on whether that -- how that comes about and what percentage of the equity, et cetera, and what value do you think it's at. That capital comes back -- that comes back to B&L. Now those proceeds will be used in a way, but we also would actually have to refinance some other debt that needs to be refinanced in order to facilitate the actual separation of the company. So we've got a of work to do here in the near term, but also down the road at the moment in time when we move forward to try to conclude the separation. But as I say, I'm long-winded, it seems on every answer, but I think it bears repeating is, we're a highly levered company and because of that, even when it might have made some sense to go out and try and pick off some longer bonds back in the early days where we could have bought them back maybe at a discount. We still prioritize and will prioritize the nearest term maturities first.

Great. Thank you for that. Maybe just shifting over to Pharmaco's operating story a little bit, and starting with Salix. So you talked about the cash flow over the next few years at Pharmaco. But obviously, folks are aware of the LOE with XIFAXAN in 2028. And so I guess just to start, how do you think about the trajectory of XIFAXAN? And as you think about various life cycle extension projects, is there any out there that we can sort of think about for the XIFAXAN drug? And where are you thinking about just sort of broader existing pipeline with regards to the Pharmaco?

Yes. I mean I'll start with a more broad comment, Frank, and that is that we have been, and we've been we've been endeavoring to, and we will continue to, and that focus will increase as Pharmaco to build out that U.S. branded pharma pipeline, starting with GI, but not limited to GI. We have great capability in the dermatology space. We, frankly, have capability outside of the GI space as well. But that is something that if you use as the analog, if you go back 24 months in the -- I'm sorry, in the eye health business, in ophtho Rx, we did not have what I would call a really good pipeline on the ophtho Rx side. And by focus and good fortune, because it takes both, we were able to take that pipeline from being 1 that I don't think most folks were excited about, and create something out of it by in-licensing a number of things and putting them in and starting down the road. We would expect to do the very same thing with respect to the pharma pipeline. In other words, continue to look for ways that we can expand it like adjust that portfolio so that we ensure that we do have a strong outlook beyond 2028 so that when you get out to 2028. You mentioned some of the -- like whether it's XIFAXAN or I think of it as rifaximin. Rifaximin, we have a great opportunity because we understand the molecule very well, and we just have a leg up when it comes to working there. We have lots of opportunity there. I mean the first 1 that I want to speak to is not related to GI, but for sickle cell. We're fortunate, we got the orphan drug designation there and we would expect to proceed with that project. That's a very, very interesting project that's not GI, but involves rifaximin. Then go back to like kind of XIFAXAN and think about extending that franchise or that portfolio in a way if we can come up with ways where we can use rifaximin for SIBO or if we could find a way where we could use rifaximin to prevent the first instance of someone who's going to be hospitalized for HE. These are things that are very, very attractive and I think we have a reasonably high probability of regulatory success. And we're pretty confident in the commercial outlook for rifaximin in use -- being used in other ways. So a little bit of that has to do with thinking about it in the GI space, a little bit it has to do with leveraging XIFAXAN. Outside of that, we've got the amiselimod project, which is which is ongoing. We have a number of dermatology projects, which are ongoing, and it is fully my expectation that we will add to the quantity and quality of that pharma development portfolio as we go forward.

Great. That's really helpful. Maybe just so folks can better understand the potential impact of the LOE for XIFAXAN, and it's 2028, obviously, but how would you think about it from sort of revenue and EBITDA impact as generics do enter the space?

Sure, I mean -- and I'll just say that anybody can go out and find a large brand like XIFAXAN and see what happens when it goes to generic. It drops right off the table. And so there's no question that in 2028, we're going to see a significant drop-off in XIFAXAN 550 revenues, and it is incumbent on us prior to that date to have laid in other products that won't necessarily 100% replace that revenue and profit in 2028. But sitting here today, you're not looking and modeling the success of those sorts of commercial programs, whether it's ones that we've talked about just a moment ago or whether it's additional things that we bring in to supplement that. That's we're staring at, but there's no question that a product like XIFAXAN 550, when it takes to generic, I mean, the trajectory is pretty predictable based on the analogs that anybody can find out there in the market.

Great. That's really helpful. I guess, maybe just shifting over to derm a little bit. So you've previously talked about Solta as potentially being an attractive business for another company to run. And so fully appreciating you can't get into specifics around planned divestitures are unplanned. Can you just help us think about more specifically what the margins look like for Solta? And just how to think about Solta versus the remaining dermatology business?

Sure. I mean, well, first of all, the great thing about Solta is, it's a device that doesn't face the LOE cliffs that you see in the branded side of the med derm business. And so from that perspective, the durability, the duration of those assets, I mean, we started out with the Thermage FLX platform, and I mean you can see the results. I always call out my friend, Tom Hart, who runs that group. It's just remarkable what we've done there. It's a terrific business. I mean, from a margin perspective, you see it's now included in the Ortho derm segment. What I'll tell you is the gross margins are a bit less than you see in the med-derm side, but they're pretty darn high. You can almost kind of back into and say if that the med-derm side is 85% then Solta is got to be somewhere around 75% to average out to the roughly 80% I think that it showed in the quarter. And I'm looking at my partners here, make sure I didn't get the numbers wrong. But that's a healthy, healthy gross margin type product. I point out that the equipment itself has a lower margin than the consumables, the FLX tips that we sell, but I wouldn't worry about that. It's a high gross margin from an OpEx intensity in terms of the selling and promotional activity. Look, I think that's a business where you could easily see, and I'm not without saying anything specifically, that's a business that's easily like kind of a high 40s, 50% type operating margin business, and that's fully configured for investment in R&D as well. So a highly, highly profitable business that's they're growing at a good cliff. I think the -- having both of those businesses in that segment is -- it's a fairly interesting little segment.

That's great. And maybe just 1 more on the derm business. So as I think about the rest of the portfolio, whether it's DUOBRII or SILIQ or BRYHALI, those have been some important stories for you. How do we think about the uptake of the trajectories there? And how do we think about what peak sales look like? And how do we think about timing for peak sales? I know that's going to, obviously, be a core part of the story going forward.

Sure. I mean, I, at least, start by saying you said the trajectory and how kind of the pace of the growth there, it has certainly been less than we were anticipating if you go back a number of years. I think what's going on in that med-derm space is in, say, for the types of products that we've introduced here, which is a couple of topicals and also biologic. But if you think about the topicals particularly, it's been a payer story. I mean, the -- it's been quite a challenge getting the kind of coverage, the kind of coverage that we would have liked to have enjoyed to give those brands the opportunity to penetrate more quickly, have much more rapid uptake on revenues for -- especially for DUOBRII. We think the world of the efficacy of DUOBRII, how it worked and how it should fit the treatment regimen with moderate to severe psoriasis, and yet we have not seen the uptake to the degree that we had hoped. SILIQ was a little bit of a different story. I mean we have a REMS program around the asset, and it just has been a real challenge to ramp it up. Now that said, the -- both all of SILIQ, BRYHALI, DUOBRII, all have the opportunity to be part of a growth story in med-derm. We've also got a triple combination that is getting close and getting great -- we're seeing great data on. And it's going to face some of those same challenges with respect to payer coverage in all, but we think that we can build a good business there. And I called out on the Q1 call some of the work that my partner Scott Hirsch has been doing when he took over interim responsibility for that med-derm business is, it's not like it was -- it's not like you would have treated that business 5 years ago or 3 years ago or even 2 years ago. The way we think about the OpEx intensity to drive the upside of those assets is quite different. And so what we see is a more profitable, but slower growth opportunity with those assets that remain in that med-derm space. So that's probably more than we wanted to talk about on med-derm.

That's great. Really, really helpful. And actually, with that, we are out of time. I want to thank you very much for joining us today, Paul. It's been great. And I want to thank everybody for dialing in. And with that, we will keep folks on schedule and move on to the next presentation.

Thank you, Frank. We appreciate the invite.

All right. Take care.