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

Okay. I think we think we're live and ready to get started. So apologies, everyone, for the late start here. I'm Matt Miksic at Crédit Suisse. I cover medical devices, and we are very pleased to have with us today Joe Papa, Chairman and Chief Executive Officer of Bausch Health. So Joe, thanks so much for joining us. I think you're on mute, maybe?

Can you hear me, Matt?

I can. I can. I have to say I was just relieved that it wasn't me on mute. That's usually my go to Zoom move. So sorry for that. I don't know if we stuck on mute by accident. But thank you very much for joining us, Joe.

My pleasure to be here. Thank you very much for the opportunity to talk with you today.

Our pleasure entirely. So I thought it might be a good place to begin. We should just jump into sort of discussion of the company and some of the events that are ahead of it, which are significant, but I thought it might be a good place to start just on the recent quarter, the current environment, how you've been affected by COVID and staffing and some of the other issues that everyone is talking about this earnings cycle. And then maybe we can go into some of the highlights on the -- or low lights from the quarter that you might want to discuss?

Sure. Happy to do that. So I'll start with the third quarter because I think it was obviously a great effort by the team, the Bausch Health team. We simultaneously delivered on strong EBITDA, strong cash flow. We advanced the R&D pipeline for future opportunities. And importantly, we were able to accelerate the strategic alternatives by moving forward with our Solta IPO, we talked about it being ready to go into an IPO in the December of 2021 or January of 2022. And also, we stated that B&L IPO would be ready to go approximately 30 days later. Let me try to provide a few specifics on this. First of all, total company has strong cash flow $564 million of cash generated from operations in the third quarter. Obviously, that's an important part of what's needed for us to go forward with our strategic alternatives. Number two, our business, the leading brands, all did very well. XIFAXAN, for example, reported revenue growth of 12% versus last year's third quarter. TRULANCE reported revenue growth of 14%. Ocuvite PreserVision did well. LUMIFY reported an outstanding 40% growth versus a year ago. So clearly, key brands all did very well for us. We're very pleased by those results. As we go through some of the R&D catalysts. One of the important questions for us as always is, can we continue to advance our pipeline, a lot of activities going on, some of the challenges that you mentioned right upfront about COVID in terms of being able to continue to move forward on R&D projects. But we -- I'm delighted to say we did a great job. We got statistically significant results from our second Phase III clinical trial of our NOV03 product in dry eye associated with meibomian gland dysfunction. Clearly, that's a really important opportunity. It's a $1.6 billion opportunity in terms of dry eye just in the United States alone. We'll be ready to expect to file that sometime during the first half of 2022. We also got approved for XIPERE, another product that we expect to launch in the first quarter of 2022. So a lot of good things happening for us. Is COVID still an issue out there? Yes, regionally, geographically, there are some hotspots, the Delta variant, certainly in Southeast Asia caused some issues for us. But because we have a very global business, we've been able to work our way through that and still generate that strong cash, strong EBITDA.

Excellent. So I think at least one thing that came up on the call that I'm sure you spend a lot of time on, maybe more time than you like to have to talk about is the sort of tax issue. So a bit of a legacy issue. But if you could maybe just give the highlights and how we talk to people off guard?

Yes. I think we've made people more aware of a concept called Granite Trust transaction. I want to be very clear, the IRS did not state we owe any amount of specific dollars. We are very confident in our position and we find really no precedent that is adverse to our position on Granite Trust. Having said that, though, we did disclose that if everything did go wrong, we would have a potential liability up to approximately $2.1 billion. However, I want to be very clear, we do not take any reserve for this because we do not believe that the facts and/or the legal circumstances support us doing that. Earlier today, because many of our investors have asked us more about it, we did post a presentation on our website. There's information from our legal advisers in terms of some of the specific case law that supports our position and we put that forth in a presentation up on our website just to everybody who is interested in it, not that I want everyone to be an expert on Granite Trust tax, but it's there. If any of our investors or shareholders have an interest, we wanted to share with them our specific case that we've been looking at, we really support our case. Clearly, this is an issue that has come up. We believe we're on the right side of this. And as I said, we have not taken any accounting provision for this because we believe the case law and the facts support our position.

Got it. Okay. That's helpful. And unfortunately, it's one of those things that you could say as much as you can say, perhaps the fact that you haven't reserved for it is maybe the strongest statement that you can make just because it means that it's not estimatable and you don't consider it to be certain. So fair enough. On Solta, it's also -- I think the comments coming out of the call were that was a little bit flatter in Q3 than what we expected maybe or maybe it's just the prior year comps, warrants weren't properly modeled and Street estimates are -- can you talk a little bit about the performance in Solta? What it means to your confidence in terms of moving forward with the IPO and then the profile of the growth of the business is going forward?

Sure, absolutely. First and foremost, I'll say Scott Hirsch and the team that are taking the Solta IPO moving it forward have done just an outstanding job, continuing to deliver the results and also prepare for the Solta IPO. Solta had a strong quarter, especially given that the Q3 is a seasonally slow quarter for aesthetics due to patient practitioners out on holidays. That's clearly one of the factors there. With that said, I think we absolutely acknowledge on the call that versus a year ago when people were just -- in the third quarter of 2020 as people were coming out of COVID, it was an exceptionally strong quarter. So we do have a relatively strong comp that we are comparing ourselves with versus the third quarter of 2020. So that was clearly part of it. But I think the most telling fact on Solta that I would remind the investor -- potential investors to think about when they're talking about Solta is that the year-to-date organic growth is very, very strong. It's 32% reported growth, 27% organic growth for Solta year to go -- year-to-date. And I think that, that is probably the most important factor that one can think about as you think about Solta. Beyond that, do we think there are some additional tailwinds for Solta? Yes. Certainly, as more and more countries have access to vaccines, we believe that, that variability that COVID has caused will continue to decline and that will give us an opportunity for additional growth with Solta. And I think we've been trying to manage it across all of Bausch Health in terms of the COVID variability. But I think because we have a large geographic footprint, we've been able to manage it. And as we see vaccine rates continue to increase, we think that's going to be good news for Solta, but also obviously good news for all of Bausch Health. But on balance, we clearly see some good things for the future for Solta. Admittedly, it was coming off of a very strong third quarter 2020 comp, but we look to the year-to-date number at the 27% organic is really being more clarity on that question.

Okay. Fair enough. And I guess on that point, Solta and assuming that, let's say, the fourth quarter or the -- look at the fourth quarter that you're able to provide if that's the way things work out when you're on the road or talking with investors about the deal that what are sort of guardrails around getting that deal done? I guess, is there -- how sensitive is the Board or are you to sort of valuation of that deal or market receptivity of that deal? I guess, what I'm trying to get at, is there other reasons why this thing just you sort of decide to hold off or push it down the road a little bit or take another step back and think about it, if it wasn't getting the reception that you wanted, I guess how -- what are some of the factors that go into this process?

Sure. Well, first of all, the team made great progress in getting through all the activities. They have filed the S-1 confidentially to the SEC. They've done all the things that need to get done that give us the confidence that we will be ready in December of 2021 or January of 2022. Obviously, that has to be tempered by the fact that it has to be market conditions permitting, as you know very well. And also that we get all the appropriate regulatory approvals. But we're confident that we have everything in place to move that forward. The team has done a great job. They've worked through all the things that one needs to do to prepare for an IPO. And importantly, they see a very optimistic future in terms of the growth opportunities. We've shared publicly historical growth. I can't talk about going-forward growth, as you know, as you're going through an IPO process. But historical growth, very strong historical growth for the Solta business relative to plus 30% compound annual growth rate over the past several years and even higher numbers than the plus 80% on the EBITDA growth. So strong historical growth gives us the confidence that we're going to be ready, along with all the work that the team has done from regulatory filings and talking to the marketplace. But obviously, I can't give a definitive other than saying we'll be prepared for a December 2021 or January 2022 timing. The Board is well aware of our plans and very excited to allow us to take this medical aesthetics company forward, a company that we think is going to be a very successful long-term opportunity for shareholders.

Okay. So conviction in the deal, check, I guess, you could say. And then one of the other things I think you mentioned is that after Solta comes the Bausch spend. And so I guess maybe, I think you've also may be gone out of your way to point out that those things aren't necessarily linked like there's something that has to happen related to Solta that would then play into the next IPO, except for maybe the fact that a lot of the people who are having to spend a lot of time are helping get the IPO. The Solta deal that are going to be required to have the bandwidth to do the next one. How should investors think about the potential parallel serial reshuffling of order of those deals in the next, say, 3 to 6 months?

Yes. I think you phrased it actually very well. We are planning for the Solta IPO in that December '21, January '22 time frame. So that's our plan. But to be clear, the Bausch and Lomb IPO, we're planning for approximately 30 days after that. They are not absolutely linked. If something was to happen with Solta, I don't expect that to be clear. I want to say again, I do not expect anything to happen with the Solta. But if it was, we could still move forward with the Bausch and Lomb IPO. We clearly believe that those 2 are 2 separate items. And we are, once again, prepared for the Bausch and Lomb IPO. We've been actually working on the Bausch and Lomb IPO since August of 2020. We stated in August of 2020 that we would be ready for a B&L IPO after October 1 of 2021. And indeed, we've announced that we were -- once we've completed all the halves we are ready. The only issue, of course, for us to go forward is we would like to do the Solta first, if that's possible, and that is our plan. But nonetheless, we can go forward with Bausch and Lomb IPO if something was to happen with Solta. I do not expect that I'll repeat it one more time, but we would be prepared to go forward with Bausch and Lomb IPO.

Sure. Makes sense. And the nature of the Bausch and Lomb IPO is a little bit different. If could you walk through sort of the stages of the deal and the sort of separation and the spin?

Sure. So as I stated, we've been preparing for the Bausch and Lomb IPO since August of 2020. Part of the question the issue for us on the Bausch and Lomb IPO was to prepare ourselves for what I would refer to, making sure that we satisfied some of the debt constraints. One of the things I did not mention, but I'm delighted to mention is that with -- what we've done in the last several months, we paid in the third quarter, $1.1 billion of debt reduction. And then year-to-date in 2021, we did $1.6 billion of debt reduction. Those are important constraints relative to our overall ability to do the Bausch and Lomb IPO. We stated that the leverage ratio of the overall Bausch Health Company now is at 6.4x debt divided by EBITDA, which is great progress from where we were just a couple of years ago. So those are all part of the equation as we prepare to do a Bausch and Lomb IPO. What has to happen for Bausch and Lomb IPO, we will raise debt on Bausch and Lomb. We said the leverage on Bausch and Lomb would be less than 2.5x. We will raise that debt. We will raise it simultaneously with our planning for the IPO. That debt will be used as well as any proceeds from the Bausch and Lomb IPO to reduce the remaining debt at the Bausch Pharma remaining company. That is the plan for that. As we look at Bausch Pharma remaining company, we've stated that we would want to keep the leverage on the Bausch Pharma remaining company at between 6.5x to 6.7x. We have a plan to do that by utilizing the EBITDA and cash that we generate from the business, by utilizing proceeds from the Solta IPO, by utilizing the debt raise at the Bausch and Lomb -- debt raise for the leverage for Bausch and Lomb, and also the IPO proceeds from Bausch and Lomb as well as the sale that we've conducted of the Amoun Egyptian business, all those will be used to reduce the overall debt at Bausch Pharma remaining company. Those are all linked to a successful Bausch and Lomb IPO. So there's some things that we need to do. But importantly, we've made great progress on [Audio Gap] And we believe that, that will allow us to do the Bausch and Lomb IPO approximately 30 days after Solta and then importantly, do a full spin of the remaining shares. So just maybe a little more specifics. We intend to IPO up to 20% of Bausch and Lomb at the initial IPO. And then the remaining shares of Bausch and Lomb will be spun directly to the Bausch Health shareholders at that time, and they will receive the tax-free spin Bausch and Lomb shares. Obviously, that's all going to be subject to market conditions and also subject to all the regulatory approvals. But we've got a specific plan. We know what we're doing relative to that plan and are very excited to accelerate this. And once again, it couldn't happen with all the great work by all the Bausch Health employees around the world that have made this possible.

Great. That's helpful. So maybe for a moment, we could sort of fast forward and talk a little bit about the Bausch and Lomb business itself? And I understand you're going to be at the helm, if I have that right?

Yes. I will be the CEO; Sam Eldessouk, the current CFO of Bausch Health will come with me, and we've nominated an entire executive team of Bausch and Lomb, and we've announced that. Joe Gordon, for instance, will be leading the surgical business, also the consumer business and the vision correction business. We have Christina Ackermann, who's going to head up the U.S., Canadian, North America Rx business for the ophthalmology Rx business. So we've got a full team of individuals. We've nominated, and we're looking forward to getting started with that team. We've already held our meetings of the team to continue to move forward. Obviously, we're still on Bausch Health company, but getting ourselves very prepared to go out with Bausch and Lomb in the very near future.

Excellent. So you may have the benefit of sort of having sort of someone else's may be filed the field a bit for you in terms of laying out where it looks like when a slightly underfunded undercapitalized ophthalmic device company spins back out from underneath the pharma company. So that's probably a good thing. But maybe if you could, maybe give us a sense of where are the strengths and weaknesses? Where do you feel that the momentum is building, where you feel that you still have some investment ahead of you in terms of strengthening some of your slower growing parts of that portfolio?

Sure. So we obviously have studied that very closely, and we know -- and I think it probably place I'll start with is, first and foremost, the ophthalmology market in what we refer to as eye health is a very robust market opportunity in our minds. And it comes down to a number of important megatrends or market drivers. The first and foremost is that we know there's a epidemic of myopia out there and myopia being nearsightedness. And that, we believe, is not something that's going to stop. It's really, we believe, associated with the amount of time that children spend on video games, looking at laptops, computers, iPads, the iPhones and less time outside coming playing video games with friends rather being inside, we think is part of the story. Now it's not just the story of the issue of myopia or nearsightedness. It's associated with people that have advanced myopia also have incidence of things that the high myopia associated with retinal detachment, glaucoma, macular degeneration. So all those things are going to drive the area of eye health. We also know that people over the age of 65 use a lot more eye health than people under the age of 65 as the baby boomers hit the age of 65-plus, clearly another megatrend opportunity for us as we think about the future. And then finally, it's things like the incidence of diabetes, all that very much associated with driving the overall market of eye health certainly to somewhere in that, call it, mid-single-digit rate. Now that's kind of the market side. What do I think about the opportunity for Bausch and Lomb specifically? We think we've got a number of very important opportunities in front of us that are going to help to drive our B&L business. And I certainly look forward to having a chance to talk to potential investors about that once we're able to do that. But just things I've said historically and why I believe the Bausch and Lomb business, I could stick with those historical comments is that: number one, we think we have the most integrated eye health portfolio. And what I mean by that is that we're one of the only companies that are in the prescription business for eye health, we're in the surgical business, we're in the vision correction, and we've got a very large robust global consumer business, including things like multipurpose solutions and things like that. So we think we have the most integrated eye health business is clearly one factor. And why I think that's important is that I used the example of a drug like LUMIFY. We launched LUMIFY into the market going back a couple of years ago and LUMIFY just for those that may not know is a product, it's an over-the-counter product. It's used for relief of the red eyes. And we moved from that product being a 0 opportunity to over $100 million in a relatively short time simply because we had the ability to talk to physicians from all different parts, the optometrists that we've called out with the vision correction, the ophthalmologists that we called on from the Rx side. And then, of course, all the consumer activities we did. We think all those working together allow us to have a very successful launch. And I use that as an example, not the only particular one, but that integrated approach, we think, is important, especially as we see the roll-up of more and more of the ophthalmology practices in terms of consolidating into group practices, having this ability to provide all their needs in eye health. We think that's an important part and how we will approach the future as we talked about this previously. Probably the second important comment I'll offer in terms of why we're excited about Bausch and Lomb, especially now. It was a business that from 2013 to 2016, some of the investments were restricted. I'll make no -- you're absolutely correct in terms of your characterization. But since 2016, I joined in May of 2016, we have been significantly investing behind the Bausch and Lomb business, especially in areas like capital expenditures as we launched our SiHy daily lens, we just are getting it to the market. in U.S., Japan, about 5 or 6 countries today. But we have the full range of opportunity now that we've invested in the CapEx to go into the rest of the world with our SiHy daily. We think that's going to be an important growth driver for us. One of the comments I made earlier in your question was the opportunity in the ophthalmology Rx side. I absolutely acknowledge that's one area we needed more investment in. It takes a little bit longer. But importantly, we made the investments. We were able to bolt on a transaction with Novaliq to bring the NOV03 products to our portfolio. We have rights that in the Canada and the United States. And Importantly, we just concluded our second Phase III clinical trial that show that, that product, NOV03, has a very good efficacy in the treatment of meibomian gland dysfunction for dry -- with dry eye. That's an exciting opportunity for us. And why it's exciting for us because, number one, it had a very, very good efficacy in terms of both the primary and secondary endpoints. And we had efficacy and as early as 15 days, that's very good comparison with some of the other products in the dry eye space that take 3 to 6 months to work. So clearly, having efficacy and having a rapid onset of efficacy for a very large market opportunity. If the FDA approves this product, which clearly we hope they will, it gives us a great opportunity to launch a product that can make a real difference in patients with dry eye disease as a simple example. Another example that we just got approval of XIPERE. XIPERE is the first product that is specifically associated with going into the suprachoroidal space in the eye in treatment for uveitis. Once again, now approved. We'll launch in the first quarter. We think that kind of timing is really strong for the things we're going to do with the IPO. And we also announced we have a biosimilar partnership that will launch for a biosimilar Lucentis, and we'll get it filed to the FDA later this year. It gives us an opportunity. So we got a lot of things going in the right direction for new product opportunities as we think about the IPO. So I probably went on a little bit long, but it's really some of the excitement we see at Bausch and Lomb as we think about the future.

No, that's super helpful. And certainly, one of the differentiating between Bausch and Lomb and Alcon, just to name the other company that's recently spun out. They, of course, did not bring their all the ophthalmic pharma businesses that say they act into the deal with Novartis did not sort of come back out from the umbrella, which gives them a slightly different profile than yours. Another difference is that's I'm sure it's obvious to you is you have a pretty well-established single-use of daily contact business. And if there's one thing that's we're fans of your friends at Alcon and like the story and like the market and ways that you were describing. But one of the challenges has been communicating around the trajectory of the margin having to do somewhat with the investments in building out that daily business and getting it up and running and not properly absorbing and so on. And if you could talk maybe a little bit about given you've ophthalmic pharma, given that you've got an established single-use business, this is getting way ahead of the conversations that I'm sure you're going to be having as you go on the road, but is it safe to say that the margin profile might be a little bit more conventional, I guess, in terms of the kinds of things that you can drive leverage, the kinds of products and mix opportunities that you have, the kind of growth opportunities that you have without what I would characterize as an unusual build-out component of sort of the margin story at Alcon?

So I do think that there is opportunities there. I will say that we are launching our daily -- SiHy daily lens in addition to the hydrogel lens that we already have in the market. So I do expect that there will be some incremental investment that we're going to make in our daily SiHy as we launch it. So -- and -- but importantly, what we've done over the last 3, 4 years is we have invested all the capital required to make sure that we will be prepared for the rollout of our daily SiHy lens around the world. So we've taken care of a lot of that already, but there are going to clearly be some operating expenses that we'll need to make sure that we fund to ensure that we have a very successful SiHy daily. I think the most important thing I'd say about our SiHy daily rollout, though, is that we know one of the most important issues for patients today and wearing a daily lens, is that they're making trade-offs. They're making trade-offs with the fact that they get good optics from the SiHy daily. But at the end of the day, comfort is an issue. And one of the things we know by putting together what we refer to as our infused contact lens, it's a daily SiHy lens, we found a way that by putting protectant and electrolytes into the actual product itself, we find that it is a more comfortable lens and where patients certainly are looking at comfort at the end of the day as a trade-off that they're making. So we do think that we're -- we've been successful in putting it out. We have somewhere in that 13%, 14% market share in those places where we've already gone out with the lens in terms of the marketplace. So we think there's good data there supporting that particular product. And with that product, once you get through the initial phases of it, it will drive the P&L that you're referring to both on the revenue side and also as you get more experience in manufacturing the lens, your yields will go up and it has positive impact on margin. The second comment that I'd offer on the margin, I think, is an important consideration for us is in the area of our pharmaceutical business as we get a chance to launch the pharmaceutical products not immediately, but over the next couple of years as we launch a product for dry eye disease associated with meibomian gland dysfunction as we're launching the XIPERE, as we launch a biosimilar, I think those also will help us to drive the overall operating margins of the business. So I do think we have a couple of things that are very well going to help position us to drive the long-term margin opportunities for our business.

Interesting. That's great. And then on the surgical business, maybe with the time we have left, just to give some credit to the folks at Alcon, I think they have done a pretty great job of coming out of the gate with some pretty strong [ ATI ] products and that's benefited the growth profile and helped them quite a bit. Where do things stand? How would you say with the same kind of cataract business? I know historically, you've been very strong and refractive LASIK and lasers. Curious as to how you feel about -- are you where you need to be? Are you a year away, 2 years away from where you need to be in terms of ATI overall competitiveness? How would you describe your posture?

So I'd say our competitor is a good competitor. They've done well. But I think we've got some places where we've been able to show some really significant growth and gains in market share, for example, in our IOL platform in Invista. We've been able to show some very significant uptake in that platform. Do we have more to do there? The answer is absolutely yes. Have we shown some good uptake with our The answer to that is absolutely yes. And with that, not only do we sell the machines, but we also are selling to the consumable packs. We think the combination there will work well for us, especially as we're looking at some of the, what we would refer to as, unmet medical needs or opportunities in the space. We do think there's places that we can build on our medical device equipment to make sure that they're more robust. And one of the things we know is, a simple example, 2020 was a year when cataracts were delayed, the surgery for cataracts were delayed. We believe in the United States, it was delayed by about 16% in terms of cataracts that just did not happen. And that's we think about rest of the world that was delayed somewhere in that 16% to 20%. So those cataracts that were delayed in 2020 are a tailwind for 2021 and beyond. We're expecting to see those come back. And as we're out there as a separate company, a new company that has a much more flexible balance sheet, we think that we can grow organically with Bausch and Lomb somewhere in that I'd call it that mid-single-digit growth rate organically. However, with the balance sheet flexibility we have, we also think there will be opportunities to bolt-on some additional projects or companies as we think about where we can go for the future. Now I don't expect them to be very large deals, of course. But I do think over time, we will have the opportunity to bolt-on some additional to supplement the organic growth rate and to fill in some of the gaps that we do know exists within our portfolio. Look to us to think about that for the future. So we think that's what's really going to be one of the important advantages of taking B&L out as a separate public company. We have a lot more flexibility on the balance sheet to think about transactions. Now we've done some small ones, as I said, we did NOV03, we did the XIPERE addition, but there's, we think, more we can do there and look us have more to say about that as we go forward as a separate independent public company.

Excellent. Lots of fascinating opportunity. So congratulations, and I look forward to hearing more about it as these things unfold. Thanks so much for joining us today. We should probably call it there, Joe. But I very much appreciate it.

Thank you, Matt. Thanks for the opportunity today to have a chance to address the questions.

Pleasure is ours. Thanks.