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

Hi, I'm Darren Campili. Welcome to the Bausch Health presentation. I am a Vice Chairman in the health care group, and welcome, everybody. I'm here with Joe Papa, Chairman and Chief Executive Officer of Bausch Health.

Hi, everyone.

Perhaps I'll kick it off with some questions.

Please.

And I'll start off with the global ophthalmology market. If you could just for us break down within the four segments what the key operating stats are, i.e., size of the U.S. versus outside of the U.S. market and BHC's positioning within each. Sir?

Pleasure to do that. So first of all, it's a pleasure to be here and pleasure to have an opportunity to be with all of our investors in person for the first time in quite a long time. So glad to have a chance to be here. Let's talk about the B + L, the Bausch + Lomb business. We're really excited. One of the things about B + L is that we believe we compete in the largest addressable market in eye health. And what I mean by that is we clearly have the capabilities to be in the vision care business, which is, for us, it's a combination of our contact lens business as well as our consumer business. That's about a $16 billion addressable market. We're also in the surgical business. Surgical business is about an $8 billion addressable market. And then finally, the what we call pharma prescription, ophthalmology prescription business, it's about $26 billion. So the totality of the addressable market that Bausch + Lomb will compete in is we believe is one of the largest addressable markets because we're in all those segments. And that's about $50 billion, so a very large market. The U.S. is a significant portion of our business. About 50% of our business is in the U.S. in terms of Americas; about 30%, Europe, Middle East, Africa; and about 20% is Asia Pacific. That's about how it breaks out, so very large addressable market, about half of it coming from the Americas and then half of it outside of the Americas is how we think about it. But we're excited. We're -- right now, as we measure our size of the diversified eye health companies, we're #3. We're behind obviously Alcon and the J&J, but we're about #3. And we're clearly looking to accelerate that position going forward.

And Joe, could we talk about the growth rates for each of the segments and your expectations?

Sure. Yes. So we look at the overall eye health business, and we think the overall eye health business is going to grow somewhere in that mid-single-digit growth rate, somewhere in that 4% to 5% growth rate. And our view is that it's going to continue to grow in that type of growth rate because it's going to be driven by what we refer to as mega trends or tailwinds. What are those mega trends and tailwinds? For example, we know that people over the age of 65 consume about 10x more eye health products than people under the age of 65. And we all know the over 65 population is continuing to grow. So that's going to be a big driver of these tailwinds that we're referring to that will allow the market to grow somewhere in that 4% to 5%-type growth rate. Take the other extreme, what else do we know? We know that patients that are the younger kids today have a lot higher incidence of myopia or nearsightedness. We know that in the United States, for example, the data is that about 20% of the children were myopic. That's now moved to -- and this is like 1950. It's now moved up to be about 40% of children are myopic. And it's on its way, we believe, in the next 20, 30 years to about 50%. And it obviously asks the question, how could it change that quickly? Our belief is that a large part of that increase in myopia is because kids are spending more time on video games, iPhones, iPads, computer screens like -- and that, we think, versus being outdoors with their friends and playing games, we think that's a big contributory factor of why we'll see the continued increase in the eye health business and drive the tailwind. Obviously, the other one that I have to probably mention is what we're seeing with diabetes. The prevalence of diabetes also continues drive the demand for eye health. And probably, one of the things I should have said about myopia that I left out is that it's not just the vision correction, that's certainly part of it. But the other part of high myopia or more advanced myopia is also associated with things like macular degeneration, glaucoma, retinal detachments. So those are some of the consequences we see in eye health and why we think it's going to be a long growth trajectory, long cycle for growth.

Appreciate that. Can we talk a little bit about surgical and, in particular, the pace of innovation and scope for product launches?

Sure.

And then I want to dig in a little bit more on that.

Yes. So one of the great things about what we've been trying to do at Bausch + Lomb is to separate our businesses into three distinct businesses: the Bausch + Lomb eye health business; the Solta business, which is the medical aesthetics business; and the global diversified, what we're calling right now Bausch Pharma, will be rebranded, of course, once we do the IPO. But getting back to the surgical and why I mentioned that is that we've been getting ready for the B + L separation into an IPO really for the past 3 years now. So we've made some significant investments in research. For example, since 2018, we put about $1 billion into research and development for our Bausch + Lomb business. We think that was an important part of it. The other thing we did, just a matter of fact, is we spent about $700 million in capital expenditures for our silicone hydrogel daily lenses, all geared towards getting us more prepared for this. But as we go to surgical, to your question exactly, one of the things that we have clearly the higher amount of R&D dollar, we feel the surgical business is one that we can have the quickest return on investment for that surgical business. So we've been investing behind everything from digital platform that allows us to capture what we call the eyeTELLIGENCE data system. One of the things we saw firsthand when COVID occurred, one of the questions everyone was asking when COVID occurred is what's happening out there when it comes to surgeries? One of the great things that we've done with our platform for medical devices is every time the device is utilized, it sends data back to the cloud that we can access, so it gives us some sense of what's happening in a physician's practice that's using our surgical device. It also allows us to roll it up to what's happening in a region and then, of course, what's happening nationally. And why that was important, when we were all trying to find data from COVID, for example, we had data that we could share with our physicians, but obviously, we could share with our investors as well. That's an example of how we're trying to build an overall digital platform that we can have access to. Beyond that, there's a lot of products that we're spending time on now. We're going into the premium IOLs. We're looking at what we can do also with a 3D microscope, for example. So we all try to bring all this technology together. We're excited about what it could mean for our surgical business. Most of these categories we're going into are the faster-growing segments of eye health. So we think that's going to help propel our growth, not just in 2022 but beyond that as well.

Joe, can you tell us about the return of cataract surgery procedures and what your expectations are in that regard?

Sure. Maybe a little background for everybody. We know that the impact of COVID had a decrease in the number of cataract surgeries that people just had to get access to the hospital environment or the ambulatory care surgery environment. We believe that the decrease in the 2020 timing because of COVID is somewhere in that 15% to 20% range. It was probably more -- in the United States, it was probably closer to that 15% decrease of what happened and outside U.S. is probably closer to 20%. But what that created was a real backlog of cataract procedures. Because unfortunately, if you had cataracts before COVID and were not able to take care of it, you still have cataracts. And that's something that, that backlog is something we're working our way through. Now one would suggest, "Well, then, okay, it's 2021, then it should have all resolved." But it's not that simple. What happened is that in 2021, we did see some increase in the number of surgeries prior to or certainly during 2020 and even more than we saw in 2019. But there's still some issues in terms of staffing at some of these cataract surgery centers. So those are some of the things that we expect, cataract surgery still continue to be a tailwind for us because there's still this queue that have take -- have to be taken care of. Because as I said, if you had surgery -- if you had a cataract before and you weren't able to get surgery during COVID, you still have the cataract. It's still something that we need to take care for these patients. That's why we see this being a tailwind for us going into the future.

And can you comment on your expectations for margins in that business? Because I think that, that's been challenging.

Yes, it has. So one of the things -- and it goes back to your question on our surgical investment. One of the things that we're spending a lot of time and effort on in the cataract surgery area is there's really three areas -- that actually four. We obviously sell the instruments for the cataract surgery. We actually sell the actual device that -- our Stellaris device, for example. But we also sell the consumables that are used during the procedure. And the implantables are the actual IOLs, the intraocular lenses, that get utilized. So where is the biggest margin opportunity for us as we go forward? One of the things we've invested in is premium IOLs. Those are IOLs that have the ability to be multifocal. They have extended depth of fields that patients -- the focus that patients are looking for, trifocal. We're launching now our LuxSmart. LuxSmart is right now being launched in Europe. But that's an example of something we're doing right now in 2022. And then we have our enVista IOL, which is a platform that's done very well for us already. But we're going to also bring it out in a trifocal and the EDOF design. That's going to be a little later, more closer to 2024. And that's where we're going to be able to drive that margin structure. Because it's the consumables, it's the implantables that have the higher margin structure. So as we launch the premium IOLs, that's where we'll see the -- we'll see some in 2022 with our LuxSmart but really in the '23/'24 timeframe as that continues to ramp up.

Excellent. You mentioned competition earlier. And curious what -- from a bigger picture perspective, what you think the key differentiating factors are for success of B + L versus your key competitors.

Great question there. What we are looking at right now is how does B + L compete in a marketplace that, first and foremost, we think is going to grow significantly as you asked before. So number one, we've done a survey with eye health professionals around the world. And I can tell you, number one thing that we have going is we have a brand, B + L, that is the #1 most recognized eye health brand, better than anyone else, better than the Essilor, better than the J&J, better than Alcon, better than Cooper, HOYA. You name it, we've got the best brand recognition. And that helps. It's not the only thing obviously, but it certainly helps. Number two, we have an integrated strategic platform. And what I mean by that is we have the most integrated platform of eye health products. And what that means is that we're going to compete on the surgical side. We're going to compete on the contact lens side. We're going to compete on the consumer side. And clearly, we're going to compete on the ophthalmic pharma business. By having that integrated approach, we have seen that work incredibly well. In the past, easy example, we launched a product called LUMIFY. It's a product for redness release. And we launched -- it's a consumer product to be clear. But we launched it with the normal consumer items that you need to do of advertising, TV advertising, all the things you do, public relations, et cetera. But beyond that, we also gave it to our sales reps. And they dropped off samples. They talk to the doctors about the value of this product and why our LUMIFY was significantly better than the existing products out there. What are the results from doing this integrated approach? We got the #1 physician recommendation for redness relief for the eye within 9 months from 0. Within 9 months, we are the #1 recommended products. Number two, we acquired approximately a 50% share of the redness relief category within 3 years. So we went from 0 to 50% in like 3 years. So we think it's this power of this integrated platform. My example, LUMIFY, is just one example. Another obvious example is when surgeons are doing cataract surgeries, to your previous question, what do they need? They need the implantable, they need the device, but they also need the preop med, the postop med. We have it. It is that integrated platform that we think is really important to our physicians. And it's going to get more important as many of the physician group practices roll up into larger, mega practices. We think we have the capabilities to help the physicians to help them treat their patients. We think that's going to be an important part. So clearly, the brand recognition, the overall integrated platform. And then finally, products. We have -- within the pharmaceutical business, we have 100 ophthalmic prescription products, 100 products. We have the largest portfolio of products of any company out there today. That's going to be the capability that we're going to bring together with not only the surgical products but the pharma prescription products, the vision contact lens products, the consumer products. Bringing them all together, we think, with all these new products that we're going to invest in, we think that's what's going to drive the overall success of the Bausch + Lomb business going forward. And importantly, we've had some time to invest in the R&D to get these new products to the market right around the time of the B + L IPO. We think that's an exciting time.

Excellent. Appreciate that. Silicone hydrogel, you've talked about that a bit. You've guided to sales exceeding $250 million. Could we talk about the cadence and how that compares to the existing market size?

Sure. So first of all, I'll just use the U.S. data because it is pretty straightforward. It's about a $1 billion U.S. market today. But it's on its way to be about $3 billion. So clearly, it's a very large market. What we're looking at right now is we've launched it to date our -- we call it INFUSE here in the United States. We call it ULTRA ONE Day outside the United States. That product is doing very well for us. We've launched in about 6 countries so far. We've got another 23 countries coming on stream in 2022. And that's just for the spherical lens, which is about -- spherical represents about 65% of the daily disposable lenses, so we're just going with spherical right now. In addition, we're going to launch another -- about 10% of the market is multifocal. We'll launch the multifocal in about 6 countries this year as well. And then ultimately, we'll launch toric product. Somewhere in the '23/'24 timeframe, we'll launch toric. But we'll have the full offering of SiHy daily lenses. What we've seen so far is that our SiHy daily lenses have an important differentiator versus the existing product. What do we know? We know that when you go in and you see an eye health professional for contact lens, the first thing they always ask is how did they feel. And we know ours have very good comfort. We know we have very good optics. But the other thing we've done, because one of the problems that we're trying to solve with our SiHy daily lenses, we're trying to solve a problem of how did they feel at the end of the day. They're still unfortunately -- the competitor SiHy daily lenses still caused some contact lens dryness of the eye. We believe that with what we've done with our INFUSE products here is that we've put in it electrolytes, osmoprotectants and moisturizers so that they're incorporated into the lens, into the solution. By doing that, we know that we can get a 94% to 97% response from patients that these lenses feel good at the end of the day and I can still get clear, crisp vision at that 94% to 97%. So that's why we're excited about it. We know the data. The data tells us that where we put our fit sets out today, we're getting about a 14% share of those patients where we have fit sets. We don't have them everywhere to be clear. But where the fit sets are today, we're getting about a 14% share. So you can see as the market grows to some -- from $1 billion to $3 billion, we've got a big opportunity here.

So the implication is they're more comfortable.

We believe. As a CEO, I believe based on the data that we have better comfort in the sense of what we're seeing from patients telling us that, at the end of the day, 94% to 97% of the patients tell us that they feel better and there's less of a problem with contact lens dryness.

Okay. Perhaps we can switch topics to pharma and XIFAXAN. An update just on the FDA guidance clinical trials for XIFAXAN?

Specifically, the new indications?

Yes.

Yes. So we've been working very diligently on our rifaximin product, that's the generic of the XIFAXAN. And we've found some very interesting things that we can do with this from a novel formulation, a next-generation formulation. And we're going after a number of different indications. One, SIBO, which stands for small intestinal bacteria overgrowth, we're looking at that in terms of that opportunity. Number two, we're looking at what if we take this into the reduction of cirrhosis symptoms? I remind you that XIFAXAN today is approved for reducing the secondary occurrence of hepatic encephalopathy, which is part of the development of these liver patients. So we asked the question of ourselves, what if we can take this and treat those patients who have cirrhosis earlier to avoid ever going to this situation where they actually have to show the hepatic encephalopathy or these serious symptoms? And how would that benefit society? We then took it on and said, "Let's go after that overt hepatic encephalopathy patient, OHE." We've shown that. We show it works. We've shown the dosage that it works at. And we said, "Let's go after now and go after what we refer to as our RED-C trial, reducing cirrhosis symptoms and keeping patients from going into hepatic encephalopathy." That study has started. Just to give you some order of magnitude, the number of patients that have hepatic encephalopathy is somewhere in that 150,000 to 200,000 range, somewhere in that range. If we go for the patients and try to stop them from ever getting into hepatic encephalopathy, the order of magnitude, that's a 3 to 4x larger patient population. So we're excited about trying to show that. We've got the study underway. We're going to use a lower dose SSD formulation. That's how we're thinking through it. We'll get the data and see if it works. If it works, it's going to help a lot more patients. That's what we think is really exciting. And maybe one final one on rifaximin, which is a little bit unusual but certainly very exciting, is that we found by using XIFAXAN and treating patients who have sickle cell disease in a pilot clinical trial, we showed that we can actually reduce the circulating activated neutrophils by using XIFAXAN. And what that led to, reduced circulating activated neutrophils for sickle cell patients, lower amount of vaso-occlusive crisis and a lower demand or need to take an injectable opioid. Those are unusual findings, but one that we think are very important. They're very objective. So we're going to pursue using our XIFAXAN or specifically rifaximin new formulation into sickle cell disease and see if we can help patients with sickle cell disease with a product like rifaximin that's been used for many years and has a very good, very clean safety profile, and we'll get the data on that. But we think that's an example of very three novel ways that we can try to help patients with our rifaximin molecule.

And how are the trials progressing in 2022?

Yes, they're all starting. They're all either have started or in process of starting. And we -- in the latest quarterly earnings report, I'll refer you to that, you actually see where everything is in terms of the process. But we're all excited that we'll get data in the next 1 year, 1.5 years to get to the next stage, whether it be a Phase II or a Phase III study. We very fortunately are able to go directly to Phase III with our product for RED-C. We had conversations with the FDA, talked about the process, talked about the data we had in overt hepatic encephalopathy. And we got to go ahead to go right into Phase III with that one. We think that's an important one especially, very large opportunity.

And do you think the peak sales potential of these pipeline products for rifaximin could be larger than what the consensus expectations are for XIFAXAN in, say, 2027, which I think is roughly $2 billion?

Yes. Well, I'm not going to probably comment exactly on the sales in 2027 because we don't give long-term guidance. But I do recognize that these are good opportunities. What I would say is we've got to get the clinical trials done. If we get these clinical trials done and they show the results that we're excited about potentially from the early work done here, for example, in sickle cell and the reduction of cirrhosis, they have the opportunity to be larger in the sense of a larger number of patients that we'll be able to treat. As to what happens, I obviously want to wait for the data to see what shows up on the data. But it could be very, very important for our overall Bausch Pharma remaining business.

Great. Appreciate that. Switching topics because we've got a few more minutes left, on your dry eye product, can you talk about next steps on commercialization?

Yes. So we licensed in a product, we refer to it as NOV03, for dry eye disease. And it's got a really interesting process in that the way it works is it helps on the evaporative side or what we refer to as meibomian gland dysfunction associated with dry eye disease. So we have the opportunity with this product to be a first-in-class, the first product that would be indicated for the use of meibomian gland dysfunction associated with dry eye disease. That's a very large percentage of dry eye disease. It's about 86% of dry eye disease is associated with this meibomian gland dysfunction. So it's a large percentage of the patients with dry eye disease. Number two, we have shown and we now have two Phase III clinical trial results that show we treat the signs and symptoms of dry eye disease. So clearly, that's beneficial. But what we also showed is that we have a very, relatively speaking, rapid onset of action. The current products in the category, let's say, in the United States alone, it's a $3 billion gross sales category, largest product is over $1 billion. But those products take somewhere between 3 to 6 months to work in terms of existing products. We've shown very interesting data. Obviously, we've got to get it filed to the FDA. We'll do that in the next several months. But we've shown data that suggests that we have benefit for patients, statistically significant benefits, as early as day 15 versus products that sometimes will take 3 to 6 months. So we're excited about it. We've got to get it filed to the FDA. That should happen in the next several months. And then obviously, we'll be releasing some of the exciting clinical results in the next several months. So excited about it, and we think that could be obviously a big driver of the opportunity for our overall B + L business.

Excellent. So I know we're a bit over, just a couple of more quick questions. From a macro international perspective, and perhaps it's just somewhat top line, but global supply chain challenges, inflation, and particularly in the U.S. but I think it's a global issue, labor shortage and Russia-Ukraine. I know it's a lot. That's why I said it's top line. But how are these macro and geopolitical issues impacting the business?

Sure. Absolutely. So let me just try taking them in line here. Number one, is there inflationary pressures in the business? The answer is yes. And what we've been working on is what we can do with project efficiency to drive further efficiency in our overall supply chain and the efficiency of our formulation just to try to offset some of those inflationary pressures. That is a project that we worked on in the past at Bausch Health, we call it Project CORE. CORE stood for cost optimization revenue enhancement. We got that restarted to try to deal with some of the inflationary pressures. But we also need to respond with pricing. We have taken pricing on our -- both on the overall pharmaceutical business, we took some pricing. But also, in the area of our consumer business, we're taking pricing as we speak. And then also, on the vision contact lens business, we're taking some pricing, took it in early January. We think that's another important part of it. On the next part of the question on the Russia business. Russia business, it's somewhere less than 2% of our overall business. It is something that's important, but it is not some -- we do not have any manufacturing assets there. It's really a distribution business, so we're going to obviously manage that the best that we can. But when it comes to our overall, what we've been focusing right now is to do two things. Number one, obviously it's the safety of our employees that's in the Ukraine and in Russia. And then number two is to make sure that patients have access to our product. So we've done some things like product donations, a very simple example. With some of the activities in Ukraine, one of the things was just they need some saline drops to help clean the eyes if they got debris in their eyes. So we've done some charitable donations. And we'll continue to do more of that. But really, it was the safety of our employees as well as making sure products -- people have access to our products for things like saline drops, et cetera, that we wanted to make sure were our first priorities.

That was very efficient. Appreciate that.

There's a lot more that goes into that, but...

Sure. Last question.

Please.

Thermage FLX in China. Could you provide an update and any implications that might have on the IPO?

Sure. So Thermage China, FLX is an important opportunity. It's in the market today in China. We're working with the regulatory authorities in China to ensure that we've got a package that not only works under the current regulations but potential future changes in regulation. There have been no changes yet, but they are evaluating that. We feel comfortable that we'll have a medical device approval. If that's the way it goes, we'll have that filing done. We're already working with the regulatory agencies to make sure we put together something and more work needs to be done there to be clear, but we're already there today. The other thing we have available to us in China is our CPT or the previous generation of Thermage also is approved in China. It's also approved on our medical device license. So we've got a number of avenues there to pursue, whether it's to use the CPT or to continue to use the FLX under the existing regulations. And if they change, we obviously will go to this new medical device regulation. But we're working very closely with the Chinese regulatory authorities with our product to ensure that we'll be successful. And obviously, that's an important part of our Solta IPO that we're also very excited about.

Appreciate it. Thank you very much for the time, Joe.

Thank you. Thanks for the questions.

Thank you.

Thank you, everyone.