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

Great. Thanks, everyone. We'll go ahead and get started with our next panel. I am very excited to be sitting here with Bausch Health management team. We've got the CFO, Tom Vadaketh, here to my left. And to his left, we have Will Woodfield, the Treasurer of the company. So thank you, guys, very much for joining us today.

So maybe just to start out, there's obviously been a lot of focus and debate around the transaction and the separation of the Bausch + Lomb business from Bausch Pharma. And I think to just level set folks, I'd love to hear from you how you're thinking about the pro forma cash flow story for Bausch Health, to start, and then maybe we can go into some of the debates around some of the exogenous factors that could potentially impact the cash flow going forward.

Yes, sure. Nice to meet all of you and be here. My name is Tom Vadaketh. Maybe just as a backdrop, I'm sure all of you know, but the Bausch + Lomb IPO was closed on Tuesday this week. And so as of Tuesday, I've taken over as the CFO of Bausch Health. In addition, Tom Appio has taken over as the CEO of Bausch Health. So on the business, the remainco business consists of the Pharma business and the Solta business. Together, that's about a $4.5 billion revenue business. EBITDA margins in the mid-50s, so you're talking about $2.3 billion, $2.5 billion of EBITDA. So -- and the business is highly cash generative. So in any typical year, we tend to -- we convert about 80% or so into unlevered free cash flow. And then -- and so that's the story essentially. There is enough powder there to obviously service the debt and then do what -- and then make some choices on capital allocation.

Got it. And in terms of thinking about the kind of pro forma capital structure, Bausch has said from the start that -- maybe not start, but more recently, that the pro forma leverage ratio for Bausch Health upon spin will be 6.5 to 6.7x. And going forward, as you think about that cash flow and the EBITDA trajectory, you've thought about the ability to delever to be about 0.75 turns per year. And I'd be curious, can you maybe unpack that deleveraging capability for me a little bit and help me think about how much is cash flow generation versus EBITDA growth versus any other exogenous factors, whether it's M&A or things like that, which is probably tough to answer. But I'd just be curious how to think about the actual ability to delever by 0.75 turn per year, pro forma for the transaction and where that deleveraging will really come from.

Yes. Sure. Yes. What we've said is that the company has the ability or capability to do up to 0.75x a year. Obviously, we've got to make the capital allocation decisions, but it's going to come from 2 places. So obviously, the EBITDA itself and -- sorry, the cash itself that's being generated, and then as EBITDA grows, that add as a multiplier effect, obviously. But the root of it is the cash generation and the actual debt paydown. That will be the bulk of it. What was the second part of the question?

Well, I guess, in addition to that, actually, it's more of a follow-up, but you sort of add to all of these statements the caveat that while we have the ability to delever by 0.75 turn. We'll ultimately have to think about what the right capital allocation is. Then you as CFO, how do you actually sort of -- how are you thinking about weighing these factors?

Yes. The priority is debt paydown for me. So it's worked for the company. So the company since 2015, 2016 has had the same approach. It's worked pretty well. Paul Herendeen, as some of you all know, was the CFO and then Sam recently. So that will be the priority, and that will be where -- unless there are alternative uses of the cash that are attractive from a return perspective. And obviously, M&A and business development is something that we will look at. But yes, that -- and that's the balance.

Got it. And so if you think about the business generating roughly $1 billion of free cash flow maybe on a go-forward basis and you're looking at your cap structure, obviously, there's been a lot of credit market volatility these days. But the history of Bausch has really been one anchored on going after earliest maturities first. The world has changed. And the reality is your dollar goes a whole lot further, to the extent that you go after the back end of the debt cap stack with bonds trading in the mid-50s. And so how are you thinking about that opportunity, particularly given the fact that there -- there's still a lot of questions about how long it might take for you to actually get to the 6.5 to 6.7x goal, then we can talk about sort of the risk of this long term?

Yes. So it's -- I can't tell you what we're going to do. But clearly, we've just come out of the gate here on Tuesday. We're very aware of where some of these long bonds are trading, and so it's something that we're looking at. The -- historically, as you know, the company has tended to favor dealing with the near-term maturities first. And that has really worked for the company and for bondholders, I believe. We -- as a result of all the transactions that we executed on Tuesday, the nearest maturity now for us is in 2025. We have about $3 billion of debt maturing then. That gives us some flexibility for sure. But that is something that we are looking at right now, what to do and how to -- what -- basically what you do. Do you do the near terms? Do you do a combination, et cetera?

And in terms of the sources of capital that you could potentially use to go after debt, you obviously have some transactions that you've looked at in the capital markets. You have some cash on the balance sheet. You have revolver. Would you be open to using your revolver to buy back unsecured bonds here? Is that something that might actually be worthwhile considering given the huge disconnect?

Look, we're going to look at it. My personal bias is to use operational cash. That's what I would rather do. As I told you before, the company is naturally highly cash generative. And I expect us to perform. We've put out our cash flow forecast as part of our guidance for the year. And so for me, I'd rather use that. Now we will look at the revolver, et cetera, et cetera. But my personal bias is to use operational cash.

Fair enough. Fair enough. And so the big debate around the Bausch Health story has been focused on a couple of what I'd call exogenous factors. So the first one that most investors are really trying to understand is the LOE with XIFAXAN and the Norwich trial with which we're waiting for a judge's decision in early August. And you have been very vocal about your position of strength with regards to the 26 patents that cover XIFAXAN. You've been very vocal about the fact that Teva, Sun and Sandoz all settled for launch dates in 2028 and beyond. But the other side of the argument is this time, it might be a little different because Norwich is not necessarily challenging the polymorph patents as much as there is a risk that they may have success around challenging the method of use patent. And maybe you can just help us think about across these 26 patents, how to think about, first of all, when the polymorphs expire, when the method of use patents expire and really what your view is on the strength of the method of use patents as it relates to the specific trial.

Yes. So I mean, we think the trial went well for us. We were confident before the trial. And coming out of the trial, we are more confident. I think you heard Joe Papa talk about that in the earnings call on Tuesday. The -- on the polymorphs, the LOEs expire between 2024 and 2027, and the method of use patents run out in 2029. As you know, we have reached a settlement with the 3 companies you mentioned, where they can launch the generics on January 1, 2028. So we frankly feel confident across all of these patents. We think that the trial went well. Our evidence went in well. The judge will issue a ruling sometime in August. And I'll just stop there. I don't want to get into the science of it and that sort of stuff. I'm too new for that.

Fair enough. Fair enough. And so I guess as we think about the debates in the market, there is some concern that if you do lose...

Actually, I just want to mention one more thing. So the -- and this is not a comment on Norwich or Alvogen, et cetera. But in addition to that, for any of these companies that are going to put out a generic, the FDA has put out an initial statement that they are likely to require bioequivalence demonstration, in vivo bioequivalents. They haven't finalized the guidance, but they have indicated that they are going to require that. And so I do not know where either of these -- where any of these 4 companies are, whether they've conducted the trials and whether they're able to demonstrate that, but that's new guidance that's coming out.

Incremental hurdle to them, bringing a viable generic market even if there is some type of success on their end with regard to the trial.

Right. Yes.

Fair enough. On your most recent earnings call, for the first time, I heard a statement from the management team, where in this hypothetical where Norwich does actually achieve some success presumably on the method of use patent that you would rethink the timing of the spin. And I'd like to maybe just unpack that concept because from my perspective, whether you spin at the end of '22 or at the end of '23 or whenever, it doesn't necessarily change the outcome for the remainco when you think about an LOE event in, say, 2025, for example, or earlier than '28. And so I'd be curious, as credit investors or equity investors, how are we supposed to think about what that statement meant as it relates to the commitment to ultimately go down this path of what you originally planned?

Yes. I think -- so I'm new, taken over as a CFO since Tuesday. But I've been with the company since January. So I've had a chance to participate in management meetings and Board meetings. The one thing that I'll just remind everybody, the objective of this whole strategic pathway from the Board's perspective as well as the management team is to create 3 strong companies, 3 great companies. And so I would -- the team and the Board are going to look at it from that context. It is not a "spin at all cost" type of strategy. The -- and so if that were to happen, and again, we do not think it's going to happen. We think we have a very strong case, and we are confident, but we'll see. But if that were to happen, we would have to talk about it. Are we going to achieve that objective of having 3 strong companies out there? And I think that's what -- I think it was Joe who made those remarks. And I don't know if it was -- certainly, from my perspective, it wasn't a change in direction or anything like that. The intention all along has been to make sure that each of these 3 companies is strong and can be successful and for a long time to come.

Got it. And I guess maybe if I just think mathematically about it a little bit. So let's say that the method of use scenario does play out and say that everybody comes into the market 2025, right, 3 years earlier than plan. Theoretically, the XIFAXAN EBITDA would be impacted. But obviously, and we can -- I want to get into the business in a little bit, but that's not the entire part of this business, then you would have some years up until then to generate free cash flow and delever the balance sheet. But the way I sort of look at it is it's really just accelerating the LOE theoretically by 3 years, right? And so you can start to think about, okay, maybe that's $1.5 billion of kind of lost value relative to your prior expectations? That maybe sort of an easy kind of back of the envelope way to think about it potentially?

Numerically, you're in the right zone. But from my perspective, it would be a change in our expectations and the modeling we've done and the planning we've done. So we would have to take a hard look again at what makes sense. You're right. I mean I think the numbers are probably in the right ZIP code.

Yes. And then as it relates to the efforts to achieve the 7.6x leverage goal to allow for you to unrestrict the future spinco, I think you said on the recent earnings call that you weren't currently at that threshold. Can you just give us an update on sort of maybe where you are and what needs to happen in order to get to that unrestriction level?

Yes, it's a matter of time, right? So we haven't disclosed where we are. We're not at 6.7x or higher. And so it's going to be a matter of time of either reducing debt or obviously, the denominated EBITDA increasing on an LTM basis. So it's as simple as that. But we -- why aren't we there? Obviously, it was a smaller IPO, right? So all along, we've been thinking about a 20% IPO. And frankly, at share prices that were higher, the market hasn't cooperated. And so both the size and the pricing was much less, and that has impacted where we came out.

Okay. Great. And then maybe just shifting over to the Granite Trust...

Actually, if you don't mind, Frank, I'll just chime in to what we've been talking about. There's that 7.6x figure for unrestriction on the credit agreement side, but we also have all of our indentures on the bond side, and those require a fixed charge coverage ratio incurrence of better than 2:1 in order to unrestrict Bausch + Lomb. So that's just something that people should keep in mind as well when they're modeling and when they're thinking about the time lines.

Great. And then maybe just shifting over to the Granite Trust transaction. So I believe a little while back, you received the challenge from the IRS. I think you're sort of typically required to respond within 60 to 90 days, and then they ultimately determine if they agree with the response or disagree with the response and sort of take it forward from there. But maybe you can just bring folks up to speed because I think in November, at the Credit Suisse health care analyst, you provided a couple of pretty helpful slides that show some strong arguments for why the case law supports the transaction. And I know that there have also been some other arguments that have come out more recently arguing that maybe this is more of a tax-free type spin. And I'd be curious just if you can kind of help us better understand the strength of your argument where you think things go forward.

Yes. The facts haven't changed at all since we first informed everybody of the matter and then the Credit Suisse conference. So we continue to remain highly confident in this matter. The -- there's something like 70 years of case law that supports this. And like you said, we shared some of the details at the Credit Suisse presentation, which I hope everyone can get access to. So the -- we received the -- procedurally, we received a notice of what's known as a notice of a proposed adjustment. That's what we received in October, I think it was, of 2021. And the next step is a formal notification from the IRS if they conclude as such. I think it's called a proposal of tax efficiencies, some words to that effect. We're waiting for that. We have not received that yet. As soon as that comes, we have our response prepared and then the process would start. So it's a matter of time. The IRS has to do what they do. And then we'll go from there. But we -- like I said, we remain very confident. At the time -- so this transaction that we're talking about happened in 2017. At the time, you can imagine before doing something like that there that we engaged with some of the top advisers in the country, top lawyers, accountants. When we received the notice in October, we did the same thing and came out feeling even more confident about the position. So we're waiting to hear back from the IRS so that we can formally respond and hopefully bring the matter to an end.

Got it. And if it doesn't go to an end, and let's say it does sort of wind its way into court, curious, my understanding is the court process can be a fairly like extended period. Do you have a sense for how long these things typically sort of play out over years when you start to incorporate appeal process and things like that? Do you have a good sense, if you guys can't arrive on the same page, how to think about the timing?

I think that's just a hypothetical. I mean we feel that the case law and the facts so strongly on our side, frankly. I mean, let's see what happens, right? I am not expecting that outcome.

Got it. Got it. Great. And maybe now just shifting over to the business a little bit. So when we think about Bausch Health, obviously, XIFAXAN is core driver of cash flow and growth for the business. And if I think about this past quarter, we did see that growth slowed a little bit. And I'd love to just maybe dig into, as an analyst, how should I think about modeling XIFAXAN going forward. I know there have been some exogenous factors with regards to whether COVID or other factors. I also know that as a business, you've increased some investment with regards to sales and marketing. And in the past, I know that the growth rate of XIFAXAN has typically responded very well to investment in marketing. So how should we think about the growth trajectory for XIFAXAN maybe over the next year, few years to say a 5% grower, a 10% grower, 15% grower? How is the -- what's the market opportunity look like from your perspective?

Yes. Maybe I'll talk near term and then we can talk about the medium term as well. But on the near-term basis, so we announced a price increase at the end of last year, and we're getting pretty good realization this year. And so that should be at a minimum, say, low to mid-single-digits coming through. In Q1, just so that I can explain it for everyone, there were 2 factors that we saw. So the Omicron virus had an impact in U.S. health care. And so we saw our TRxs about flat, up a little bit frankly, but not the kind of growth that we were expecting to see. So it was slower than we expected. But the major year-on-year impact was an inventory build that it occurred in Q1 of last year at the wholesalers, which didn't recur this year. And so it just created a bit of an unfavorable compare. It wasn't a surprise to us. We knew obviously that, that occurred last year, and it was part of our planning. And so this year, I mean, hoping -- obviously, Omicron has kind of waned off right now. And we think that we should start to see -- we hope sort of mid-single-digit type of level. We haven't guided to it, but that with the price and some modest volume, we need to see those -- the TRxs come through. And so far, there's still some weakness there. Over the medium term, Tom and I, Tom Appio, the CEO and I have just started. But with the team, we see white space in this market, both in the IBS-D where there's a huge population with unmet needs, and we have -- we believe we have a drug that works. And then also on the HE side, a very large amount of white space. And so the extra investment that you talked about is in A&P, advertising and promotion for this year. We are -- we expect to start spending that from Q2 into the second half and mainly targeted on the IBS-D side, and we will see if that works or not. But we're expecting, like you said, to see similar returns from past investments. And so over the medium term, you would have heard Tom Appio talk about it, our strategy is to accelerate growth in this area. This is a growth engine, we believe, because of all this white space and then also accelerate growth in the international market, which, again, we think it had a very nice first quarter with organic growth of 8%. And we can see that -- again, that's a business that has -- is a very highly diversified business, branded generics. It's been a little bit under the radar screen. It's a $1 billion business and profitable and has no LOEs -- no LOE issues. And so that should -- we should see nice growth there. So over the medium term, acceleration of that one and XIFAXAN is what we believe will carry us through. And on the diversified segment, which has been the victim of LOEs the last few years, most of these LOEs are behind us at the moment by now. We expect the business to -- the sort of the downward slope to flatten out over this year and next, and then the business should stabilize. We've always run those businesses to maximize cash, and that continues to be the strategy.

Great. And then maybe just touching on ortho derm for a minute. Over the past few years, you've taken some steps to stabilize that business. And maybe you can just help us kind of understand beneath that ortho derm layer, what's sort of driving stability? And how should we think about the trajectory there as well?

Yes. So we think we've addressed what we wanted to address in terms of the cost structure and all of this stuff. We wanted to basically get a fit-for-purpose organization for that size of business. The -- it had been declining. That sort of slowed down for the last couple of quarters, and we should see a flattening out and a slight increase going forward. It's not a large business. There's a couple of good products. But there, as you know, we've -- the payer side is difficult. And that's been the challenge that the company has had for many years. And so we'll have to be choiceful about what we invest in and how we expect that business to perform going forward. But yes, it's not the growth driver of the company, put it that way. But we think that the actions we've taken have had the desired results.

And then maybe just stepping back and revisiting the M&A discussion a little bit. Obviously, whether -- whenever XIFAXAN goes off patent, it's obviously at some point going to go out patent. You've got to -- as CFO and obviously, speaking sort of more long term here, you've got to set the company up for success beyond the next 5 or 10 years. So how do you think about where to deploy capital from an M&A standpoint? How do you think about the pipeline? And how do you balance that against kind of where the debt cap stack is trading? Obviously, the -- with where your bonds are trading, there's not a whole lot of like liquidity available to you in the market today. So how do you sort of balance all of these issues to ultimately prepare the company for a longer-term path?

Yes. Well, as I said earlier, in terms of capital allocation, the debt paydown is a priority for me and for the company and that it will remain so. And so -- and to your point, so doing large, large deals are probably not in the cards in the near future. If we can get a few more TRULANCEs, that was an unusual opportunity. Those are perfect, particularly if they're in adjacencies where we can just leverage our platform, the very strong sales force we have in GI to grow the businesses. So yes, we have not contemplated nor are there any plans right now to do a very large acquisition that would require major financing. The focus is to manage what we have. As I said just a few minutes ago, I think that there is a lot of opportunity to see growth and increase the size of a company and increase revenue within XIFAXAN and international, and then we'll go from there. And then I would also -- sort of be remiss not to mention our pipeline, but we do have -- it's not a very -- not a massive pipeline, but we have some very exciting products in the GI space and then also 1 or 2 in dermatology that are showing a lot of promise. And these will be new novel formulations based on rifaximin or XIFAXAN and then in dermatology. And so those as well over the longer term should give us growth. Those trials are progressing well, and we're excited about them.

And when I -- just going back to the M&A discussion, when I do think about access to capital, can you just remind us in terms of your indebtedness capacity, what you do have today?

Will, do you want to take that?

Sure. So we have a new credit agreement, as you know, but it still has the maintenance covenant there on the 4x. And we have our indentures. Our indentures have those incurrence tests of 3.5x. We have a credit facility basket of $2.5 billion that we haven't used. So we feel like we have a fair amount of secured capacity.

Okay. Great. I guess just lastly, I mean, obviously, the equity and debt markets are unique times right now, but the move over the past week across both your stock and bonds was pretty sizable move. And I'd be curious, as you thought about the earnings front, right, like it wasn't a massive change in terms of guidance today, but you did get guidance. What do you think like today the market's kind of missing about the story when you look at your bonds trading in the mid-50s or kind of the recent move in payment equity?

It's probably above my pay grade. You guys -- the folks in this room are probably better positioned to answer that. But I think you -- in my view, you touched on the few issues. So there's the Norwich trial, the Granite Trust, those kinds of things. There's a little bit of noise out there that has driven a little bit of uncertainty. But in both of these issues, there is no new news. We have -- I think we've discussed it here in this call, we continue to be confident in both of these, and we just have to see them being -- getting resolved. But other than that, I would not dare give you an opinion of what the markets are doing.

Fair enough. Great. Well, with that, we're out of time. So I want to thank everybody for joining us today, and we'll be moving to a keynote for our next session. Thanks. Thank you guys very much.

Thank you.

Thank you.