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

Great. Thanks, everyone, for joining. For those who don't know me, Sean Palmer from Barclays, subbing in for Rishi today. To my left, I have Tom Vadaketh, CFO of Bausch Health, and Will Woodfield, Director of Bausch Health. Thanks, everyone, for joining in the room today. Thanks, Tom and Will for joining. Really appreciate it. Maybe start to give you a few minutes to give your background for those don't know you yet as well as any perspective on, obviously, the last few weeks of activity.

Yes. Thank you, Sean. And maybe I'll just kick off with just thanking Barclays, you, yourself, Sean; Rishi, who is somewhere in the audience, but Barclays has been a huge supporter of the company the last few years, and we all appreciate it. I've been in the company since January. The Bausch + Lomb part of the business was IPO-ed on the 10th of May. And I took over officially as the CFO for Bausch Health at that point, so from the 10th of May. So going about a couple of weeks, but I've been here longer, as I said. I started working for Bausch Health on Jan 1. Maybe I'll just take a couple of minutes to sum up a little bit about the transaction and allow you to get into the -- into it. So as I said, on May 10, we completed the IPO of Bausch Health. That was about a 10% IPO. It's a -- I wouldn't say a culmination of a process, but certainly a significant step in a process that had started back in 2020. And so we're very pleased to kind of reach that milestone. Just speaking from a capital structure point of view, what was the net impact of the transaction? So we raised about $600 million or so from the IPO itself. B&L, Bausch + Lomb, concurrently raised $2.5 billion in -- actually a little north of $2.5 billion in debt. And we ourselves, Bausch Health, had raised about $1 billion in bonds back in January. Anyway, the sum total of all these transactions resulted in a couple of things. One, we reduced our total debt from $23.5 billion or so to $20 billion as of the 10th of May. And then we also extended the maturity profile of our debt. So prior to May 10, we had about $9-or-so billion in debt maturing in 2025. We now have $3 billion. So we reduced that profile of about $6-or-so billion either in the combination of paying some of those off and then also pushing those out. So we're very pleased with the outcome. It was the end of a lot of very significant amount of work from the team, and now we're poised to go. Maybe just a very quick summary on the business. So what does that leave us behind the RemainCo. RemainCo consists of a pure-play Pharma business and the Solta business. If you remember the Solta business, our plan is to IPO that at some point. We believe it's of significant value and a very valuable asset for the company, and that remains as an objective for us. But the remaining company comprising of these 2 businesses is think of it as about a $4.5 billion revenue company with EBITDA margins in the mid-50s or so and very high cash conversions, unlevered free cash flow in the 80% zone. So very strong -- as an incoming CFO, a very strong company to take the reins on. I took over as the CFO on May 10. Tom Appio has taken over as the CEO on May 10 as well. And in terms of our priorities, Tom Appio -- if you listen to the earnings call, Tom Appio shared the priorities. I'll just hit the top line. I took a -- I made a list here, but the first and foremost is to drive growth. And when I talk about that, I'm talking about short- to medium-term growth. We have some wonderful assets and brands in the company. We have brand of generics international business both based in Europe, Canada and Latin America. That's about $1 billion kind of flown under the radar screen when we were part of the bigger Bausch Health empire. Now as a pure play, this is a significant part of our business. We had great growth, about 8% organic growth in Q1. And this is a business that has no risk of loss of exclusivity. So it just trucks along and will keep growing. It's profitable as well. So that business, the U.S. business, of course, is the largest portion. And even with our largest product, XIFAXAN, we believe that there's a short- to medium-term opportunity to accelerate growth, and that's what Tom and I are focused on. The second one is thinking a little bit longer term in our R&D pipeline. We're going to intensify the rigor around the pipeline, make sure that we are going to hit the time lines that we want to hit, create really just more operating rigor around the whole thing. We want to put in a high-performance organization, an organization that is -- has a sense of urgency, a sense of doing things now. And then finally, we do have our strategic alternatives pathway that the company embarked on since August 2020, and we want to see the completion of that. That involves flexibility to monetize the remaining 10% of B&L, for example; the monetization of Solta, which we believe is a valuable asset. And then when those 2 happens to leave behind 3 strong companies that can then go off in the future. And so then just one final thing, maybe just that is pertinent to this audience is, from a capital allocation perspective, our priorities really remain and the approach remains the same effectively as we've seen in the company in the past. The debt paydown, we're obviously a highly levered company, and debt paydown remains a top priority. The company has paid down about $10 billion in debt over the last 5 to 6 years. And we will continue that approach with that being the main approach. I already talked about the highly cash-generative nature of the business, and a lot of that cash will be focused on debt paydown. Priority #2, and I wouldn't say it's second but equal is, of course, long-term strategic growth. And so business development and investment in that growth will be the second priority that we will go after. And so with that, I've used up already a lot of your time, Sean, but I'll hand it back...

No, it's very helpful, and appreciate it. I think I want to hit 3 themes in the time we've got remaining, one, some questions on the business with some updates; two, a lot of questions on capital structure, capital allocation here on a few of those points and then some questions on the litigation side. So maybe starting on the business side and you hit on XIFAXAN a minute ago. Can you walk us through the recent trends in XIFAXAN? What's happening with doc visits? How should we think about the cadence of growth for the rest of the year?

Yes, sure. Yes. So in the first quarter of this year, we had growth. The XIFAXAN scripts grew about 1% or so, but slower than we would have expected ideally and certainly slower than we expect when we planned for the year. That was the result of the Omicron -- the COVID-19 Omicron explosion really in Q1. If you remember, the number of cases this year in Q1 were about 4x as large as they were the same point last year. We saw an impact on -- in primarily primary care physicians, where much of those offices that are swiveled to treating these patients as opposed to us. So we expect to see a recovery from that as we go through the year. It's -- you're all probably receiving script data. You see at the same time as I do. Recovery is slower than I would like, but we expect to see a recovery towards the end of the year. What was the other part of your question?

Yes, what's happening with doc visits.

Yes. So I mean -- so I just [indiscernible] yes, that is the main issue that we saw in Q1. So we expect to see come out of that as we get into the back half of the year.

Yes. And we'll come back to the Norwich trial in a minute. But given that litigation, are you managing the business any differently right now?

No. I mean, I'll save my words for when you -- we are confident in our intellectual property, and we're confident in the outcome of that trial. So we are running this business as we have before. There's no change in emphasis. As I said, I believe and we believe that there is a short- to medium-term opportunity for growth. There are some unmet needs out in the market that we think we can go after. And then we are also continuing to manage our R&D pipeline because we have some great products coming through that will take us fast when XIFAXAN patent does expire in 2028.

Yes. Great. Maybe that's a good transition to how should we think about the R&D portfolio? Can you talk a little bit about what you're investing in?

Yes. So we have -- just back to XIFAXAN, we have 4 novel XIFAXAN products in the pipeline. I don't want to go through all of them. We've disclosed them before, but perhaps hone in on one that we're particularly excited about, which is RED-C, take that as an example. The RED-C, we started Phase III clinical trials in 2021 and currently going through patient recruitment. And so we expect -- we had hoped to see a successful outcome there. What this is, is sort of treating -- so if we think about HE, this is a condition where patients with cirrhosis of the liver get HE. It's a disease that affects the mind but emanates from issues in your gut, essentially. What we are trying to do with RED-C is present -- so currently, our drug, XIFAXAN is approved by the FDA to prevent recurrence of HE once the patient has had HE. What we're trying to do with RED-C is treat that population of patients that have cirrhosis but haven't yet encountered HE. The patient population size is something like 3 to 4x as large. We believe, I mean, that it's a condition and it's a very important medical issue in the country that needs to be treated, and we think we have the right product for it. We've had good results so far from our trials. And then, of course, from the company's point of view, commercially and economically, we think there's a great opportunity. So we're investing in that. That one is going to get into Phase III, as I said, as we go through the next few months. We have a few other products. I'll just rattle them off on XIFAXAN. So we've got something that addresses SIBO or small intestine bowel disorder. There's one that addresses sickle cell patients. So we have a number of those which we're excited about on the XIFAXAN side. In dermatology, we have a product called IDP-126 that has just come through and completed Phase III. We've got good results there and are expecting to file an NDA later this year, and assuming and hoping that, that gets approved, we expect to launch next year. So we have some exciting drugs coming through the pipeline that we expect to basically extend the growth and revenue trajectory of our key products and key businesses.

And from a timing perspective, the key -- are there certain key milestones you're watching for each one?

Obviously, on -- I don't want to put out milestones here that specifically, but obviously, completion of recruitment for RED-C and then starting to see that initial data from the trials, of course. And then an IDP-26,just, for example, just getting through the application process.

Okay. Talk a little bit about investment in Derm. Can you talk to us about the existing Derm business? Obviously, very cash flow generative but under some pressure. Can you walk us through trends expectations going forward?

Yes. I mean it's a very different Derm business than the company had a few years ago. It's much smaller now. We are running it for profit. Notwithstanding what I just said about IDP-126 that we're pretty excited about, there have been payer challenges in this business in the past. We have resized it, resized our spending and our operating expenses, et cetera, so that it is profitable and now positioned to grow. JUBLIA, for example, is a product that we launched a few years ago and is seeing great growth, and we'll continue that. But essentially, that -- and we have included now dermatology as part of our diversified product segment. And similar to other businesses in that segment, we are running it for profit and for cash.

Maybe switching over to TRULANCE. Obviously, Q1 was up about 14%. What were the drivers of that growth? Was it improvement in doc visits, price, share gains?

Well, so the -- I mean, the growth did come through share gains. So we grew 14%. Our estimate is that the market grew about 6-or-so percent, so we think it's share gains. Where it's coming from, I think it's just -- it's a strategy ever since we made the acquisition. We've managed to fold that business into our existing portfolio. We already had a very successful and scaled [ BI ] platform behind XIFAXAN. And so both on the market access and pay upfront, where we're able to bring that product in and immediately improve market access, and those improvements have continued year-by-year. And that's what we're seeing. And then also with our sales force, we have the platform to grow. So it's all of the above, frankly. And it is a great example of the type of acquisition and business development that we'd like to continue to pursue.

Absolutely. Switching a little bit. Inventories at the customer level, still a little elevated relative to last year. How do you think that's going to impact the rest of this year?

I might -- so I view -- I think it's wholesale inventory levels that you're talking about. I think they were at about the right level. So we put that data out in our earnings deck, and they've been at that around that 1 month kind of level for the last few quarters. Coming from '20 into '21, there was an upset for sure, but I think that was in anticipation of COVID recovery. And it's essentially the wholesale is trying to anticipate future demand and signs of recovery that they're seeing from the retailers. So we are not expecting any major shifts in inventory levels as we go through the year. And that's not certainly something that we haven't factored into our planning for the year and the guidance that we've given for the year.

Great. Maybe if I can switch over to the litigation side. Start with favorite topic, Norwich case coming up. Without too much of a preamble, I think if you think about the potential outcome being complete win, complete loss or partial win/loss, how do you think about managing across those 3 different scenarios but also would like your perspectives on the upcoming trial outcome towards the end of the summer?

Yes. Just for the benefit of the audience, the trial occurred in March. It was a 4-day trial, and we expect a decision or a judgment from the judge in early August. From our perspective, we think it's done very well. So going into the trial, I spoke to our lawyers. They felt very confident. They usually express their confidence level in terms of percentages. And we went in feeling like we had a greater chance of winning than not winning. And coming out of the trial, both our internal counsel and external counsel believe that we have -- we're in an even stronger position. We think our evidence went in well. And based on what we heard, we think the arguments are in our favor. So we don't think we're going to lose. And we don't think there'll be a sort of midway result. We think we're going to win. I don't want to kind of game out here in front of this live audience what could happen under different scenarios. We -- but I'll just say, I think we have a very strong case, and we expect to win.

Great. Switching over to the Granite Trust. Can you give a little bit of background for everyone, just kind of a reminder of what the issue is. Have you started discussions with the IRS, where that stands?

Yes, yes. So this is a tax-related issue. The company executed or implemented an internal reorganization back in 2017, a legal entity reorganization. That resulted in a capital loss, and this structure or this transaction is known as the Granite Trust. It's a mechanism or it's something that is underpinned by both IRS guidance as well as 70 years of case law. So we feel very comfortable. We felt comfortable at the time that we executed this back in 2017 because we had engaged with a whole bunch of advisers and felt very strong in our case while doing it. In any case, for those of you who don't know, the IRS who are currently auditing our 2017 tax returns issued what is known as a notice of proposed adjustment, basically indicating that they didn't agree with the position we've taken. And the next step is, again, in the hands of the IRS. We expect a formal communication to come back from them, which we can't wait for, frankly, because since this arose, we have once again reengaged with both advisers, our internal experts as well as both legal counsel and accountants -- accounting firms and feel even more strong with our positions. So we need to receive this next step from the IRS at which point we'll respond and then the clock will start. The ball's in their court. We really can't do a lot to control timing. And I'll just leave it at that. I mean, we are waiting to hear back formally from the IRS. We -- for the benefit of everyone here, shortly after this occurred in the fall, I think it was just -- it was a Q3 earnings call of 2021 when we disclosed it, and this notification had just been received a couple of days before. We did -- we attended the Credit Suisse conference. And if you look up the earnings deck for that conference, it's somewhere around November 2021, I think, there's a couple of pages in there that has all this case law as well as the IRS guidance that I would encourage because if you haven't done so to look up, they just sort -- it provides more information and supports, we believe, the strength of our position. So it's a matter of time, Sean. We would like to see it as soon as possible. And if it was next week, it would be great.

And just to confirm, you have not taken a reserve, and you're so comfortable with that position?

Correct. Yes.

On the [ star draft ] case, I guess the opt out from that. Can you update us on the trial? Is there a date set? Kind of what's the ask that's out there from the opt out?

Yes. The -- well, so there was a sizable number of opt-outs after we settled [indiscernible] sued first. And we have settled with a number of those already. A significant portion of those opt-outs have already settled with us. And we hope that the rest of them will do the same. We think the terms of our class settlement were fair, and we have reserved for what we think is a reasonable position with the severance. So it has to run its course. And if they want to talk about settlements, we are ready to talk.

Any guess on when it gets resolved.

I would not dare to...

Have you disclosed the reserve amount?

No, we have not.

Any other litigations we haven't talked about that's worth touching on briefly?

I think that's enough for the day.

Fun questions then, switching to the capital structure side. We'll get Will involved a little bit here. Obviously, there's a lot of numbers out there, the 7.6, the 2-0, the 6.5 to 6.7 maybe starting with the 2 immediate, the 7.6 and the 2-0 [indiscernible]. Talk us through when you think you can achieve the fixed charge coverage ratio test. Where are you today? What are the tools you can utilize in order to get there?

Sure. So we put out those, I would call them 2 incurrence tests or affirmative covenants to unrestrict Bausch + Lomb, which is the first step towards actually spinning off the shares of Bausch + Lomb to the shareholders of BHC. Well, actually, one of them was already there in all of our indentures. That's 2:1 fixed charge coverage ratio. And then as part of our new credit agreement that went live 2 weeks ago in May, we put in another affirmative covenant for achieving 7.6x on a pro forma basis, and the definitions of both those ratios can be found in the docs, and so I'd encourage you to read them. And we haven't put out time line on when we can reach them. And you can do a pretty good job, I think, modeling them based on the information we have out there, both for the HoldCo company, and you have being out there now with some financials that we just put out last week, so you can solve for what the remaining company looks like and get a sense of how long it could take to get there. We're not going to put out time lines. I will say we do have this 10% remaining stake in B&L, which, when we monetize that, that obviously helps with the time line for everything we're trying to achieve there as well as anything going on with Solta.

If you can update us on -- that's one of the tools. Update us on other tools to be thinking about as we do our calculations to figure out what the math is based on what you provided thus far.

Sure. So again, we have that 10% B&L stake. I would say we've gotten some questions when could we exercise that. I would say the answer is as soon as the lockup expires on the existing IPO that we have and that we've said is 125 days. It could be shorter if the share price outperforms. That would be the earliest we could exercise. The remaining approximately 10%, obviously, we'll use our judgment to do it whenever it makes the most sense for the company. And there's Solta, which Tom already talked about our base case would be to IPO that, monetize it at a time that makes sense as well. Other than that, it's a lot of good old-fashioned cash flow generation, paying down debt, growing the business, EBITDA, things of that nature. I'm not sure if I left out anything, Tom.

No, I think that's it. I think it's -- I like the term old-fashioned. I think we just need to operate this business. And that's what I've come in here to do is to operate this business and run it as efficiently as possible. I looked in from the outside, and I think there's a ton of opportunity with the RemainCo, and that's what we really got to do.

So the unrestricting as a Step 1, the spin as a step 2, something particularly on the second step, the 6.5 to 6.7 is the commitment that you're kind of stepping into and over the last number of months, it seems like it's still a 2-step process, but talk us through how you think about the 6.5 to 6.7, your comfort with that and the way you think about leverage long term for the business?

Yes. It's -- so the steps to get there are essentially the same. It's going to be a matter of time. Generate cash as efficiently as we can and use that to pay down the debt and also grow our EBITDA, of course. The -- for me, 6.7 is too high for our company. So we will get that down. I touched on capital allocation before. And so one of the priorities for the company is going to be to get our leverage down. We will continue to pay down debt unless there's an alternative use that makes economic sense. I don't want to put out a target right now, but I'd like to get it a lot lower than 6.7x.

Got it. And Will, you touched on this, the 10% that's an asset you guys thinking about that. That's definitely going to be something that's monetized and utilized for debt paydown? Any chance it gets included as part of the spend if you delever through other means?

Could you repeat that, the last part of...

Yes. If you delever through other means whatever the triggers may be, is that 10% something you're committed to you to further delever the business versus included in the -- could it be included in the amount that's being spun out?

No. We've been pretty clear that's 80% that we'd spin, and this 10% is truly for the benefit of RemainCo.

Are there any implications from a timing perspective on when you would have to monetize that? Any tax implications when you have to get to 10% monetized?

I think once we spin off, that does start a clock ticking, but it's a fairly long clock I think, is probably the best way to characterize it.

Got it. Tom, maybe a question for you, maybe an interesting question. If you were sitting back looking at this 12 months, 18 months ago, would you do anything different about sequencing, timing, structuring on the B&L part of the transaction?

Look, I don't want to sort of Monday morning quarterback this. I think the company had a strategy. They've followed through with it. I think the IPO on May 10 was a significant milestone, and I think we just have to see it through. Like I said, my main focus, I've come in here and Tom Appio has taken over as the CEO, and we think there's a real special opportunity here with RemainCo, and in particular, the Pharma company. We expect at some point to monetize Solta, and we have the flexibility to do that without any particular time pressure. But the RemainCo Pharma company, we're here to run it. We're here to grow it. We think there's a short- to medium-term opportunity with a bunch of unmet needs and a very nice portfolio and then, in the long term, as I've covered earlier. So that's our focus.

Well, maybe a question for you. On the rating agency front, that's a fairly active dialogue probably on an ongoing basis. How much time do you think they're going to give you to achieve the 6.5, 6.7 as they think about where you are now coming out of the last few sets of transactions to close a few weeks ago relative to working for it at the beginning of the year.

Sure. So I mean, we do talk to the rating agencies all the time. We talk to them before we do any transaction before. Before earnings, for example, we talked to them before we issued our Q1 earnings the other week. And so we pretty much know where their head's at we like to think, and they know what we're up to. And so it's all out there. It's a great resource to read those reports and here, like, for example, Moody's triggers, where they do say pro forma RemainCo after separating from B&L has to achieve a certain leverage ratio. You have to have leverage sustained below a certain level. And the question is like how long is that sustained period. I think we have a pretty good track record in terms of addressing our debt, both paying it down and being proactive in managing maturities. And so I think that has helped us with the rating agencies to understand that, that is something that they'll give us some credit for, is my interpretation.

On the debt repayment side, how do you think about balances secured and unsecured mix that you've got in the capital structure balance between maturities. On the near end, you've got some debt as I'm sure you've seen that are trading at deep discounts, could be opportunities to do things there. Talk to us a little bit about how you think about cash in the near term. Are you thinking about the long-dated bonds that are trading in the 50s and 60s and that balance as we talked about secured and unsecured mix going forward.

Look, as a CFO, my main lens that I look at is the company and what's best for the company in the long run. Our focus and the approach that we've had for the last 6 years has been to keep attacking the near term. And that's worked out very well. It's kept the business going without any issues. And I think it's been good for bondholders as well in the long run. So that's my bias. Having said that, it's not lost on us that the longer-dated bonds are trading at where they are. We do have cash, and we have capacity. So we are -- we will consider and we do want to delever. We do want to pay down our debt. So we are -- we will consider all options, but our bias on a long-term basis and in the interest of the company would be to keep doing what we've done before.

Can you just refresh us on what your governors are on the secured side as far as in current statements [indiscernible] et cetera, and how we should think about where you want to be positioned relative to those going forward?

Sure. So I'll take that one. So on the indenture side, which is what we're living with and hard to modify, we have -- now we have a 3.5x incurrence test for raising secured debt across our indentures. And we also have a credit facility basket that is unused, and that's $2.5 billion right there. So that gives you a sense of the, I would say, pretty sizable secured capacity. On the credit agreement side, obviously, that's something we have more flexibility about. We do have a maintenance covenant currently there even under our new credit agreement. That's a 4x first lien net ratio. And that's residing with the revolver side of the house. So we'd have to talk to our revolver banks about modifying that.

Maybe a question I didn't ask around various sources of capital that you could raise. Do you have the ability to raise more debt at B&L that you could take back up, or are there restrictions in place to prevent that?

I don't really want to talk to B&L. They're a separate company. They have a separate board, separate CEO, separate CFO. So far be it for me to kind of venture into that.

Okay. Absolutely fair. Maybe a few last questions in the last few minutes just kind of cleanup questions around the management side. How's the incentive plan structure for RemainCo management? Is it improvement in EBITDA? Are there certain targets and metrics? Is any part of that incentive plan include payments in spin to equity.

So generally speaking, the structure has remained about the same. So take me, for example. I've just joined the company. The majority of my comp in the long run will come from equity. And 100% of that equity is BHC equity and not B&L equity. Now for those people who have been with BHC a while, they may have parts of the equity, but they can stock, for instance, a restricted stock. That will behave very much like an existing stockholder. So they will get a portion of B&L equity. But I don't know if I'd characterize that as part of the incentive. It's just a reality and a result of basically the spin and ultimately -- but going forward, 100% of new awards would be on BHC as a structure.

Got it. Very helpful. Will, maybe 1 or 2 more questions for you as we think about kind of building out our pro forma models. What's the pro forma cash balance at Bausch? How do we think about min cash going forward? And how do you think about liquidity going forward between your revolver and your balance sheet cash?

Sure. So when we launched our refinancings back in January, which ended up closing a few weeks ago as well as some bonds we did that close to February. We did say we need about $300 million B&L, $400 million at RemainCo. That's the Pharma business plus Solta. And I'd say that's fairly accurate. So that's kind of where we're going to be targeting going forward around $400 million of cash for that business. And then our revolver, we have a $975 million revolver that just came online 2 weeks ago, maturity in 2027. We did do a revolver draw of $315 million as part of the transactions that closed a couple weeks ago. You can read about that in our disclosure. We have some letters of credit there, but we feel we have some pretty substantial liquidity there. And then Tom has already talked about the cash flow generation of the company. And so when you put those all together, we think we're in pretty good shape from that respect.

Great. And then looking back over the last year, obviously, a lot of onetime costs, not only in litigation things, et cetera. Can you give us some guidance to quantify what that quantum over the last year is and how you think about it going forward?

I don't think we've given projections. I think there's still some onetime type cost to do because the work of separating the 2 companies is still ongoing. And take my function, for instance, in finance, at the leadership level, we're pretty much done now. We've got both companies have got their teams in place, but there's still hiring to do, and et cetera, et cetera. Take IT, for instance. We've got to price of other systems and many systems are [ committable. ] So there's going to be some spending that's going to continue. We'll call that out. We expect that to tail off significantly towards the end of the year. And going into next year, there should be hopefully little. We want to be done with the physical separation as fast as we can.

I would just point out that those of you who are students of our earnings decks, you can see -- in the back pages, you can see where we've adjusted cash for some of those separation-related costs.

Well, I think in the interest of time, I think we're going to wrap there and make sure everyone stays on time, and I know you've got a full day this afternoon. But thank you on behalf of the Barclays team and everyone here in the room. Thank you guys both for your time this afternoon for coming out to the conference year in, year out. We really appreciate it. And look [indiscernible] you guys long term. Thank you very much.

Thank you, Sean.

Thank you, Sean.

Thank you, everyone.

Thank you.