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

Okay. Welcome, everyone. For those of you who don't know me, my name is not Rishi. Ravi Saraogi, I run the distressed analyst team on JPMorgan's credit trading desk. It's my pleasure today to welcome JJ and team with Bausch to present to us all. A few housekeeping items before we get into it. We will not be taking questions from the audience today. And the conversation today will be squarely around the business of Bausch. We will not be touching on the capital structure in the presentation today. Many of you, I know, do have one-on-one meetings with the management team. So you'll have an opportunity to ask all your questions in those meetings.

So with that, maybe, JJ, why don't can we just start with -- I know there's seasoned health care experts in the room. There's also generalists. Maybe just a brief introduction of Bausch for the room.

Sure. My name is JJ Charhon. I'm the CFO of Bausch Health joined the company 8 months ago. Before that, I had stints at GE Healthcare, Novartis, HP, to name a few. So I have a broad experience of various industry segments of the health care industry. Bausch Health has got a long history. It has become a highly diversified health care company with 4 different segments: Salix that has mostly GI-related products. Then we have a diversified segments, which other U.S. pharma -- pharmaceuticals across basically three different major P&Ls: Dermatology, Neurology, we have also a Dentistry business and a small generics business. Then we have an International Segment that is made of three platforms: one in Canada, another one in Latin America, mostly in Mexico and Colombia and the third one in Europe with, I would say, a major presence in Poland, Russia and Serbia with a small presence in some of the other Eastern European countries. And finally, we have a medical device business called Solta Medical, which provides devices for the cosmetic industry, highly profitable, fast growth platform, I will talk about that in a second. So highly diversified, different attributes of the business model for each segment that I think I'll cover a little bit later. And that explains, I think, the resiliency and the consistency of our growth profile over the last few quarters, but that's kind of a brief introduction of the company.

Great. And then, JJ, you reported earnings recently for Q4. Maybe can you just expand for the room some highlights from the Q4 earnings, in particular, with respect to cash flow. And then to your point, maybe we can through some of the business segments in more detail.

Yes, of course. Q4 and 2024 in general, are really a strong year for Bausch Health. And when I'm referring to Bausch Health, I'm excluding the B&L business for a second. Revenue grew mid-single digits, 4% for the quarter, 5% for the year, and we grew EBITDA 7% for the quarter, 6% -- 8%, sorry, for the year and really reflects a little bit the trajectory we're expecting really moving forward, strong contribution from both the Salix business, the Solta business and our International platform and great operating leverage across all the financial metrics, gross profit growing faster than revenue, EBITDA growing faster than gross profit, which is really a reflection of the positive business mix as well as really tight management of expenses. We believe in being ambidextrous in driving growth, but also at the same time, driving productivity and optimizing resource allocation across all of our P&Ls, and we can talk more about specific examples of that, that we've done in 2024. Cash flow was extremely strong, particularly in the fourth quarter. Some of it was due to onetime items and some tax planning that had some onetime benefits in 2024, but cash flow generation is very strong for the business in excess of $1 billion. We did $1.3 billion of adjusted operating cash flow. So that allows us to significantly delever the business. We reduced our net debt by almost $1 billion in 2024, which was great.

Great. So maybe the business obviously is composed of multiple segments. Could we drill in on some of the individual businesses for the room? Maybe starting with International, which I think on the call, you discussed maybe doesn't get the appreciation or the attention that it deserves?

Yes, of course. As I said, it's got three different platforms with very different attributes. What I think I like about that segment is it has attributes that are almost more akin to an OTC business where brand equity really has a lot of value. I'll go basically platform by platform. I'll start with Canada. Canada is a little bit of a hybrid. It has many of the attributes of a U.S. pharma business with branded pharmaceuticals enjoying IP protection, but also has a number of products that are off patents. It's a broad portfolio of products that are being marketed in Canada. We have I think a very strong commercial infrastructure that allows us really to sometimes be a partner for other companies to market and commercialize products in Canada. We also have a very rigorous management practice of allocating our commercial resources to a subset of our products that we believe will respond best to promotion. Those products actually grown double digits over the last couple of years, which I think is just an illustration of where we put the focus. Then we have Latin America. Latin America is mostly a large presence in Mexico. We have a business in Colombia, but it's a much smaller contribution and also lower profitability than really our big platform in Mexico. It's a very diversified portfolio. The largest platform really represents only a single-digit percentage of our total revenue for the region. And it's a business that enjoy really good margin due to the fact that about 70% of that business really goes through the private channel, 30% is associated with government tenders, which are obviously typically at lower prices. But the mix and the dynamics that we're enjoying are mostly to the private channel. And we have big umbrella brands like Bedoyecta, which is in the vitamin and supplemental space that we leverage a little bit like an OTC company. And we do line extensions and really continue to grow the number of SKUs that we sell through those platforms. So we feel really good about not only the current trajectory of the business, but the prospects for future growth. And then lastly, EMEA. And when we say EMEA, we say Europe, people think about the Western European markets, but Valeant decided back then to really invest into markets that where competition was a little bit different structures where some of the large players really didn't have necessarily a strong presence. And so we purchase a couple of local players that allow us to build a strong presence, starting in Poland, where we have a little bit of a similar setup than I was referring to in Mexico and then also a strong presence in Russia and Serbia. We have other sales forces and presence in other countries like Hungary or the Czech Republic, but they represent a smaller percentage of our portfolio. So same strategy, combination of branded generics, some products that are protected by IP, although fairly limited and then some OTC products across a variety of therapeutic areas and good growth and margin dynamics.

And generally, across those 3 major markets, how would you characterize CAGR -- revenue CAGR and operating margin CAGR?

Yes. Listen, I think those 3 platforms are anticipated really to grow around mid-single digit. I think that's a fair starting point for all those three. There's probably a little bit better demographic dynamics, obviously, in Mexico than there is in Canada. That obviously has an impact. And the ability also to drive price up in addition to volume is a little bit variable by platform where we think, particularly in the commercial channels, we have a little bit more leverage in Mexico.

And then maybe just the cost side, as you drive that growth, is your cost structure where you needed to be? Are there additional investments you need to make?

Yes. Driving operating leverage is, I think, one of the whole market, what we're trying to do with our portfolio across all platforms, whether it is at Solta or whether it is at some of our platforms in the International segments or even Salix. So that has to be one of the outcomes of the way we are driving growth where operating expenses offer the leverage, and we're able to drive our profit faster than our top line.

So maybe it's a good segue into Salix. Obviously, Xifaxan has been a standout this year in Q4 in particular. Can you talk about some of the initiatives that the company is working on to drive further growth there?

Yes. So I think the commercial deployment optimization continues to be something we're constantly working on only for Xifaxan as part of Salix, but some of the other brands that are under the Salix umbrella. One thing that we've talked about during our earnings call is the ability to use an AI engine in deploying our sales force to where we believe the calls are going to be the most effective. And the AI engine is a fancy word just to say that we're using the relationship between a number of data sets, including scripts, but also behaviors of some of the health care practitioners and then trying to correlate them to really where we have our call points today and where they need to be. And that has been extremely helpful and continue to grow volumes of not only recurring scripts, but also new scripts for Xifaxan, which is quite extraordinary when we know how many years this product has been on the market. It's a fairly narrow market because the patients we're dealing with tend to be in a fairly advanced stage when they have an HE event, particularly on the HE side. But it has continued to drive growth, and we've seen some acceleration of our growth between Q2, Q3 and Q4, which was great to see.

So can we maybe talk about the two major indications in a little more detail? So HE, I think you mentioned on the call, is now 70% of Xifaxan revenue. Can you maybe contextualize for the room, like what do you think your penetration is currently? What's the size of the market? How do you continue to grow?

Yes. Listen, I think penetration is about 50% for really the HE population. There continues to be obviously the need to drive the growth. 70% of our volume really is associated with the HE indication. That has been actually fairly stable over the last few years. I know that when IBS-D was introduced, obviously, HE was the sole indication. But it kind of has stabilized now around 1,730. That's driven by the fact that when you're on the drug and you had an HE event, you're basically going to stay on the drug until the end of your life, where for an IBS-D event, it's kind of a treatment. And then assuming you don't have any recurring issues, you're going to be off the treatment. So that's a little bit the nature of the applications and the use cases for the drug.

And how about IBS-D? I know you say it's been stable for a while, but if I recall years ago, it was kind of more 50-50 mix. Is it all been driven by HE growth? Or has IBS-D become more competitive?

Yes. I think the 70-30 has been now I think the mix now for, as I said, a few years. I think it's just the nature -- IBS-D is really a crowded market where on the HE side, we've pretty much the first line of treatment. And there's not a lot of equivalent treatment available on the market, which has explained some of our continued success in the space.

And then the other kind of topic that came up on the call was the Norwich 30-month stay or not. And clearly, you've taken a view that there is a 30-month stay. Can you elaborate for the room, some of the controversy there and why you have the view that you have?

Yes. So a little bit of context. Norwich is suing the FDA for not providing them with kind of a final approval on their ANDA. The lawsuit really is a combination of really arguing that Teva has lost its first file of status for a number of reasons. And there's been rumors or reports that no which believes that the 30-month stay is not applicable to them just because their amendment or their second ANDA really should be associated with their first ANDA. I can tell you that the company's view and that is not the case. But the main crux of the matter is really associated with the Teva first pilot status. That's really where most of the arguments are. The FDA, Teva and ourselves that have joined the suit will make public arguments or will make arguments public this Friday. So I would certainly encourage all of you to review the arguments made by the three defendants and then make your own opinion about the strength of the Norwich case. We strongly believe that Teva is entitled to maintaining its first pilot status, and that really is the most important element.

Got it. And then obviously, Xifaxan will be going LOE in 2028. How is the company thinking about navigating that LOE event?

Well, I think I would refer to just the typical life cycle that you see once a product goes LOE, there will be a number of generic entrants in the market. The company will be a participant through its generic P&L. And then there might be or there might not be some royalty fee depending on whether authorized generics are being -- contracts are being used by some of those companies that we've dealt with.

Got it. And then just between here and there, the other topic that came up on the call is the inclusion in the IRA list. You touched on it briefly, but any more context for the room, impact you expect or how you plan to navigate?

Yes. Listen, it's really early to provide any specific guidance as to how this will impact the company. As just a reminder, this is the 2027 list, which means it would -- if any impact, would have an impact only in 2027. At this stage, we're looking to provide all the information that has been requested. We'll be engaging, obviously, with CMS to discuss what is appropriate in light of their desire to bring the discount rate up. And then once we have a little bit more clarity around what the process, the outcome is, then obviously, we'll provide an update to the market. I would just say that there are many variables in this. The first one is really the incremental impact in terms of negotiating rates. I would encourage you to refer to the first list of the first 10 drugs and what has been made publicly available. In general, the impact has been fairly limited for at least those 10 drugs. But that's a function of how the CMS incremental discounts go and then obviously, the starting point. So you can either take kind of an incremental view and say, you know what, that's going to translate into another 5 to 10 points of discount or you could say CMS is looking at being inside a certain range of discount irrespect as to where the starting point is. And that obviously will drive a very different outcome depending on the company and the product. And then once that is better known, then the company will have to decide how they optimize their channels and develop mitigation strategy to minimize the impact it may have on its P&L. So a lot of variables, a lot of uncertainty at this point in time as to how the second list will go when compared to the first list. And once we have better clarity, we'll communicate.

Got it. So maybe in the interest of time, turning to Solta, which is another standout performance this year and Q4.

Yes.

Can you talk about what is driving that growth? And how sustainable is it?

Yes. Interestingly, Solta, 80% of its business is based in Asia. And the two main markets that are driving all the growth are China and South Korea, and they both had an outstanding year in 2024. Korean business more than doubled. And then our China business continues to grow upwards of 30%. What's really interesting about the Solta business is that it's kind of a razor and blade like model. You sell the machine and then tips are really used for every procedure. Today, 80% of our revenue is associated with tips, which means that this only business model is poised for a lot of growth, but also a lot of resiliency and stability because that consumable business is going to have a lot of momentum even in the markets or the situations where the installed base of the machines really is fairly stable year-over-year. But we're able to drive both the installed base and the consumables well. It's mostly volume. It's actually not price. It's already a fairly premium offerings. So we feel the better trade-off is continue to drive price and penetration of the installed base. And we have still quite a bit of runway. The Asian markets are in our view, continue to be underpenetrated when compared to what you would find in the U.S. or potentially in Europe. So we feel really great about this business.

Can you talk about that a little bit? Like is the market -- how much is the market growing versus just underpenetrated versus you're winning market share from competitors if you decompose your growth?

Yes. We believe -- I mean, it's hard because market data is not readily available. But we believe we're gaining market share, but in the market where we have the strongest presence. There are other commercial platforms we've got in smaller markets in Asia like Thailand. We have some sales in Australia, Taiwan, Hong Kong. Those are smaller contributors to our overall growth. I think most of our growth really has been driven, as I said, by South Korea. In South Korea, it's been mostly associated with expanding the reach of our sales force into a different kind of clinics and Cosmedicare institution, and that has been extremely successful. And then in China, just the market is so large. We still have to get geographical coverage that I think would be similar to what we're seeing in Europe. So we believe it's a combination of share and then market continue to grow.

And then maybe specifically for Solta, just given the really rapid pace of the growth, are there additional investments you expect to make in Asia or just in general? Or is this another example of operating leverage as revenue growth?

Yes. So there are 2 kinds of investment, investment in the P&L in the form an expanded sales force, for instance, or additional promotions. Those are the investments that we're making selectively in certain markets where we're trying to restart really our growth strategy that is in the U.S. and also in EMEA. And then there are investments in innovation that we can continue to make. It's important to stay current and being at the edge of innovation through some refresh of the installed base and next generation of machines. And we have a number of programs that are ongoing to address exactly that.

Okay. So maybe a good segue to the pipeline more generally for the company. Talk to us about Red Sea or what you're most excited about in the pipeline?

Yes. Well, listen, I think the data coming out of Phase II were really encouraging. Just as a reminder, Red Sea is addressing a larger target populations of patients that have got liver cirrhosis, haven't really reached the stage where current Xifaxan place, which is an HE event. And so almost as a treatment for preventing an HE event. And so we're excited about the program. Database lock is planned for fourth quarter of this year with kind of a first read on the data of Phase III by first quarter in '26. And the view is to obviously submit an NDA in 2026 and launch the product, provided the data, is confirmed and we get the data we want in 2027.

Got it. Away from Red Sea, anything else in the pipeline that you'd highlight?

Yes. So there's another compound called amiselimod that really is -- we're looking initially at two indications, Crohn's and UC. For Crohn's, we've actually decided against it after further review. But for UC, we're still evaluating the potential of actually going into Phase III. Initially, the view was to focus on moderate-to-severe patients, but that has shifted. So the evaluation we're currently conducting is whether this is better suited for mild-to-moderate conditions where there are less competition, all the biologics really are more in the moderate-to-severe, which obviously, we believe is not necessarily suited for this development program. So more to come on that point.

Okay. All right. So we've talked through a bunch of the segments. Maybe just lastly, at the corporate level, as you think about Xifaxan LOE and other LOEs, are there additional cost cuts that you think you can take, I guess, maybe at the segment level, but especially at the corporate level as you look past that?

Well, listen, I think we are very cost conscious. We've done a number of initiatives really to drive optimization of sales deployment. For instance, in our Salix business, we've decided to cut the sales force in certain areas where we believe the benefit of that commercial infrastructure was just not there. But we do also the same around looking at contracts and sometimes where we have coverage and contracts and really look at the volume price relationship things that any pharmaceutical company would do, particularly for mature products. So we continue to do that. And then across the Board, we have a robust set of initiatives really across all functions, including supply chain. Supply chain is kind of interesting because in the pharmaceutical industry, my experience has been that you try to keep supply chain as stable as possible for obvious regulatory reasons and it's -- there's not a lot of appetite for risk-taking and driving continuous improvement just because of cost of goods sold being such a low percentage of your total revenue and just the opportunity, the risk return profile is typically not there. We're in a different situation where we rely on a broad set of sourcing arrangements. We have obviously the need to continue to drive productivity on the medical device side. For OTC products, the consideration is completely different. And then we have the ability to continue to maintain operational flexibility. It's one of our key attributes that really has allowed us to take advantage of market opportunities when generic players really run out of stock. We're able to do changeover to our manufacturing lines and really supply the original product at high volume. We've had a couple of examples of that in Canada and the U.S., where we've been fairly optimistic. So that's going to be a key feature of our operating model moving forward.

Okay. So we have about 5 minutes left, JJ, maybe just for the room, you've been with the company for about 8 months now. Any, I guess, initial impressions, surprises, closing remarks that you want to share with the room?

Yes. Listen, I think in general, I would say two things. Number one, the breadth and the depth of portfolio of Bausch Health is quite incredible. I was really surprised to see really the various attributes of both OTC products, branded generics and really the resiliency of the operating model. Sometimes I feel like we're looked at very much like a U.S. brand pharmaceutical just because of the share Xifaxan really has and obviously, the headlines around the IP discussion. So I do believe that we're not given the deserve credit around the diversification, the resiliency and the consistency of our performance. That's point number one. Point number two, I know we won't talk specifically about the capital structure. But I think in general, the company has got a lot of options and sometimes I don't feel, again, this is the way the market looks at it. So it's upon us to really communicate effectively and to make sure that we articulate very well our strategy and the options we're evaluating and reflecting really the optionality that is in front of us.

Great. Well, great. With that, thank you, JJ, and thank you, everyone. Enjoy the conference.

Thank you.