Bausch Health Companies Inc. ($BHC)

And it's with Bausch Health Companies today. And we have both Thomas Appio, who's the CEO of the company; and also JJ Charhon, who is the CFO. Now it's interesting. You haven't been here for many years. So it's a pleasure to have you back. And I know you've both been involved in some significant heavy lifting over the last couple of years to rightsize things again.

And maybe I thought what would be helpful is just to level set for us and give us an idea of where we stand with the company in terms of various metrics before I move into some more in-depth questions, if that's okay.

Yes, sure. All right. So as Doug said, there's been a lot of heavy lifting over the last few years since the IPO of B&L. So in terms of -- first of all, let's talk about just the execution from a commercial standpoint. As you saw last quarter, the execution, 12th consecutive quarter the growth on the top and the bottom. I think one of the things that probably the investment community, I don't think we get probably enough credit for appreciation for is the team that we've built and the execution on all these assets that are part of Bausch Health. So clearly, our Salix franchise led by Xifaxan, the growth has been -- we have a fantastic team that we've built there, and they're executing on all cylinders. And if you look at -- as I talked about many times of the engine that we built in terms of our commercial excellence -- so really pleased and happy with where we've come from an execution standpoint of our Salix franchise and of course, our international franchise, which always continues to perform and grow nicely on the top and the bottom. I think the other thing that the investment community probably doesn't appreciate as much or is Solta. I mean the Solta business has -- is an exceptional business for us. Of course, you've seen the outstanding growth there. We just completed the acquisition of our distributor in China, which gives us scale in China. I think that you saw the results of the first quarter. We expect, of course, the EBITDA to be -- continue to improve, and JJ can talk about that of the one-timers that we had in December and in January. But that asset continues to grow and perform globally, both from an Asia Pacific standpoint and from a U.S. standpoint. So I think that asset has the opportunity to continue to power growth for the future. We just received in China what called AAA trademark status, which if you know what that is, it's -- Thermage has received triple market status AAA status, which not many companies get. There's only about approximately 190 companies in all of China that have that. So clearly, consumers will see that, and it is the trademark, the gold standard of skin tightening. So that's a great achievement that we just got over the last few weeks. I'm going to pass it off to JJ to talk about some of the heavy lifting that we've done from a capital structure standpoint because I know you're interested in that. But I also, before I hand it off to him, our legal team has done an outstanding job of defending our intellectual property. And as we announced on the first quarter earnings call in terms of where we are with the opt-outs and all the U.S. opt-outs are settled. So a lot of work has been done from a legal perspective. But I'll turn it over to J.J. to talk about what he's -- the dramatic change of the capital structure.

Yes. Thank you. As you know, Bausch Health is going through some transition. We're in the process of finalizing the path to complete the separation between Bausch Health and Bausch + Lomb -- the portfolio is also going through a transition. We are assuming that we'll maintain market exclusivity associated with Xifaxan until the end of 2027. That represents a good proportion of our revenue, a good proportion of our cash flows. And so therefore, from a financial priority standpoint, really, the company is focused on 3 elements. The first one is maximize cash flow between now and the end of '27. And obviously, the commercial execution that Tom has been referring to has been a very important aspects of it. Number two is really setting up our portfolio post Xifaxan for success. What we're doing for -- with our International segments, what we're doing with Salta, as Tom was referring to, is of utmost importance because that's going to be an important element to it. We're obviously also, as you've seen from our press releases, focusing on some potential selective inorganic opportunities to really supplement our pipeline. And then the third piece of it is really how do we set up the process, the time line for maximizing the value of our stake in B&L. And the reason why this is so important that when you think about our capital structure and the net leverage we currently have today, it's obviously not fit for purpose when you think about the portfolio post Xifaxan. We are overlevered, and we have to delever the balance sheet further. Some of that will come from organic cash flow that we'll be generating over the next 2 years. But clearly, there will be a gap. And that gap will have to be filled in 1 of 3 ways. You can either decide to raise some new equity, which obviously would be very expensive and highly dilutive given where BHC is trading right now. So obviously, that's last option. You could try to capture some of that discount. But as you've seen over the last couple of years, our debt has been trading up. When I joined as the CFO of the company, we had about a debt discount of about $3 billion on $16 billion of gross debt. Now we're under $1 billion. It hovers here and there, but it's mostly that discount is the differential between the coupon and our cost of capital. So there's not a lot of, I would say, distressed debt discount associated with that. So there's not really much to grab there. So the last source of funding is really proceeds from asset sales. And most likely candidate here is obviously B&L. So that's why the refinancing that we did last year, which was about $9.6 billion, if you add up what we did in April and then the debt exchange we did in December was really designed to provide ourselves with additional runway so we can let B&L and the management team execute on their Vision 2027. They had an investor meeting in November of last year, where they laid out financial targets for the next 3 years. And so we're very confident in the plan. And the idea is this refinancing not only provide financial flexibility around resource allocation and potentially make some investment along the way, but also provides more time for the B&L team to execute on that plan before we start monetizing our stake, should we decide that's the best path to get the capital structure in order.

Okay. Perfect. So let's drill down on a couple of things. Can we go straight to operating cash flow? I think you've guided to $1.2 billion to $1.275 billion this year. If we adjust for CapEx of $50 million and the legal settlement that was $160 million, we get somewhere between $1 billion, $1.1 billion, let's call it that. When you think about 2027, if we look at the $160 million that's related to the legal settlements, and the IRA headwind that's coming for Xifaxan, is it fair to say that cash flow probably be roughly the same year-over-year?

Yes. We haven't provided any guidance associated with cash flow for 2027. But I think your -- the way you laid it out makes sense. There'll be ups and minuses versus 2026. I think you highlighted the fact that legal settlements are now behind us. The last installment of the settlement associated with the really was paid out in the first quarter. So we're happy about that. And then to your point, with the new IRA rebate, there will be a reduction that will offset a lot of that. We continue to see growth or anticipated growth in the rest of our portfolio. So that will also a partial offset to the IRA rebate. So I think assuming that cash flow is going to be roughly similar to what we have in 2026 is not unreasonable and obviously assumes that we maintain market exclusivity for Xifaxan Until the end of '27.

Okay. So just moving on from there. Tom, you've done a great job with Xifaxan, okay? We do have a little bit of a price increase in there, but the growth in prescriptions has been very strong. Can you -- we talk a little bit about that lingering Medicaid benefit and is growth going to really approximate what we're seeing with prescription growth and adding on a little bit more?

Yes. I think that the team has done an outstanding job with Xifaxan over the last 4 years on both indications. OHE has -- the sales and marketing team have really executed there. And as I said earlier, our AI engine, which has really been able to deploy our field force and get much more out of our field force to be able to drive growth. Now as we look -- as we exited Medicaid and 340B, if you look at the -- where we're playing today, not in those spaces, we're still seeing growth. J.J. can talk about what's lingering there, some of the volume that's coming through on that other channel. But we believe that, of course, as we look at what we can bring to physicians and patients that we can continue to grow in where we are competing today. JJ, you want to comment on the LOE?

So the way I think about Xifaxan revenue, I would broke it down into 2 pieces. The revenue associated with the channel we're still in today, which are basically the commercial channel and Medicare. And then Medicaid and 340B, which we exited starting on October 1 of last year. So volume and pricing dynamics are fairly consistent in the channels we've been in over the last few years. And we're not really seeing any major differences in terms of script trends and also price potential. Now if you look at the revenue associated we make in 340B, we were getting a lot of scripts, but not a lot of revenue, as you might expect, as this was a heavily discounted channel. The residual revenue that we've got at the end of last year and the first quarter of this year were a little bit ahead of what we're expecting. I mean, obviously, there was some erosion that was going to happen that was anticipated, but the residual revenue has provided some tailwind for us. We expect that to kind of decrease gradually over time throughout the remaining of the year, obviously, on the Medicaid side. 340B is a little bit more complicated because some of those patients are being covered by other channel. But I think the optimization that the team has done for both the commercial channel we're in, but overall, the mix of business that we are has been outstanding and has explained why we continue to enjoy some very strong growth in the first quarter.

Okay. So there has been discussion recently around the two Norwich trials that are now combined. And I have to say that my belief when the judge made his original ruling on a drug product was that this is going to be a January 1, 2028 situation. But now I'm hearing that it could be a little bit sooner than that based on the potential outcome of these cases. Now we still have the outstanding 180-day exclusivity at Teva. Under what circumstances in your view, could they lose that?

Yes. So right now, the case is with the Federal Circuit in D.C. and the appeal, we're still waiting for the decision. As we said in -- at the last earnings call, any time after we were assuming or estimating any time after April. Of course, in the meantime, Teva has, as I said on the earnings call as well, they received approval. So as we look at it, we're waiting on that case. But it's also that case, but then there's also the second case in the New Jersey District Court that is there as well. There's no trial date set for that. And those patents are different in terms of what is -- what the patents were on the earlier trials, earlier cases. So we're continuing to monitor and wait we believe we're going to defend our intellectual property and we have been over the last 4 years. So we'll see what the courts decide. And -- but clearly, Teva getting approval is a nice step.

Yes. There's no doubt about that. But if they don't market it within 75 days, there's still the secondary that would cause them to forfeit, but there is still the secondary factor about the ongoing litigation, and we're going to have to see how that falls out. But that -- could that be the trigger point here for them losing?

In terms -- so right now, in the D.C. district, okay, that's -- but then you have Norwich, what we call Norwich 2, which is that case in New Jersey. So there's many factors, it's multifactorial playing out here on these 2 cases. Again, there's no trial date set for the New Jersey case. I don't want to speculate of what's going to occur with the Federal Circuit in D.C, but then there's a second case. I don't know how -- as there has no trial date that's set in New Jersey, I don't know how they're viewing it or what they're looking at, at the present time.

Okay. And just to wrap that all up, is there any information that could come out of the Supreme Court ruling between Hikma and Amarin that could inform what may happen with respect to skinny labels?

Yes. That's -- it's a good question. But the skinny label has been an issue. there. I think that what I just would say is that in the end, we are -- we believe in our intellectual property, and we're defending it. And we'll have to wait and see what the Federal Circuit says.

Okay. I'll get to Bausch + Lomb in a second, but I did want to speak a little bit about some of the other businesses, like Solta has been doing extremely well. We saw the growth that you reported in Q1, exceptionally strong, 52% volume growth, et cetera, et cetera. As we look through the remainder of the year, and I know that, that's likely going to fall a little bit, but how do you see that business growing over the next several years?

Yes. Doug, as I've said many times, I love this business in terms of what -- as a portfolio that we have within Bausch Health, I think there's 2 really strong aspects to this business. Number one, our capital versus consumable. 30% of our business is capital, but 70% is on the consumable side. So it's very durable and it's cash pay. So -- and of course, a premium positioning of the product. If you look at what we're trying to do globally, of course, we have a fantastic business in Korea. And of course, now acquiring our distributor in China that gives us scale, gets us direct to the patient and to the provider and what we can do there. So I expect a nice growth of our business in China as we move forward. JJ can comment on the EBITDA of what we're going to -- what we're thinking about in terms of the one-timers that we had in December and January. But I believe that with this acquisition, we can continue to see a nice business there. We have an outstanding leader in China, and he runs Greater China. So we're looking at that part of that region to continue to perform. If you look at the U.S., the U.S. is -- the growth is good. I'm looking for hopefully getting some step change growth with the new launch of our Fraxel. That's a new product that we launched last year, which I think is, of course, is an outstanding laser and has really great treatment efficacy. And then our focus in Europe of -- historically, the European business has not been a focus prior to me becoming the CEO, but our focus now is probably on 2 or 3 core markets that can drive growth there as well. JJ might want to comment on how we see the profitability of this business going forward.

Yes. So if you think about our growth in the first quarter and particularly in China, where we said we grew on a reported basis about 190% year-over-year, you have to break it down to 3 drivers. Number one, our volume was particularly strong in the first quarter, about 50% growth year-over-year. Number two, we had a price increase associated with the integration of our full-service distributor, which was about 70% or so. And then we had some FX tailwind as well. So we can all debate about whether the 50% is going to be sustainable for a long time. But the 70%, it's kind of a reset of our pricing level and therefore, our margins in China. And I'm not sure the market really did the math around what that means on a dollar basis and ultimately, how could this translate into a significant increase into our enterprise value just by this transaction. We had some depressed margin in the first quarter due to the fact that the COGS of the inventory we bought back from our distributor was step up in value. So we were going through that still in the first quarter, but we're anticipating that to be fully cleared by this quarter, by the second quarter. So that is a major change in the dynamic of the business and the trajectory that we're going to be seeing. As we indicated on our earnings call, China has became the #1 spot in terms of the major geography in Salta. And so we're very optimistic about our ability to continue to expand coverage or to accelerate the expansion of coverage and be in charge fully of demand generation in that market. So margins are anticipated to be stable with obviously a much higher pricing level.

Got it. I would also -- when we take a look at the integration and how well it's going in China, it's -- this is a market that where we look at where the product is positioned as a premium price. Look, it is the gold standard. I was just in China in December where we met 150 of our key customers and KOLs. And I think that when you look at our ability now to go all the way to the consumer and to the provider, I don't think the investment community is appreciating what has been accomplished on this deal. And then I mentioned at the beginning, getting the AAA trademark on Thermage. So that's where in China, I've lived there for many years, having the consumer, the trust in the brand and having that AAA status will really help us differentiate us from the competition that is in China today, either internally or coming in externally from other markets.

Okay. So just to wrap up then, I need to spend some time on Bausch + Lomb. When you think about the value of that asset there, and it's like -- when you look at the margin profile of that company and what is expected to happen, it likely should be trading at a higher multiple, especially given the quality of the pipeline, which they just talked about at their Investor Day in Q4 last year. What do you think is more important right now, increasing the flow to that business or seeing that margin profile increase over the next little while? And then added to that, is this something that could be sold outright to a third party? Or would you hope to do this in a more packaged way selling portions of it over time?

Yes. I'll take the first part, and I'll hand it off to JJ to talk about that. B&L had their Investor Day. We see Bausch + Lomb as a great asset for BHC. Their Investor Day was very successful in terms of not only what they have today in their commercial engine, but what they have in their pipeline in all of the segments that they compete. So we believe in Vision 2027 and what they can accomplish and also the strong management team they have to execute on it. So we believe it's a great asset for us. And I'll turn it over to JJ to just talk about how we're looking at the valuation of it.

Yes. So listen, from a process standpoint, all the options are on the table. The objective here is to maximize the net proceeds and if we decide to use that as a way of completing the separation between the 2 companies. And I think the expectation is that the margin improvement will be gradual, but a little bit back-end loaded. And so therefore, we are patient. And this is why the refi was so important last year because it gave us the ability to really wait until the margin improvement would be realized and the market really rewards B&L for it. So we're confident about the plan. I think we're going to have to be patient and see really what happens.

Okay. Well, listen, it was great to have you here. Thank you. It's nice to have you back and good luck with your meetings.

Thank you, Doug. I appreciate it.

Thank you.