Bausch Health Companies Inc. (NYSE:BHC) 38th Annual J.P. Morgan Healthcare Conference Call January 13, 2020 4:30 PM ET
Joe Papa - Chairman and Chief Executive Officer
Paul Herendeen - Chief Financial Officer
Scott Hirsch - Chief Business Officer
Conference Call Participants
Chris Schott - J.P. Morgan
Okay. Good afternoon everybody. I’m Chris Schott from J.P. Morgan and very happy to be hosting Bausch today. We’re going to be going to a fireside chat format and from the company we have Joe Papa, company’s Chairman and CEO; Paul Herendeen, CFO; as well as Scott Hirsch, Chief Business Officer.
We’re going to do the fireside here, we’re going to go across the hall for the breakout, but maybe just to kick off, Joe, maybe a bigger picture question here, 2019 busy year for the company, just walk us through some of the highlights as we think back on last year for Bausch.
Sure, Chris. First of all, pleasure to be here. Happy New Year everyone. 2019 was a good year for us in terms of – and busy year as you absolutely said. It was just a year ago that we kicked off our campaign for pivot to offense and that’s really what 2019 was all about for us in terms of – as we approach pivot to offense it was how could we grow organically and indeed we’ve now shown seven consecutive quarters of organic growth. So, clearly that’s a big part of what we talked about offense.
The part of it though was how could we drive long-term shareholder value and we had some success in doing that, but importantly also, where were the opportunities for us to bolt-on some products that we felt could help grow our core businesses both in the Bausch + Lomb eye health business, but also in our Salix gastroenterology business, and all that came together very nicely.
I think we did about approximately six different bolt-on transactions when we acquired the TRULANCE product, the dolcanatide product from – that was clearly one we acquired, amiselimod. So, a number of different products we were able to bolt-on, which we think just absolutely aligns with our story about pivot to offense in what we try to accomplish and so we’re really excited about what 2019 was all about, pivot to offense and now as we look to the future we’re all about being an eye health company, a 2020 vision.
Oh, I like that. So, on your 2020 vision, maybe just talk about within each of the divisions, what we should be most focused on as we head into this year for the company.
Sure. For us when it comes to 2020 vision it’s really more about what we talked about the past continuing to invest in the business and grow organically as clearly front and center what we’re trying to accomplish. Number 2, it is always going to be about our new products. We always have the phrase what’s it all about. It’s about new products, new products, new products, continuing to invest in those new products both from an R&D point of view to get them to the marketplace, but also the success in them.
We’re really excited for 2020, we’re going to launch in the United States our silicone hydrogel, daily silicone hydrogel product. We think that’s going to be an important advance for us relative to the marketplace. It’s one of the fastest growing parts to the market. We have a monthly there, but we don’t have a daily, we’re going to launch that daily. We think that’s a big opportunity for us.
Other things that we are looking at. Clearly continued success in VYZULTA, a product we have in the derm business called DUOBRII, which we think is a game changer when it comes to our ability with DUOBRII to approach the psoriasis patients with a new way of treating their psoriasis heretofore if you had a psoriasis you often used a high potency corticosteroid, but you have a certain limitation about how long you can use the product.
With DUOBRII, we now have a product that allows you to treat to clear. That’s a major change and importantly managed care is absolutely looking at that and saying, we get it. We could take the cost of treating a biologic patient from ballpark $50,000, $60,000 a year, down to less than 1, an order of magnitude of that. So, that’s clearly, we think a big, big opportunity for us in 2020 and we’re really excited about, and clearly, it’s going to be the continued strong growth of our XIFAXAN, our largest product, we think is a great opportunity for as we go after the IBS-D category.
Interesting statistic is that, in IBS-D there’s about 12 million prescriptions written annually for the treatment of IBS-D and therefore antispasmodics, antidiarrheal, things that just mask the symptoms. We’ve got a way to treat that patient with IBS-D with XIFAXAN that we think could potential through an episodic treatment of a couple of weeks cure the patient. That’s really, we think, really exciting and a lot more opportunity for our XIFAXAN product.
Great. And a question for Paul, you put out three-year CAGRs revenue 4% to 6%, EBITDA 5% to 8%, just walk through how Bausch can maybe achieve those targets and level of confidence in that type of growth for the business?
Yes, sure. Look it’s a really, really good question because after we had our Q3 call, you know people started to obviously focus on what the year 2020 looks like relative to 2019. So, people – yeah, it’s a very timely question. First, let me set the stage. You know beginning part of this year, back in February when we provided guidance for 2019, we said, mid-point of our guidance range is for revenue and profit we said we could grow revenue 4% to 6% CAGR for over three years, and our adjusted EBITDA 5% to 8% over three years. Those numbers were, middle range was 8.4 billion for revenue, 3.425 for adjusted EBITDA.
Why we do that? We originally started providing longer-term revenue and profit guidance because we wanted people to have some guidelines there as kind of where we were trending both respect to revenue and profit because back several years ago there was a pretty wide divergence of where analysts had us whether they were too high, too low, and now with all the information that we had out there we said, look there’s a lot of information, let’s make sure we provide some guidelines. So, first let me answer the question. We have that guidance out there. We obviously are committed to that guidance.
Now, how do you get there, particularly thinking about like what does 2020 look like? I’d way well, two points. One, it ain’t linear. It is not linear. And part of that is, you think about 2020 relative to 2019, we talked about on our Q3 call there’s couple of things or a little bit of headwinds for us in 2020 that we’ll work our way through. We of course expect to grow, but I expect the growth in 2020 we’ll be below that trajectory, but then we’d see an acceleration in 2021-v-2020 and then 2022-v-2021.
So, where does that come from and Joe has touched on some of this in his opening remarks. It’s all about new products. We’ve got a number of products that are recently launched that are still in significant growth phases and those are, I’ll try to tick them all off, if I miss one, somebody will elbow me, BRYHALI, DUOBRII, SILIQ, RELISTOR, Daily SiHy, LUMIFY, VYZULTA. I think I got all the ones that are launched in growth phase.
So, those are in growth phase, but then in addition to that, you have a number of other franchises that are growing quite nicely. For example, our largest franchise is XIFAXAN. XIFAXAN has had spectacular growth and that’s not by accident, it’s fundamental driven by excellence and execution in our Salix unit and it’s grown nicely and we expect XIFAXAN to continue to be able to grow.
Again, thinking about 2019, 2020, 2021, 2022, you know some good growth there. We’ve added TRULANCE into the mix, also awesome. Unbelievably even within our Bausch + Lomb business generally that’s a business that can grow and we’ve said this fairly consistently kind of a mid-single digit grower over the long haul.
When you start to strip away the unfortunate enduring impact of these LOE assets, it’s kind of the good news, bad news, we go the revenue, we got the cash flow it’s all good except it sets up for a bad comp from a growth perspective. As you start to put those in the rear view and we are doing that in 2020 the underlying performance, the growth performance of many of our key franchises will come out and that’s why we provided that guidance.
Makes sense. I think you mentioned 2020 a year of growth, is that same thing about revenue and EBITDA growth is, I know, can’t give specific numbers, but …
Good try there Chris, but I’m not going to provide guidance today, but I do want to just emphasize on 2020, because we did provide a lot of this information on our Q3 call, if you didn’t listen, the transcripts are available in all, but we have some challenges from a growth perspective in 2020. Really good results, it’s kind of more of a function of doing better in 2019, challenging a little bit in 2020 as we work our way through those final LOEs particularly Apriso, talked about the drop off of Glumetza, and some other items. You get past [I'd] [ph] expect 2020 going to grow, going to be lower and then accelerating 2021 accelerating 2022.
Maybe one last question on that three-year target. Since you’ve given that, any areas you’d highlight where the business is running particularly ahead of expectations or particularly behind expectations?
I’m going to actually go backwards and say, yes, and address that say, thinking about things that are ahead or things that are behind and instead of saying as of like today, sitting here today, or back in February when we refreshed that CAGR guidance is, when Joe and I got here, if you went back and looked I said, one, XIFAXAN first of all has done much better than I think the market expected to do and honestly a little bit better than what we were expecting there.
Secondarily, our Global Vision Care business, at first aided by just the rock solid performance from Tom Appio and the team that run that, the international part of Vision Care, that was rock solid, but then on top of that we have a fellow named Joe Gordon who runs it in the U.S. who brought that back from a place where it was kind of drifting to being a real growth driver for us in the U.S. and soon to be, hopefully with, knock on wood, with the launch of the Daily SiHy, we expect to be able to continue that.
So, those two certainly ahead and there are others as well. The majority of our business performed as we thought, and of course the one that we love to talk about, but we don’t really love to talk about is that unfortunately it has taken much longer for that derm business, the medical derm business to rebase itself, but I think we find ourselves here in 2019. Again, I said on the Q3 call, we kind of, I think we found the base for that legacy derm business and now with the new assets that business flipped from a declining mode to a growth mode, this is all really good stuff.
Yes, absolutely. Leverage is obviously still a key topic for the story, just remind us kind of post this recent settlement where we stand with leverage and how we should think about the company prioritizing its cash flow going forward?
Sure, I mean, well, first of all, and thanks for brining up that settlement because we think that was an important step for us. It was the largest remaining legacy liability that we needed to come to grips with and we believe that our legal team did a fantastic job of maximizing our position in that and we’re delighted I should say to take that and say it was an unknown, make it a known, and secondarily to finance that. It did set us back. I mean it was $1.21 billion.
We are funding that, we did fund it through the issuance of [debt] [ph]. It is a, that’s a broadly three-tenths or so of a turn. So, takes us a step backwards. I think we’re in the high-6s kind of on a pro forma basis. Pro forma for that settlement, and so we continue to need to prioritize the use of our free cash flow to reduce our debt, but again back to that settlement that was the right thing for our company to do and we’re fortunate to be able to put that in the rear view.
What is an ideal level of leverage for the business given the assets you have and the diversified portfolio?
To quote Captain Miller from Private Ryan, anywhere but here. You know it is, when you are levered in the high-6s that’s too high for your business. We need to actively work to bring that down and of course the ways we do that are prioritizing free cash flow to reduce debt, but for the settlement we would have been making that great progress I think on that front and we will expect to continue to do that next year by prioritizing free cash flow and the second and best way is grow that operating earnings.
Chris, the only think I would add is that, Paul, Will, the team did a phenomenal job and just giving us freedom to operate. So, yes, we have the higher leverage than we would like. We acknowledge that, but we’re going to continue to work it down, but importantly with what Paul has done and Will has done, the have freedom to operate allows us to go ahead and make some investment, increase our R&D, things that we know are important to growing the business for the long-term and that’s what really it's all about driving long term shareholder value.
And on that point of investment, just talk a little bit about the biz dev approach, we saw some obviously activity in 2019 is balanced against obviously a de-levering kind of priority. So, what’s the focus right now? What’s the opportunity set that you see in the market? Scott, we’ll hear you, yes.
Sure, I’d add. So, thanks guys. I think, as Joe said, everyone in this room knows how to make a DCF say what they want and that’s by changing their cost of capital. And that’s really what this company has done over the last year or two and our last unsecured issuance was at 5.25%, the lowest rate this company has ever issued notes at and what that really provides us is an opportunity to go out there and source commercial accretion and pipeline value without being dilutive to the equity and this year, I think we’ve done exactly that on a number of products and in their own rights some of these products would be attractive market cap companies if they were in that position, but as Joe mentioned the first move we made in our offensive acquisition in 2019 was the acquisition of the synergy assets TRULANCE and dolcanatide.
TRULANCE was a completely de-risked commercial asset that fit right in our GI business in the IBS category. XIFAXAN was already in the IBS category, the sell point, the physicians, the sales force, the prescribers are all very much synergistic and overlapping and three quarters in, we’re looking at TRX growth of over 25%. Dolcanatide was the first new chemical entity sourced into Bausch, it’s already completed a Phase 2 in a large subset of patients in opioid-induced constipation and we’re looking at it in number of GI conditions. And then as Joe mentioned with our press release, amiselimods, amiselimod is an S1P Modulator.
The S1P Modulators have traded in this category. Some of you may remember, ozanimod and Receptos sold for over $7 billion. We have not publicly said, how much we paid for amiselimod, but it was immaterial financially to us. So, certainly not in that price range. And we announced today that following a cardiovascular study, the class has known cardiovascular risk, but following a large FDA sanctioned and approved 190 patient cardiovascular study, we saw no QT elongation.
So, we have an S1P Modulator with pre-clinical and clinical protocols in a number of autoimmune conditions that range from Chron’s ulcerative colitis, lupus, MS, NASH [indiscernible] psoriasis and I think we are excited about the opportunity to bring that to market in different autoimmune conditions. And then lastly, one I’ll highlight is, NOV03 which we recently licensed in. NOV03 is a non-aqueous eyedrop from the treatment of dry eye.
Dry eye is a very large market both in the U.S. and internationally and what we have is a non-antibiotic treatment. So, a product that actually works to draw the lipid layer to the surface of the eye and the onset of action is very impressive here. We’ve already completed one Phase 2 crossover Phase 3 with stats sig in signal and potentially we can see that in two more studies starting this year for a dry eye drug in the near future.
So, I think from a BD perspective, we’ve actively engaged in a number of different products this year. in their own right, these will be attractive sort of companies if we could get them there and I think we’ve done it for under $250 million. So, very attractive purchase points for these assets.
Maybe I’ll just add one thing to what Scott said, because he is absolutely right. We are very efficient in acquiring them, but importantly they give us some opportunities to take some of our business as global. Clearly the Bausch + Lomb business is a global business, but the [MSL mod] is a global opportunity for our Salix business. So, that’s another example and with what we’ve done with our Solta business we also have a global opportunity in our dermatology business. So, we feel really good about what that means for the elements of growth for the future where we are trying to bring this business in terms of being a global business for opportunities.
Do you see opportunities for more commercial stage assets and do you have the financial flexibility to pursue those if they are in the market?
My answer to that is, clearly, we do see opportunities out there, we clearly will continue to look at them. Obviously, we have to be smart as we look at these assets based on our leverage ratio, but we’re going to continue to look at these assets because we do think that within the footprint of our eye health business, we’ve got the most integrated eye care company in the world not baring, there’s other good players out there to be clear, but we have the prescription business, we have the surgical business, we have the contact length business, we have the over the counter business, we have a multi-purpose solution business, we’ve got a really integrated platform. If there is products out there that makes sense, we’re going to look at them and try to determine how we could make a best fit it.
Let me say, [I want to add] to that, I think so synergy was trading almost a $1 billion enterprise value at one point and we were able to acquire the assets for over 80% discount to that. Amiselimod as I said, the S1P classes have traded for billions of dollars. We found the asset standalone without a sponsor in Japan. It takes work to go out there and find assets that are in overpriced, but we do the work and we find them and I think we’ve been able to prove that we can go out there and source assets for very good value.
Just tripping a little bit, how important is it for you to be a diversified company with the number of divisions that you currently have and I guess because – do we think at some point a different corporate structure as leverage comes down or is part of how you want to run the business you want to have a broad diversified kind of business like you have today?
Sure. So, I think first and foremost we feel very fortunate we have good assets and they are global businesses, the global business opportunities I’d say number one. Number two, we are building them so that they can be independently strong businesses so that we are prepared to make them independently strong and that’s one of the comments we had about our 2020 vision. And also, we think that there are businesses that are very durable characteristics.
I would say that, could they function separately? The answer is absolutely yes, that is true. We do like the fact by putting them together, especially in the United States where you have market access questions. We do think that there is value in working together across the business, especially with market access questions, but they could absolutely standalone is the answer to the question. Yes.
So, it really – some point I’d say, a valuation discussion and a …
Absolutely, clear. I think we feel, as you would expect as management of the company that we are significantly undervalued and certainly when you look at the Bausch + Lomb peer companies where they trade – they are trading at much higher multiples than we trade. So, clearly we do think that there is an opportunity for improved valuation and we’ll continue to look at that, but as it stands today, the businesses are together and we could get good value for that in terms of the overall durability of our franchises, but at the same point, we recognize that sometimes one has to consider other alternatives to realize that value.
Pivoting to new launches, maybe just an update on the new launch portfolio and maybe specifically DUOBRII just how that launch has been going and what we should be focused on in 2020?
Sure. We’re really pleased with DUOBRII. DUOBRII, as we’ve launched the product, we are seeing a number of characteristics that suggest a very strong launch. First and foremost, we get the total prescription performance as one of the best dermatology launches ever in terms of actual number of prescriptions that have been written in the first six months of the products. So, clearly that’s a positive. Second thing I’d say about DUOBRII is that we do look at the number of dermatologists that have actually prescribed it and about two-thirds of dermatologists have already prescribed it and it’s only now six months into the marketplace.
So, clearly, we’re moving into the right direction. The final area that I want to make sure I highlight is that, is this coverage from market access is an important part of the U.S. business. We went from about 30% coverage that we launched in August, September we were up to like 38%, 43% by October, we did our earnings in November and it was I think it was 57%. I’m delighted to say, today we are up to 63% coverage in the market access for the United States.
So, that is, I think a really positive leading indicator of where we’re going with this product and we said, all along that we felt by June, July of 2020 we would be somewhere around that 70%, 75% coverage. So, if you look at the prescribers, we are clearly getting the prescribers on derm side. We’re seeing the prescriptions, we’re seeing the refill, we’re seeing the market access covered. So, across the board we’re very enthusiastic about what the opportunities with DUOBRII, predominantly because we can help these patients who have psoriasis and for the first time give them a topical product with a high potency corticosteroid steroid that they can treat to clear rather than being limited to a certain duration of time.
Makes sense. And then timing wise, with that coverage you mentioned. So, by second half of 2020 should we start thinking about normalized growth [indiscernible] for that product?
Yes. I think that’s a fairly accurate representation. The simplistic way to think about this is, it’s as the – as you get the increasing coverage in the marketplace, you need to discount and coupon less as you discount coupon less gross to net it gets more favorable. So, the answer is yes to your question.
Okay. And then just final question [indiscernible] here, on the SiHy opportunity, maybe just talk a little bit about where capacity is and how you’re thinking about the U.S. rollout of that line of products?
Sure. We launched our silicone hydrogel daily contact lens in Japan. We did that last year, it has been a good launch for us, but you always learn things when you launch a new product. Very simply stated when you are making a monthly lens and you need 12 lenses a year to go to 365 lenses, obviously you need more capacity. So, we’ve been putting together the capacity both in the United States, but also in Ireland.
In order to do that, we’ve been able to build our capacity, and we feel absolutely prepared that as we approach the U.S. launch later in 2020 and then European launch in early mid-2021 that would be prepared to have the capacity based on the expertise we get in making these lens and so we’re in great shape relative to that capacity expansion.
It has taken a significant amount of capital, but we’ve planned for it and we’re prepared to make that investment in order to make sure that we get a great lens and we’re very excited. Bausch + Lomb has always been known for really good optics, really good comfort and fit. We believe that our silicone hydrogel lens will do exactly that on a daily basis.
Great. It seems like there has been a lot of great progress in the year. So, continue the discussion across the hall in the breakout. Well, thank you.
Thank you, Chris. Thanks for the questions everyone.