Bausch Health Companies Inc.'s (BHC) Management Presents at JPMorgan Global High Yield & Leveraged Finance Conference (Transcript)
Bausch Health Companies Inc. (NYSE:BHC) JPMorgan Global High Yield & Leveraged Finance Conference March 3, 2021 2:00 PM ET
Company Participants
Paul Herendeen - Chief Financial Officer
Unidentified Analyst
Well, good afternoon, everyone, and welcome back to our last healthcare company presenter of this three-day event. We are happy to have, as they say, last but not least, Bausch Healthcare and Paul Herendeen, I think many of you know. All we are going to do this without slides, the proverbial fireside chat. I think this is our third one. And actually, it was a year ago today just before the pandemic slammed into us that we saw you in Miami, and we had no idea what’s about to happen.
Paul Herendeen
Yes, that was -- I mean, it seems like it was more than just a year ago. I’m --first of all, we are delighted to be here even from bad and clean up and going last, it's great to have the opportunity to be a part of this conference. And I just wish we are -- I wish I were in Miami.
Unidentified Analyst
You’re being very good for the company. I see you in the home office there. As I alluded to in the -- just the green room for a moment before, because the spin-off is planned, I have fewer questions than normal on how the eye care business is doing and what its pipeline is and so forth, because that will be for someone else's benefit. But you did highlight on the call, the delayed surgeries in the U.S. I don't think you spoke to them OUS, but maybe you could speak to the percentage. And then what that means, how they'll feather in over the next year or two?
Paul Herendeen
Yes, sure. And I want to cover a point here, because you say it's almost like for your purposes, you're not thinking about the eye health business, I think, you should. I think you need to think -- continue to think about the eye health business until we split, because until we do, we're one company. We generate cash flow and that cash flow we deploy to reduce test year at BHC and that in part is going to facilitate the spin at some point in the future. So until we split, that's all important. And we love both of our businesses.
Great question about kind of -- it's not on the pace of recovery, I think, in thinking about in the surgical business where in the U.S., I mean, we estimated that I'll get the -- you would have to refer my notes, I think was like 16% of cataract surgeries were delayed in the U.S and it's a pretty good sized number, 600 when we look at my notes here 650,000 wide surgeries that we estimate were delayed. And so, in the U.S. that provides a tailwind for that surgical business, not just in 2021 because you may or may not absorb all of those extra surgeries, there is always more people coming into the funnel.
But outside the U.S., we estimate that number is kind of like 20% of surgeries were delayed even a little bit more than you saw in the U.S and that too will be a tailwind for us. Importantly, right now, as we sit here today, that surgical business is about a 30% U.S business, 70% OUS. And so while we are expecting in 2021 and 2022 tailwind in the U.S., it's even more of an important helper for us in that international or OUS part of that surgical business. But let's not lose sight of that, eye health care is a great business.
Unidentified Analyst
I'll keep an eye on eye care, Paul. I got the message. You love all your children equally. I thought with all the focus on expediting things, or urgency or what have you, one thing that often gets lost in the shuffle is the degree of headwinds that you've been dealing with since pickup date, I guess, probably 2016 was peak earnings. 2020, I believe you lost about $100 million of EBITDA from generic LOEs that you -- or LOEs that you stepped into. I think it's about $100 million for this year, right?
Paul Herendeen
Yes, for 2021. It's a real important point, but …
Unidentified Analyst
Well, I was just going to say, I didn't have a chance to go back and recap the entire -- you were running up a down escalator or your -- you had a groundspeed that was limited by your headwinds, or whatever the metaphor is. Can you recall what the three or four-year cumulative that you had to be dealing with?
Paul Herendeen
Oh, it was well over a $1 billion. I mean, I think I -- on the Q4 call, I said if you look over the last three years, the headwinds were kind in the high 200s or low to mid-$300 million of growth drag on - at revenue now associated with these LOE assets, a lot of those were in the neurology business, but certainly not all of them. I mean, so an important driver in Ophtho Rx, with LOTEMAX, an important driver in derm where we had just a number of those products face loss of exclusivity.
And concept I talked about David on the call was, yes, looking back at in 2016, as we're looking at 2017, 2018, 2019, 2020 and beyond, yes, you're just staring at this mountain of products that are going to lose exclusivity in a very short or condensed period of time. And that's why we started reporting and I'm glad we did, like kind of our estimate of what the growth track would be in any particular year.
So rather than talk about that, what I want to talk about is looking ahead and again, I don't have my slide deck sitting here right in front of me. But the LO you do, the LOEs that we're looking at in 2021 v 2020 are in the low hundreds, I guess, $105 million, $106 million at revenue.
And you say, well, yes, that's a meaningful growth drag. I said, yes, but down from, let's call it averaging around $300 million in each of the last three years. What I think that speaks to is that LOE growth drag was really masking the underlying ability of our base businesses to generate organic growth.
And as that LOE drag recedes as a challenge for us, you're going to start to see much more clearly the ability of our company across all of our base businesses to put good solid growth on the board. And so, sorry, I don't want to get off this topic without covering -- set aside, of course, the one everyone thinks about in 2028 for XIFAXAN. But if you set that aside, just look out over the next five years, handful years, there's not a lot in the way of LOEs that are going to be anything other than an MD&A item as opposed to the -- really massive headwinds that we've seen for the past, well, five years now.
Unidentified Analyst
So if you think that's the last -- this will be the last year, you'll have to call it out the way you do in a bridge?
Paul Herendeen
I think once you start calling things out in a bridge, you might as well just keep doing it. It's been helpful. I mean, I think we got a lot of good feedback from investors and a lot of check marks for providing transparency. I think it's a decent thing to provide as part of your guidance package.
Unidentified Analyst
Yes. All right. So all right, let's actually refer to that LOE 2028. I guess the mission is to find alternative products with the same or similar molecule. I'll butcher it, because I'm a generalist. But I think you've called out sickle cell. Can you talk about the clinical work that's being done? The scope of the market? What's your hopes there?
Paul Herendeen
Well, you had hope there, an important point there was that the FDA did grant us the orphan status for rifaximin for sickle cell. And so for us, this is a, I’ll call it, a relatively contained project that if we are success, you could, in a reasonable timeframe, have a very, very interesting product on the market for sickle cell. Not going to make any proclamations about what kind of size that could be. But I'd say a very meaningful product, assuming everything works and we find the right space for the product in the marketplace. So that's a priority for us.
Yes, we got some good news on development of Red Sea for trying to get earlier in the treatment of people with hepatic-encephalopathy. So try to stop them from getting that first hospitalization. If they have a pathway there with an enhanced version of rifaximin, it could be an important additional portfolio and something that one -- it can meet all the criteria. It's got to bring value to patients and physicians. It got to bring really value to the healthcare system and we think that there's a prospect there, that's a very interesting alternative for us with a substance rifaximin that we know very well that we can put into a proprietary formulation that can demonstrate effectiveness for treatment that's not here before available. So really excited about that.
But I want to keep going on the Salix pipeline and pipeline in general. It's incumbent on us as it has been from day one that we continue to flesh out that our R&D pipeline and add things in whether it's in GI or whether it's in dermatology, or frankly, whether it's in neurology, or whether it's in one of our eye health business, or in any one of our business today, that we continue to flesh out those portfolios, such that each of the businesses when you look at them you say, hey, when I get out whatever date you're looking at, this business has a positive, strongly positive terminal growth rate, so that it continues to have value.
The challenge that we -- our field business is -- XIFAXAN is a very large asset. It has great growth prospects. Now all the way up through its extending [Technical Difficulty] out in 2028. And so when you get to that date, it's a big deal that you have this revenue that goes away.
I know, Mark, it’s a lovely to think about linear fashion and say, what are you going to do to exactly replace that and say, I wish it were a simplistic formula -- form to say, well, here, we're going to add X, Y, Z and we're going to stage it, so that we never be continue to roll off of 2027.
But the point of the story is, what we need is we need to know that in 2028, we've got a great portfolio that is positioned to grow and capitalize on our competitive positioning in the GI space for Salix. And I think between here and there, it's our job and I expect we will succeed and go ahead in doing that.
Unidentified Analyst
Okay. You're right, I do have your presentation handy. I'm going to have to know your company better than I ever have, because it is becoming, well, we're losing the eye care plan. Could you talk about new product pipeline in the derm space, which again, I haven't drilled down into? But there are a number of things enumerated in your deck?
Paul Herendeen
Yes, I mean, the derm business is funny because that is the area where we have had pretty good productivity of getting products out into the marketplace over the period that I've been here. We continue to have great capability. It's actually a group that we have out in California, that does most of the development work in the derm space.
I think that right now, we've just launched our ARAZLO. Right now, we've got IDP-120 for acne, which is just complete -- Phase 3 is completed at our primary endpoints and yes, we're looking for what's next there. We've got another active combination. For us Phase 3 is completed and where do they -- where we go from there.
I think we have the capacity to continue to develop our products and get them out into the marketplace. The main portion of the derm is that -- is the commercial model because that space has been one that's been impacted more so than any other space that I'm aware of in the branded -- U.S branded prescription pharma business. And it's a question of how do you go about doing that? And that really is not reflecting through the pipeline or how are you going to play in derm.
And I know that we’re -- we continue to look for ways that we can reconfigure that business and capitalize on what we have, which is a portfolio products early in the market, portfolio products coming to market, a really good set of individuals and people that work in that business. And we have watched that business really creep down and reset itself now is the opportunity for us to recondition that and bring it back into a growth mode. And in large part that's more around how we reconfigure the commercial side to adapt the model to the realities of just getting at to med derm business with our type of product portfolio.
Unidentified Analyst
Solta, which has been getting a lot of attention seems to be highly regarded and highly valued in part because it's I guess, a cash business, not a reimbursement business. Is that part of the secret or going forward in the dermatological pharma space, too?
Paul Herendeen
Well, the secret being cash pay?
Unidentified Analyst
Yes, Yes.
Paul Herendeen
Yes, I mean, if you go back to the old pharma model, I said, in one of our breakout sessions earlier, like if you took our product portfolio today and went back 10 years and had it in the derm space, it'd be a terrific, terrific portfolio with lots of revenue and extremely profitable, et cetera.
But yes, but today, with the pressure from payers and that pressure just continues to increase, saying, I'm flat, not going to pay for that. I just -- I'm just not going to pay that you need to look for other ways that you can bring good products to bear or bring good products to the marketplace in a way that when physicians write it, they know that patients can go out and get it.
We've shown in a couple of instances that we're willing to go forward with a cash pay model. I would say, if you want this product, you're going to pay $75 cash and here's how to go about getting that. That's a new model. And you got to be sure that your economics in that works, and I think we're starting to put that out, if we extend that we can further advance that model, I think you're going to see that we are going to, one, that business is going to be solidly profitable; and two, it's going to have growth prospects as we look forward.
I want to just say on Solta because it does get a lot of attention. Solta is a great story. It's run by a terrific guy, one of my favorite guys in the -- in our company, Tom Hart, and that business just continues to grow dramatically. And that's basically on the back of some really good technology with the Thermage FLX platform. And that is a razor blade type business, so you get the systems out there. And then you have the consumables, the FLX tips and we've got a long way to go with that business, that is predominantly Asia Pac focused business.
We have done very well in place the machines there. We've ramped up dramatically in the FLX consumables. In Asia Pac, boy, we're not done in Asia Pac in terms of placement of equipment. We're just getting started in Western Europe. The U.S. businesses has gained a lot of traction over the course of last several years. That business is just very, very well-positioned for today.
Unidentified Analyst
I really haven't had a chance to channel check with physicians on that. It was a relatively small part of following you historically. I think the company only paid about $200 million, $250 million more. And then the revenues were coming down for 2 or 3 years. So -- but I have no idea I took my eye off the ball. What happened? Is it a new device?
Paul Herendeen
Well, it's an easy question, because it shows you the value of management. And, like you say, you have that business if you went back to 2016, when I first joined, if you looked at it, it was a business of saying, I'm not sure what -- like you're look and saying, of all the things we've got, here's this little thing that's pointed in the wrong direction. Honestly and I think we've disclosed this, I'm sure we’ve disclosed this publicly. We will be public now is we look to sell it. And there were not a lot of attractive track of bids for the business. And the bids that did come in, we kind of looked and said, this business has not been managed. And by the way, that was a theme within our company. We had a lot of business units. So we're not especially well managed. So this business is up and managing. So Tom Appio runs B&L outside the U.S is a guy who with a lot of contacts, he went out, he said I've got this fellow Tom Hart and we should put him in charge, it wasn't putting Tom in charge -- Tom Hart, but it was also then supporting him with the kind of investment that he needed both in building out his sales and marketing infrastructure. But incredibly importantly, like stabilizing the manufacturing, build out digitally healthy R&D and ensuring that business was invested in a way that they had a chance to succeed. But all that starts were having a great name like Tom Hart with great vision. And like I said, you didn't notice it a few years ago, because you wouldn't notice it. It's important to notice it when it started to grow like a bad weed based on the real good work of Hart's team.
Unidentified Analyst
Can I just get a little bit more commentary because I'd like to run with that? You said that it was a common theme of not having well managed units back in the day. Is that just because it was just set up for M&A or that's the only thing that first comes to mind?
Paul Herendeen
Well, all I can tell you is I mean you guys -- you watch from the outside as I did before I got here and said the other company was -- the company was built on series of acquisitions and for as an outsider looking in, whenever anybody asked me about value, yes, I often said it's you got all these businesses you put together. Some are very attractive businesses, but I didn't see from the outside that there was any story about how you put them all together, and then optimize and get -- and maximize the value of each one of those businesses. And all I could see from my position coming in was, yes, we had an eye health business with vision care business with contact lenses were the whole market was going to daily silicon hydrogel lens and there wasn't one in development in 2016. I mean, how can that be?
Yes, so we did about doing that. But I think the other way about it is in the United States our vision care business was declining quarter after quarter after quarter, when Joe took the reins back in the early part of 2016 towards the latter part of 2016, another guy in the name of -- a Board in charge of that business, and I'll tell you what, it took him a while to find his feet. And it took us a while to support him with the kind of investment he needed. Once Joe Gordon got used to it there, you started to see -- we started to call out on our quarterly calls, quarter-after-quarter of organic growth in the U.S. And like, I mean, the U.S vision care business for the last several quarters, even in [technical difficulty]. It's just a testament to that team.
So all I'm saying there is I'm comparing what are we doing with the assets we own versus what are the prior regime do and I just admit we are fundamentally growing the value of those assets by appropriately investing and providing resources where they're able to produce productivity in terms of revenue, increase profit, increase cash flow, where I'm not sure what the fellows were doing before -- what we hear about, I know what we're doing.
Unidentified Analyst
Fair. I like that. So one thing before we leave Solta, again, it's been called out a few times lately, but as I thought about it preparing for this call, it seemed to me that the same logic that applies to eye care applies to Solta and perhaps more so than if it's valued at an even fancier revenue or earnings multiple, there's a -- whatever the opposite of gravitational pull at work there.
Paul Herendeen
Yes, it -- yes, I see where you going here, David and I would submit that yes, I mean, I think outsiders looking in at our company because we are a collection of a variety of assets. We try to be transparent, we try to show you as much as we can. But you don't see Solta in isolation and understand what it could be, I would submit that equity investors and debt investors are looking at the value of that asset, don't value what it's worth in its sum of the parts. That entity went from being one that was worth a little bit to in this environment, in the type of business it is and in a way it's tracking and the opportunities that are funded, it's a very valuable business. No question about it.
Unidentified Analyst
So you highlighted back in August, that there would be just synergies. Could you give a sense of how much work and money and effort blood sweat and tears went into putting these things together? I presume getting synergies, I presume sharing IT and resources management and R&D, and I don't know what else. So every time there's might be something else that gets suffered, there's going to be more synergies there would be, right?
Paul Herendeen
Well, there could be. I think the way we're looking at today and I think what you're referring back to is, we kind of called out and said, okay, if we separated with the assets we have today, our guesstimate at the time which we haven't changed, it was circa $150 million of aggregate to synergies, of which 60% or so would attach to the eye health business and the balance to RemainCo. That's a fact of life. We share a lot of systems. Yes, we share you -- we submit that we are a pretty leanly managed organization generally, we're pretty proud of our efficiency and how we deploy capital. But when you split something in two, the easiest example, you split your IT system in two, it's not half of what you spend in one company. It's a pretty big step up that if you add those two things together, your goal is to make it not be one plus one equals two. It's one plus one equals 1.5, 1.6, but yes, that's an example there, the synergy is unavoidable and in any material. And yes, a lot of blood sweat and tears is going into the process of architecting. What does each organization look like? You're building out organizations, but each is ready to rock and roll. Would it be the case that when we're ready to roll here? By the end its completed, everything going to be perfect? No, but we'll be ready.
Unidentified Analyst
Okay. I've got a few more, but I'm going to turn on what's popping up on my screen here. Compliance and I'll read. The first one is what we think verbatim. Do you plan to complete any refinancings in the market, in the high yield market before all the moving pieces of the strategic review fall into place?
Paul Herendeen
Yes, I mean, it just specifically state what our financing plan -- what our financing plans may be, but I just I'll answer with the statement that says, I think you will agree with me that as we've gone out to complete all of our debt financings, we've tried to do so at a point in time where all of the relevant facts were known to all the party so that everybody kind of knew what was the state of play? Right now, yes, we have a lot of balls in the air. And so there's some uncertainty, but as those play out, I mean, we may well come back and prior to separation, look to complete a financing. But again, not going to outline what our specific needs are right now, but please, I hope you'd agree, I hope the market would agree. Our intent is always to provide all of the information so that if we go forward with our financial transaction, everybody knows exactly what's up.
Unidentified Analyst
Yes. I wonder if we're a rating agency would fit into that, because that's not entirely within your control. But once the game plan is laid out, an investor in a new bond I guess want to know how the agencies come out on the RemainCo?
Paul Herendeen
Sure. And as you know, I mean, our relationship with the rating agencies, I think is quite good. And that's -- it's quite good, because we endeavor to meet with them frequently, at least quarterly and keep them apprised of what our plans are and of course, we have confidentiality with them. So they know that, at the most. Yes, what our plans are, we can evaluate what they're thinking about what our plans and so yes, it's really an important consideration. But I think, without choice being off on a third party, I think go back and say from just a perspective, it's like, we want market participants to understand exactly what's upfront raising that capital.
Unidentified Analyst
Okay. Let me go back to -- should I pick. So a question here about XIFAXAN concentration. When considering asset sales -- this is actually pretty sensible, I think. When considering the asset sales is the concentration of XIFAXAN at RemainCo part of your calculus?
Paul Herendeen
I mean, of course, XIFAXAN would be an important part of RemainCo. We talked a little bit, I think a little earlier about how important it is. Is it so sure? I mean, you're looking at RemCo having it this one asset that will date certain, lose exclusivity at the beginning of 2018. Once you look at the balance of the portfolio, what do you have? I think -- the way I think about this is just going to come a day 2028 sounds like it's quoting one of the market participants from an earlier meeting. 2028 sounds like it's a long way away, it's not. Right around the corner -- and it feels like it's right around the corner. And I would assure all parties that we look out and we look at when we're thinking about RemCo. When you look out, you say what you want to be is you want to have a vision of what RemCo looks like in 2028. And that's important both from the perspective of RemCo in thinking about its value, in its ability to do accrete value from an equity holders perspective, and secondarily having a capital structure at that moment in time, that fits what that company becomes in 2028 with the loss of exclusivity of XIFAXAN. So, yes, of course, it's part of the calculus when you think about potential divestitures of any asset.
Unidentified Analyst
Okay. I always like to ask of companies that have active investor dialogue and conferences. Any learnings from your recent conference presentations, your post order slate of investor meetings? Do you think people are excited about something, misunderstanding something? What's your general sense?
Paul Herendeen
Well, of course, I mean, this last quarter we have -- we are welcoming two new Board members from Carl Icahn's Group. And so that that's had a fair amount of attention and people ask me, what -- how do you think about that? And I'll tell you the way I think about it is, first, I think it's terrific that someone that an investment group, that caliber elected to take a stake -- the size of the stake they took in our company, because they see the value in a very, very similar way to the way we see the value and the value for -- meaning, the value today is still not what the value could be tomorrow, and I think that welcoming them on the Board, I'm always interested in the insights of smart people. I think we always have a lot of very good investors that are concentrated in our shares, they share their thoughts and we love to hear them because you can always learn something. I'd love to say that the situation we find ourselves in is one where it's also clear that this is the road that we should go down. The facts are that I don't think there is any single comparable transaction to what we're going through right now to try to unlock this value. And so the insights from any external parties are quite valued. We have some investors that are not public, who we speak to not publicly like, I'm not going to call them out, that we speak to that man, some of the advice that they provided to me has been very helpful in framing various ideas, and so that input all gets baked into. So there's been a lot of in the wake of the announcement of adding two new Board members, we had a lot of that.
On a different -- from a different front and this is -- I know this a debt conference, we're going to talk about the equity value for a second. I think what's most interesting is I think that the folks that we've talked to most recently, are really starting to come around to the idea that this eye health business, the one David, you don't want to talk about, but I do. The eye health business is going to attract from an enterprise value perspective is way more valuable than people were kind of giving us credit for 4 or 5, 6 months ago.
I think when we announced back in August of last year that we want to stand up the eye health business and spin it out, people's reaction was oh, okay, so here's their business and they slapped, I'll call it a modest multiple on it above our trading multiple but a modest multiple on it. It said, well, that's worth in, okay, but I don't see it as like, I'll tell you what the comparables for that business traded very, very high multiple, not going to call, you can look it up. Traded very high multiple in, you start to ask the question, I'm starting get the feedback is that, why would our eye health business trade at something like the low end of a range? And the answer is, it won't.
And the reason why it won't is because our business is a darn good business. I almost swore there. It's a darn good business that has great growth prospects and it's somewhat unique and it has all four legs of the stool. It's got a great consumer business, a vision care business, a surgical business, an Ophtho Rx business, it is positioned to go from number four in a four player market globally to being a pretty interesting company. So why would that trade at the low end? And I think people are starting to come around to the idea that is, it probably won't trade at the lowest.
Unidentified Analyst
Yes, well, don't get me wrong, I work with Chris and it's all help tell the story on the entire separation in the some -- the value. It's just that we know, we're going to quote sell it for three or four times. And that's all we're going to get. So even if you cure cancer, that's not for our account. Unfortunately.
Paul Herendeen
We just -- just got to make sure that we also focus on that on -- I know, we're running short on time here, but focus on what RemCo looks like. Set the leverage aside because we'll have to do it in a way that it can handle it. RemCo, damn good business, I swore there. I didn't mean to [multiple speakers].
Unidentified Analyst
We're almost going to have to cut you off. But let me get this one last investor question and that is, are the banks entitled to the asset sales and dividend from Spinco?
Paul Herendeen
Entitled? I don't know that the specific answer to say is it mandatory. Just suffice it to say that if we're spinning -- excuse me selling assets, it's highly likely that the net proceeds would be used to reduce debt. That’s …
Unidentified Analyst
Cool.
Paul Herendeen
… I'd have to go back and look to see the specific answer to that question, I apologize.
Unidentified Analyst
No worries at all. Paul, I think we've landed this right on the 35 minute mark. So maybe we'll have you back next year, but it'll be a different dialogue, I think.
Paul Herendeen
Right. Yes and I hope it's in Miami.
Unidentified Analyst
Thank you Paul for your time always.
Paul Herendeen
Thanks, all.
Question-and-Answer Session
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