Bausch Health Companies Inc. Q1 FY2022 Earnings Call

Good morning. Welcome everyone to our first quarter 2022 earnings conference call. Participating in today’s call are the Chairman of Bausch Health and Bausch + Lomb’s CEO, Mr. Joe Papa; new CEO of Bausch Health, Mr. Thomas Appio; and the new Chief Financial Officer of Bausch Health, Mr. Tom Vadaketh. Before we begin, I'd like to remind you that our presentation today contains forward-looking information. Our actual results may vary materially from those expressed or implied in our forward-looking statements, and you should not place undue reliance on any forward-looking statements. Please refer to our SEC filings and filings with the Canadian Securities Administrator for a list of factors that could cause our actual results to differ materially from our expectations. We use non-GAAP financial measures to help investors understand our ongoing business performance. Non-GAAP financial measures may not be comparable to similarly titled measures used by other companies and should not be considered along with, but not as alternative to, operating performance measures as prescribed by the GAAP. You will find reconciliations to our non-GAAP measures in our appendix of the presentation online. Finally, the financial guidance in this presentation is effective as of today only. We do not undertake any obligation to update guidance. I would like to take a moment to remind you that the first quarter results are the fully consolidated results of Bausch Health, covering the quarter ended March 31st, before the IPO of Bausch + Lomb, which is scheduled to close this morning, subject to customary closing conditions. Our discussion today will focus on Bausch Pharma and Solta and we will briefly comment on Bausch + Lomb's results disclosed in its IPO prospectus. Bausch + Lomb will file a separate 10-Q within 45 days after IPO pricing and will host a separate earnings call in conjunction with the filing. Please note that the results of the B&L segment presented here today will differ from the results presented in the stand-alone financial statements of Bausch + Lomb as those stand-alone state results include certain corporate and shared costs that are allocated to Bausch & Lomb, which are not included in our B&L segment results. With that, it is my pleasure to turn the call over to Joe.

Thank you, Christina, and thank you, everyone, for joining us today. With the initial public offering of Bausch + Lomb’s scheduled to close today, Bausch Health begins the journey towards the separation of its global pharmaceutical and eye health business, an important step that we expect will help unlock the value in each of our established franchises. Before I start, I would like to thank the 20,000 Bausch Health employees around the world for their ongoing contributions to simultaneously move forward with our strategic alternatives process, advance our R&D projects and drive business performance that helps to improve people's lives around the world. As part of our planned succession about Bausch Health management team, Tom Appio will lead the new Bausch Health into its next chapter as Chief Executive Officer. Tom's extensive experience in pharmaceuticals includes more than two decades at Schering-Plough and 12 years in Bausch Health, where the B&L International business delivered significant top line and bottom line growth under his leadership as President and Co-Head. Tom Vadaketh succeeds Sam Eldessouky as the new Chief Financial Officer of Bausch Health, with over 30 years of financial leadership experience in several industries and companies, both public and private, including Tyco, Procter & Gamble and Cambrex Corporation. Tom's experience in the successful spin-off of Tyco subsidiaries will guide the separation process. Sam began serving as the Chief Financial Officer, Bausch + Lomb today, May 10. We are confident each organization will benefit from a dedicated focus on our respective verticals that will feel innovation to address significant unmet medical needs. On Page 6, let me provide a quick update on our strategic alternative process and the B&L IPO. We launched the initial public offering of 35 million shares of Bausch + Lomb last week equivalent to 10% of shares outstanding, generating gross proceeds of approximately $630 million, which will go towards the repayment of Bausch Health debt upon closing. Given current market conditions, we decided to proceed with a smaller IPO offering than we originally intended. At IPO closing, Bausch Health will own a 90% majority stake in Bausch + Lomb. Bausch Health will have the flexibility to monetize approximately an additional 10% of Bausch + Lomb shares to decrease debt and for the benefit of Bausch Healthcare shareholders. Remaining 80% will be distributed directly to Bausch Health shareholders following the expiry of agreed-upon lockups and the achievement of our target net leverage ratio of 6.5 times to 6.7 times subject to shareholder and regulatory approval as noted on Page 7. We remain patient with Solta and wait for better market conditions for its IPO. Solta Medical is a valuable asset and has the potential to grow in the double digits driven by healthy demand for aesthetic products and services. Both the CEO Scott Hirsch will report to Tom Appio going forward. Before I turn it over to Tom, I'd like to make three points. First, since resolving the legacy US class action security litigation in 2019, we have reached mutually agreeable settlements with a meaningful portion of the Opt-Out and have 21 matters remaining. We disagree with reports in the media regarding the characterization as potential risk and dispute the claims and the remaining individual Opt-Out complaints. We believe we have viable defenses in each of these actions, and will continue to vigorously defend ourselves. With respect to the evaluation of the 21 remaining Opt-Out cases, as publicized by the plaintiffs, we disagree with any suggestion that these cases have greater value than the class action and have taken provision for these remaining Opt-Out cases. Second, I'd like to comment on a few items that have been raised recently in the public and reiterate our confidence position we have previously stated. One such item are various allegations made by the Opt-Out plaintiffs in the securities case, which we disagree with. We have stated this before, but I think it's important to reiterate. Bausch Healthcare is and will continue to be fully compliant regarding the debt covenants as we go through the strategic alternatives process with the IPO and spin-off of Bausch + Lomb. The entire company, together with multiple legal advisers in the US and Canada, accounting and valuation advisers and our banking advisers have done a tremendous amount of work over the past 18 months to get to this point. One of the final steps in the process we are committed to about Bausch Healthcare achieving the leverage target we set out with for 6.5 to 6.7 before spinning off Bausch + Lomb. And with respect to the XIFAXAN Norwich trial, as you know, we had our trial in March of 2022. Our evidence went in well, we remain more confident in the strength of our intellectual property today than before the trial and therefore, in our chances of a successful outcome. Finally, I want to comment on the B+L business and our recent roadshow activities. Over the past few weeks, Sam and I had a chance to meet with many investors and analysts to share the B+L story. B+L fundamentals are strong and the business continues to show strong momentum with 5% organic growth in the first quarter of 2022. We continued to see the favorable impact of mega trends that we expect to continue to drive the Bausch + Lomb business in the future. As a final comment today, we are reaffirming our top line guidance of 4% to 5% organic growth for the full year 2022. With that, let me turn it over to Tom.

Thank you, Joe, and congratulations on Bausch + Lomb’s IPO. It is a privilege to lead Bausch Health as it enters a new chapter. I look forward to working with our Chairman, Joe Papa; and our future Chairman, Bob Power, who will assume his role upon Bausch + Lomb’s full distribution and the rest of the Bausch Health management team. Before I speak about Bausch Health, let me say that our thoughts are with those affected by the Russia-Ukraine conflict. Each of our 76 employees based in Ukraine is safe and accounted for. We have dedicated resources to address the humanitarian crisis in the country through multiple channels, including collaborating with GlobalGiving, a non-profit organization for an employee donation program to support affected communities. Bausch Health is a global organization with an energized and talented team and a well-established platform for scientific innovation and proven success in the commercialization of health care products. We have a global organization with a presence in approximately 90 countries. We have a differentiated pharmaceutical portfolio across multiple high-growth therapeutic areas. We have a global medical aesthetics business in approximately 50 countries. We have strong cash flows supporting delevering and investment in pipeline opportunities. We have the ability to leverage global infrastructure to pursue a robust business development agenda. We have a seasoned leadership team with a track record of driving profitable growth. Our diverse portfolio spans more than 600 products across multiple therapeutic areas, including gastroenterology, hepatology, dermatology, and neurology. Our team has built a strong foundation that positions the company for continued success. Our specialty sales force is instrumental in the success of our well-known established franchises led by XIFAXAN, which is recognized for its strong efficacy in treating IBS-D and hepatic encephalopathy, also known as HE. We continue to leverage our primary care sales force to maximize opportunities for the products in our GI franchise through better market access and commercial strategies, we have grown TRULANCE into a $100 million-plus brand. We are laser focused on accelerating the growth of our existing pipeline and with our commercial platform, we are well-positioned for business development and partnership opportunities. We are committed to making our products accessible to patients around the world, our pricing strategies balance access, affordability, and the ability to invest in future medicines. We advocate for payers to expand access to our products and provide patient assistance wherever possible. We recognize different economic realities require the use of flexible approaches for market access and these efforts made it possible for more patients to benefit from our drug therapies. We have continued to strengthen our governance framework. We have separated the Chairman and CEO roles. Our Board consists of talented directors with valuable industry and functional experience. I want to personally welcome Dr. Robert Mulligan, currently a Professor of Genetics at Harvard Business School and a former Director of the Harvard Gene Therapy Initiative. Under the guidance of our Board, we will establish a strong framework for creating value for our stakeholders, operating agility, and continued commitment to the highest standards of ethics and integrity. Lastly, we are committed to building a culture of performance and accountability, as going forward we'll focus on people, products, and processes. Finally, and let me briefly comment on Q1 performance. First quarter organic growth was stable compared to the first quarter of last year with sales of $1.9 billion despite incremental macro pressures and a challenging supply chain environment. Q1 was also impacted by the divestiture of our Amoun business in July of 2021. Adjusted EBITDA for the quarter was $732 million, down 13% versus Q1 last year on a constant currency basis, driven by higher investments in sales and marketing and R&D, which we believe will strengthen our business for the future. The separation of Bausch + Lomb enables us to increase our ability to grow the pharmaceutical/Solta businesses with focused commercial investments while expanding our product pipeline with innovation. I want to thank the team for all their hard work and dedication to get us to this point. With that, let me invite Tom Vadaketh, to provide a financial update for Q1 and our outlook.

Thank you, Tom, and good morning. We appreciate everyone who has joined us on this call. Before I start, please note that my comments on revenue today will focus on organic revenue, which excludes the impact of foreign exchange, divestitures, and discontinuations. Consolidated revenue for the first quarter was $1.9 billion with flat organic growth compared to the prior year. First quarter revenues for Bausch Pharma and Solta were $1 billion, down 3% on an organic basis versus last year. This was driven by a low single-digit increase in average price, offset by lower volume. The first quarter was a challenging environment with the Omicron resurgence impacting primary care and nursing home capacity in the US as well as the resulting COVID lockdowns in China. Geopolitical tensions have created ripple effects on an already tight supply chain, contributing to inflationary pressure on input costs. Navigating these challenges requires increased focus and agility as we safeguard the supply of our products. Let me provide more details on each of our segments. You can refer to Slide 9 for a summary of our sales results. Starting this quarter, we will report sales under our new reporting segments: Salix, International, Diversified Products, Solta Medical, and Bausch + Lomb. Please see Slide 34 for a quick guide. Salix revenues of $464 million were down 2% compared to the first quarter last year, following a record high fourth quarter. The reduction was partially due to lower volumes related to the loss of exclusivity for certain products. The year-over-year decline was also related to the non-recurrence of favorable wholesaler inventory rebalancing in the first quarter of the previous year, which we estimate impacted the year-on-year revenue comparison by approximately $50 million. XIFAXAN sales increased in the low-single digits, and TRULANCE sales grew in the mid-teens on healthy volumes. The Omicron surge in the US slowed TRx growth, prompting us to increase our digital marketing investments behind XIFAXAN to accelerate growth and continue market share gains. On page 12, you can see that the key Salix brands continue to gain market share. International delivered first quarter revenues of $244 million and organic growth of 8%, excluding the impact of divestitures, discontinuations, and foreign exchange headwinds, primarily related to Amoun. The growth was driven by continued strength in Canada and EMEA. Our international business is highly diverse, with a durable portfolio of over 500 products, with no single product accounting for greater than 10% of segment sales and no risk from potential loss of exclusivity. Turning to diversified products, which now includes the Ortho Derm business, first quarter revenues of $249 million were down 16% compared to last year. WELLBUTRIN and APLENZIN reported a combined 14% increase in revenue driven by net realized pricing. Our neuro business was down 17% due to unfavorable comparisons arising from the COVID-related demand last year for PEPCID, ATIVAN, and MYSOLINE. Our generics business was down 24%, primarily due to new competition. Dermatology sales were down 13%, while dentistry remained flat. Lastly, Solta Medical's revenue was $72 million, flat year-over-year due to COVID lockdowns in China, which accounts for about one-third of Solta's business, along with a shortfall of critical components in the first quarter. We estimate these two factors impacted growth by about 17 percentage points in the first quarter. We expect these issues to persist into the second quarter and are focused on resolving the microchip issue. We anticipate the COVID lockdown in China to abate as the year progresses. Our revised guidance for full-year revenue now reflects this temporary impact on growth. The business is well-positioned for attractive growth rates, and we will continue to focus on maximizing shareholder value. I would now like to provide brief commentary on Bausch + Lomb. The first quarter is fully consolidated with B+L's results. Bausch + Lomb's revenues of $889 million were up 5% organically, in line with our 4% to 5% organic growth guidance for full-year 2022. The strong momentum heading into 2022 led to solid performance in the first quarter, enabling us to overcome softness due to COVID-related lockdowns in China and currency headwinds of $29 million for the quarter. We continue to see mega trends driving the stability of this business and expect this dynamic to support growth for many years to come. Adjusted EBITDA was $170 million for the quarter, representing approximately 9% of sales for R&D expenses, reflecting our commitment to continue investing in the business and launching new products. Growth for the quarter was led by the Global Surgical and Vision Care segments. In the Surgical segment, we witnessed strong demand for consumables and IOLs as the market addresses the COVID-related backlog and the number of procedures continues to rise. The Vision Care segment, which now includes contact lenses and consumer products, continues to show growth momentum in key franchises such as eye vitamins, LUMIFY, and BioTrue. The ramp-up of Daily SiHy lenses is contributing to this growth. During Q1 2022, we launched Daily SiHy in 14 different markets in Europe and Malaysia, and we expect global rollout to continue with another 10 countries this year and the launch of multifocal lenses later this year. In the Ophtho Rx smart business, we are excited about the recent launch of XIPERE in late March, viewing this as a first step in transforming the portfolio. We expect two additional products, NOVO3 and Lucentis biosimilar, to launch in 2023, which we see as catalysts to accelerate growth. Vyzulta TRxs were up over 40%, and international Optho grew organically by 16% in the first quarter. A summary of our market share performance can be found on Page 17. Turning to the consolidated P&L for the quarter, I will focus my comments on non-GAAP results on Page 19. First quarter adjusted gross margin decreased 40 basis points compared to last year, driven by significant inflation in freight, energy, and other input costs influenced by current market conditions. We began experiencing inflationary pressures in late 2021, which have since intensified due to the Russia-Ukraine crisis and the lockdowns in China. Adjusted operating expenses for the first quarter were $705 million, an increase of 6% on a constant currency basis compared to last year, driven by higher selling expenses to invest in the business and support product launches as well as R&D spending. R&D expenses were up 14% on a constant currency basis and represented 6.6% of product sales, compared to 5.5% last year, as spending returned to pre-COVID levels in Bausch + Lomb and Salix. Adjusted EBITDA was $732 million for the quarter, down 14% compared to last year, with an adjusted EBITDA margin of 38%, down from 42% last year, with half of this decline driven by higher selling expenses and one-third due to increased R&D costs. Now, let me discuss our balance sheet. We used $63 million of cash from operations on a GAAP basis, impacted by legacy legal settlements. After excluding these settlements, adjusted cash flow from operations is $325 million, down from last year due to the timing of payments. We ended the quarter with net debt of $23.4 billion for Bausch Pharma after repaying $200 million of senior secured term loans using cash on hand. The Bausch + Lomb IPO resulted in gross cash proceeds of $630 million before underwriting costs. Concurrent with the IPO, Bausch + Lomb also anticipates closing on its new debt issuance today, raising $2.5 billion in new term loans. In addition, BHC raised $1 billion from a new secured bond offering in January 2022, and our cash balance at the end of the quarter includes proceeds from this offering. The net proceeds from the IPO and the debt raise, along with the secured bond proceeds, will reduce debt by $3.4 billion since the end of the quarter, decreasing the debt for unconsolidated Bausch Pharma from $23.4 billion at the end of Q1 2022 to approximately $20 billion as of today. In January 2022, BHC entered into a new credit facility with $2.5 billion in new term loans, which is closing today. With the expected closing of these transactions today, we have made significant progress in reducing our debt and extended the maturity profile of our debt obligations through 2025 by approximately $6 billion. Following these transactions, our debt is approximately 85% fixed, and we currently do not have any maturities until 2025. We will continue to optimize our capital structure while retaining flexibility to invest in the business. It is important to note that post-IPO, Bausch + Lomb's cash flow will not be available to the rest of Bausch Health. Bausch + Lomb is required to remain a restricted subsidiary of Bausch Health under its debt instruments until Bausch Health achieves the required leverage ratio under the bank facility and fixed charge coverage ratio under the bonds. As a result of the lower proceeds in the IPO and less deleveraging than initially expected, we are not yet able to unrestrict P&L. However, as of May 10th, it is no longer a guarantor of Bausch Pharma's unconsolidated debt. We believe that B+L's status as a restricted subsidiary will not materially affect its ability to operate or implement its business plan. From a capital allocation standpoint, deleveraging remains a priority for our combined Bausch Pharma and Solta business. We will also invest to grow the business both organically and inorganically. Given the high cash flow conversion rate of the business, we have the ability to improve our net leverage ratio by approximately 0.75 turns per year while continuing to invest in R&D projects that promise attractive returns. Now, let me discuss our outlook for the year. We are reaffirming our outlook for organic growth for the total Bausch Health business of 3% to 5%. Our revenue guidance on a consolidated basis is projected to be between $8.25 billion and $8.4 billion. On an organic basis, we expect Bausch Pharma to grow 2% to 3%, B+L 4% to 5%, and Solta 2% to 5%. Given that the B+L IPO is expected to close later today, we will provide limited guidance for the Bausch + Lomb segment moving forward. Bausch + Lomb will provide such guidance when appropriate once the IPO closes and in compliance with applicable law. On a consolidated basis, we expect to generate adjusted EBITDA of $3.225 billion to $3.375 billion for 2022. This outlook accounts for higher foreign exchange and ongoing COVID impacts similar to those experienced in the first quarter of 2022, along with post-IPO dissynergies now that B&L has gone public. At current rates, we anticipate total FX pressure of approximately $230 million relative to 2021, equating to an incremental FX impact of about $135 million since our February guidance. The FX impact on full-year adjusted EBITDA is estimated at $50 million, an incremental $20 million since February guidance. Our guidance assumes that the China lockdowns will continue through the second quarter and that inflationary challenges remain in the near term. We expect slow recovery in healthcare capacity in the US will dampen TRx growth in the near term, and our commercial strategy this year will implement new methods to support patient needs in this environment. We anticipate a full-year gross margin of 71.5%, compared to 72% previously projected, due to product mix and net inflation. We continue to explore ways to counter these pressures through operational efficiencies while making our products affordable and improving market access. We will continue to invest in the business, with R&D and selling and marketing expenses anticipated to grow this year following last year's significant spending reduction. Additionally, we estimate full-year dissynergies of $150 million on a run-rate basis. Following the IPO of Bausch + Lomb, we will begin incorporating these costs into our non-GAAP results starting in Q2, with an estimate of $100 million in dissynergies for the remainder of this year. For consolidated interest expense, we expect $1.48 billion for the full year due to higher debt costs, partially offset by savings from debt paydowns. Please note this interest expense forecast includes interest from the new $2.5 billion B&L term loans closing today. Assuming no further capital markets or debt transactions, we expect to generate $1.55 billion in cash flow from operations. Before I conclude, let me update you on how our financial reporting will change as we prepare for the spin-off of Bausch + Lomb. Going forward, we will consolidate B&L's results and report a majority interest to reflect our 90% stake until we complete its distribution. After distribution, we expect to report Bausch + Lomb as a discontinued operation. Now let me turn the floor back to Tom Appio for concluding remarks.

Thank you, Tom. It is great to have you on the Bausch Health team. Before I wrap up, I want to wish the Bausch + Lomb team tremendous success. Having worked with this team closely for 12 years, I am excited to see our talented team lead the independent Bausch + Lomb in its next chapter of growth and success. Looking forward, Bausch Health is moving with a sense of urgency to drive near-term growth while supporting our long-term strategic priorities on Slide 32, which I would like to elaborate more in detail. Firstly, we will drive growth through operational excellence across the enterprise. We continue to believe that Salix and International will be growth engines for our company. Our anchor brand of XIFAXAN is best positioned for incremental growth with increased investments intended to further raise awareness of the clinical unmet need in IBS-D and HE. We recognize the pressure on the US healthcare system to safeguard the standards of care for patients as hospitals and nursing home facilities navigate ongoing capacity and staffing challenges. XIFAXAN provides a clear health care solution for reducing rehospitalization patients with HE, reducing pressure on an already overburdened healthcare system. Evidence of commercial excellence is seen in our ability to drive results with RELISTOR, TRULANCE, and Jublia, where we have realized increases in market share with targeted market access wins and direct-to-consumer investments. We will leverage our international commercial scale by launching 45 different products across 50 markets within our International segment. We will increase focus on operational efficiencies through effective portfolio and life cycle management. We also see good potential to stabilize our cash-generating business of derm, neuro, generics, and dentistry. In the second half of 2022, we believe our Solta business will see the recovery of procedures in Asia Pacific, availability of inventory, and continued market expansion in Europe. Second, we will intensify our focus and operating rigor behind R&D and business development. We know that building our pipeline through both effective R&D and strategically is crucial to the long-term health of our company. We have been investing in middle and late-stage clinical trial development for unique novel rifaximin formulations to address GI, HE, and sickle cell anemia, as you can see on slide 31. Our clinical studies for IDP-120 and IDP-126 for patients with acne met their primary and secondary endpoints, and we are currently preparing the next steps for regulatory approval. We are also advancing our research of amiselimod for mild-to-moderate UC. Third, we will cultivate a high-performance, results-oriented culture. Already, we are feeling the energy that comes from our renewed focus. We are going to continue to create a sense of urgency, ownership, and accountability and really build a fit-for-purpose organization. Finally and fourth, we will progress our strategic alternatives and deliver shareholder value. This has been a key priority for Bausch Health in the past and will continue to be a key priority going forward. We have an attractive cash flow profile. We will utilize cash generated from operations to improve leverage. We have the flexibility to monetize an additional 10% remaining stake of B+L equity and launch Solta's IPO when the market conditions are right as we target a net leverage ratio of 6.5 times to 6.7 times as we previously committed. As the past two years reinforce ongoing engagement with all our stakeholders is critical to operating a business that is agile enough to keep pace with the world transforming at an unprecedented pace. We will be laser-focused on these priorities as we build Bausch Health for the future. Before we open up for questions, I'd like to take a moment to highlight that we will endeavor to reach out to many of you in the coming months as part of a comprehensive IR effort. For future programs, please visit our events for more details or contact Christina Chang, our new SVP of Investor Relations. With that, let me turn the floor to the operator for questions.

Thank you. We will now begin the question-and-answer session. Today the first question comes from Ken Cacciatore with Cowen & Company. Please go ahead.

Hi, thanks everyone. Congratulations as you continue to move forward. So my question is you do have upcoming potential lawsuits. You mentioned, Joe, at one point, the Opt-Out. Wondering about XIFAXAN if there is a loss, and we know you could appeal if there was one, would that in any way hinder the spin or hinder the covenants? And then also, just wondering, I know it's difficult for you to speak to, but there's clearly a discrepancy in how the two shares are trading. Obviously, Bausch still retains 90%. Can you just talk about why this discrepancy is there? Anything that you'd like to comment on what might be causing this? Thanks so much.

Ken, it's Joe Papa. I'll take that question. I mean, let me start with respect to the XIFAXAN case in the Norwich trial. As I said in my call, comments, I do believe that what we presented, the evidence it went in well, we remain more confident in the strength of our intellectual property today than before the trial and therefore, in our chances of a successful outcome. Number two, I want to add to that comment. In addition to that, we have seen that the FDA put through an additional product-specific guidance on XIFAXAN, specifically in August of 2021, that has an incremental requirement for approval of XIFAXAN. For both of those reasons, we feel very confident in our situation with the XIFAXAN intellectual property, our expectations as I've stated. I will answer the questions as this hinder the spin. Obviously, we do not expect that the IP loss will occur. But if it did occur, it would have to have an influence on the timing of the spin as we think through this. But once again, I just want to repeat one more time. We have a high degree of confidence based on our expectations of how the trial went. I did see some additional public comments on this that supported that we would prevail. But certainly, we'll wait and get the answer in August. But at this time, our expectation is we will win, we will be able to move forward with the spin. On the question of the share price discrepancies within Bausch Healthcare and Bausch + Lomb, I think the comment comes down to part of what you asked. I do think that there are some questions that people have raised specifically in terms of some of the comments that I made in terms of how we're looking at and some of the Opt-Out claims that occurred by Opt-Outs. They made suggestions that potential claims against are more than the class action lawsuit. We do not see it that way at all. We have taken reserves for this. I do think that's one point. I do think that XIFAXAN was the other point. And then the final point was there was a question that came up recently on the Granite Trust. Once again, on the Granite Trust, we feel very confident in our position with Granite Trust. And I think that, that is the other question that was out there. But all of these, really, in my mind, are going to go back to the business fundamentals. We think there are strong business fundamentals as what Tom Appio laid out in the Bausch Pharma business. Clearly, what I said on the B+L business and going forward, we think the B+L business is going to be driven by a number of mega trends that we think are going to continue to both push us forward with good opportunity for growth. And as we said publicly, we are reaffirming where we are on the guidance of B+L now for the 2022 time frame. So all of those, I think, wrapped around and talk about why we see the upside from where we are today.

Yes sir. Our next question comes from Chris Schott at JPMorgan. Please go ahead.

Thank you for the question. Could you provide more details on the plan to separate? It appears that you need to generate revenue from the remaining 10% of the P&L IPO for Solta, and you would also require ongoing cash flow from the core business, if my calculations are correct. Considering the recent capital raises, are there any timelines you can share regarding when the company might complete this process? That information would be beneficial. Additionally, how do you view an IPO for Solta in comparison to potentially revisiting a sale process for that asset? This could impact your deleveraging efforts, and I'm curious whether you are committed to the IPO path or if there's flexibility to explore other options for that asset. Thank you.

Sure. Good question, Chris. Let's discuss the path forward on the spin. As outlined in the earnings presentation, several factors need to align for us to proceed with the full separation. First, the performance of the B+L and Bausch Pharma businesses will be crucial. Tom Appio has highlighted the strong cash generation of the Bausch Pharma business and the growth anticipated in the B+L business, which are significant considerations. Secondly, as the B+L business performs, Bausch Health will be in a position to monetize the remaining 10% of B+L shares to reduce debt, which will also be advantageous. The third point relates to the potential IPO of the Solta business. While I'm taking note of the sale suggestion, it's important to emphasize that all of our businesses remain options for decision-making. Currently, we believe pursuing the IPO is the best strategy going forward. However, it will depend on the combination of these three factors. I cannot provide specific timing details beyond what we've previously shared. We need to navigate the customary lockup periods following the IPO before taking any actions, and we also want to ensure that Bausch Pharma is at the appropriate debt levels of 6.5 to 6.7 times. Those are the additional comments I can share regarding the timing. We will continue to progress through this as efficiently as possible.

Yes, sir. Our next question today comes from Doug Miehm with RBC Capital Markets. Please go ahead.

Yeah. I just wanted to maybe delve into a bit more detail with respect to the change related to your inflation comment, COVID, foreign exchange. Is there a chance as we look out through the remainder of the year that we could see another change to your outlook for EBITDA, which is very important to you in terms of meeting all the requirements that you just mentioned for the distribution. And I'm just wondering, in those types of markets, you already indicated that Q2 is for Solta's likely going to be like Q1. But could this last through the remainder of the year and make it even worse?

It's Tom Vadaketh here, Doug. I'll respond to this question. We have included everything we currently see in our guidance. As you know, the COVID lockdowns in China have expanded, and now Beijing is entering a lockdown phase. We've assumed that this will ease in the second half of the year, which will naturally affect the Solta business. Regarding inflation, we've incorporated what we're observing. Inflationary pressures began to emerge towards the end of 2021. We've taken steps to mitigate this, including pricing adjustments and our supply chain team has successfully secured longer-term supply contracts to protect our bottom line. We will continue to do this to alleviate as much pressure as possible. However, there is a risk of facing additional headwinds, which is hard to predict, but we believe we have accounted for everything visible in our current outlook.

Okay. Great. I don't want to dwell on this, but regarding the 6.5% to 6.7% debt-to-EBITDA range you're aiming for to complete the distribution, our analysis indicated that you might reach that by the end of the year. However, with the reduced cash flow you are projected to generate, I suspect your ability to pay down debt over the next five months, by year-end, will be diminished. I'm curious if it's realistic to expect the distribution could occur this year given the anticipated lower cash flows, even considering the follow-on offering at B&L IPO and Solta IPO by year-end.

Sure. I'll address this, and Tom might want to add his thoughts. We are examining the valuation of the B&L secondary 10%, as well as the potential of the Solta valuation. Additionally, we are considering the cash generation from the Bausch Pharma business. All of these are important factors in our analysis. While I can't provide a specific timeline at this moment, we do see opportunities to continue reducing debt. The profitability of Bausch Pharma is quite strong, as Tom Vadaketh has pointed out, and that will help us in paying down debt. We believe all the necessary components are in place, and we will keep executing our business strategy as we look to the future. While I can't give a precise timing, there are possibilities for this to occur by the end of the year or early next year. Our timing will depend on Solta's situation, both now and in the future. So yes, earlier timing is possible depending on our cash flow and developments with Solta. Tom, do you have anything to add?

I want to emphasize that the fundamentals of the business remain very strong. The pharmaceutical division is expected to have EBITDA margins in the mid-50s range. Our unlevered cash generation and free cash flow generation are at 80%. I anticipate that these trends will continue. We have a fantastic team dedicated to ensuring these outcomes. However, regarding timing, I hesitate to provide a specific date.

I would say that the business generates a significant amount of cash, and our top priorities are paying down debt and improving performance. As Joe and Tom mentioned, we will concentrate on driving business growth while paying down our debt, and we'll see how that impacts us as we approach the second half of the year. However, we need to consider various factors, including COVID, the lockdowns in China, and the situation in Russia and Ukraine, all of which will influence our progress. We are definitely focused on delivering results in the second half.

Thank you. Our next question comes from Greg Fraser from Truist Securities. Please go ahead.

Thank you. Good morning. Just following up on the XIFAXAN patent case. You're clearly confident in your position, more confident than before. Can you comment on whether you've engaged in settlement discussions? Is settlement still a possibility? And do you have insight into whether or not it’s a generic candidate is compliant with the new bioequivalence guidelines? Thanks.

Those are great questions. While I can't discuss whether we are in settlement discussions, I can provide some insight from a broader perspective. First, our company holds 26 patents related to XIFAXAN, which demonstrates a strong case. TEVA, Sun, and Sandoz all chose to settle, indicating our solid intellectual property position. Secondly, the FDA released new product-specific guidelines in August 2021 that require additional data on bioequivalence. While I can't detail specific aspects of those guidelines, I can say there are differences in polymorphs and their absorption, and we have robust patents for polymorphs as well as use patents. I won't comment further on Norwich's product, but we believe the combination of our intellectual property and the new guidelines could raise questions for them as they move forward, especially since those guidelines emerged after their ANDA submission. Overall, we feel more confident now than before the trial, and that's the best insight I can provide at this moment.

Thank you. And our next question today comes from Gary Nachman with BMO Capital Markets. Please go ahead.

Hi, thanks. So again, on the Bausch Health, 6.5 times to 6.7 times leverage target to achieve that. What other levers might you have? Could B&L take on any more of the debt to effect the spin? Is that leverage target still less than 2.5 time you didn't mention that today? And any other divestitures that you think might happen in the near term to help generate cash flow? And then for Tom, talk about your flexibility for Bausch Health to do business development, if you carry leverage up at that level? And generally, how good you feel about the pipeline versus how much inorganic growth you might need for that business to really grow going forward? Thanks.

Okay, Gary. I'll take on the first part of the question. Tom can take the second. Relative to the 6.5 times to 6.7 times. I think I tried to answer the question of the company is we've got the opportunity for the business fundamentals. I think it's got to be first and foremost the answer for both the B&L business as well as the Bausch Pharma business. But specifically on Bausch Pharma, obviously, they've got some good opportunities. They're a very profitable business, generate a significant amount of cash. Number two on the question, could B&L take on more debt? I do want to be commented on that. We did take 2.9 times leverage, that is the leverage we took in light of the fact that we only went out with a 10% IPO. We made a decision to take being out to 2.9 times of debt leverage. So I just want to be specific on that. Tom, do you want to take the other part on the...?

So what I would say is that in terms of monetizing other assets, of course, we're a publicly held company, so we'll always look at ways to, if we can, to monetize assets that is good for shareholders. And of course, if we're able to do that, that then frees us up to do things with some of the cash. What I would say is from an R&D perspective and a BD perspective, clearly, we have opportunities, as I spoke about of our pipeline right now in R&D. I was just out at our R&D facility in California. It's a really great energized team out there. We have a lot of good projects that we're working on. And then we have established an entire BD and strategy team, and that is looking at tuck-in type acquisitions that we can bring into the portfolio. As I said in my prepared remarks, we have teams in 90 countries around the world. So depending on where it is, especially if we take a look from a US perspective or an international perspective, looking at the things that we can bring into the portfolio that will fit nicely into the commercial presences that we have. Of course, it will be a focus and a balance, but clearly, always looking at that balance to pay down debt, but also put products into the pipeline, which we have, as I said in my remarks of what we're going to be able to launch in international and bringing in products that we can put there. We are also looking at how we can bring products into, again, our US business to really maximize the value of our commercial capabilities.

Absolutely. And our last question today comes from Jason Gerberry of Bank of America. Please go ahead.

Hi. Good morning, everyone. This is Sian for Jason. Thanks for taking our questions. Maybe just a couple of follow-ups on the XIFAXAN IP case. Do you have a sense of a view on what the timing of a potential ruling could be? Typically, I think a ruling could come six to eight months after the trial conclude. I think for me sitting under trial, I think there was expected to be a post-trial brief due sometime early June. So if you can comment about the timing, that would be great? And then maybe just a follow-up on Ken’s earlier question about how in a scenario, if you were to lose the IP case how it could affect the spin. If I understand the commentary correctly, that last quarter view is that XIFAXAN case would not impact – wouldn’t have any impact on the spend regardless of the outcome. So curious about commentary on there? Thanks.

Okay. So I'll take the first part of it on XIFAXAN. The Norwich decision, we're expecting a decision in early August. So we're hoping that that's the time frame that we can see, so we can move forward from this but right now, that's what we're looking at from a decision standpoint. And then I'll let Joe address your second part to the question.

Sure. Regarding intellectual property, I want to reiterate that we believe we will prevail in this area. We have 26 patents and a strong case, and we feel more positive about it now than we did before the trial. Additionally, I want to specify that the FDA released draft product-specific guidelines in August 2021, which could impact the potential approval of the Norwich product. This is definitely another factor to consider. That said, if we were to lose the XIFAXAN case, which I do not anticipate, it could present an issue for us. We will keep monitoring the timing of this situation as it relates to our overall plans, and we will provide more updates if necessary. However, once again, we do not expect that outcome.

Thank you. I would like to wrap up today's call. I appreciate everyone for joining. As I mentioned earlier, Bausch Health is committed to driving long-term growth and enhancing shareholder value with a strong sense of urgency. I also want to express that we plan to engage with many of you over the next few months as part of a detailed investor relations effort. I am eager to have discussions about the Bausch Health business and the benefits we can offer to patients and shareholders. Thank you.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.