Bausch Health Companies Inc. Q1 FY2024 Earnings Call

Greetings. Welcome to the Bausch Health First Quarter 2024 Earnings Call. Please note this conference is being recorded. I would now like to turn the conference over to your host, Garen Sarafian, Investor Relations at Bausch. You may begin.

Good morning, and welcome to Bausch Health's First Quarter 2024 Earnings Conference Call. Participating in today's call are Thomas Appio, Chief Executive Officer of Bausch Health and John Barresi, Interim Chief Financial Officer. Before we begin, I'd like to remind you that our presentation today contains forward looking information. We ask you to take a moment to read the forward-looking statements disclaimer at the beginning of the slides that accompany this presentation as it contains important 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 administrators for a list of some of the risk 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 be considered along with, but not as an alternative to, measures calculated in accordance with GAAP. You will find reconciliations to our non-GAAP measures in the appendix of the slides that accompany this presentation, which are available on Bausch Health's Investor Relations website. Finally, the financial guidance in this presentation is effective as of today only. We do not undertake any obligation to update guidance. Our discussion today, Thursday, May 2, will focus on Bausch Health, excluding Bausch + Lomb. However, we will briefly comment on Bausch + Lomb's results announced yesterday. We will refer to year-over-year comparisons with the same period last year unless otherwise noted. With that, it is my pleasure to turn the call over to our CEO, Thomas Appio. Tom?

Thank you, and welcome to those of you joining the call this morning. We started 2024 on strong footing. Building on the momentum we established last year while maintaining our focus on operational excellence and our patient-centered mentality. We delivered another quarter of growth making our fourth consecutive quarter of year-over-year growth in both revenue and adjusted EBITDA. For the first quarter of 2024, revenues for Bausch Health, excluding B&L, were $1.05 billion, up $41 million or 4% on a reported basis and 5% on an organic basis. All segments delivered revenue growth on both a reported and organic basis when compared to the first quarter of 2023, led by Solta with 23% organic growth. Adjusted EBITDA for Bausch Health, excluding B&L, was $504 million, an increase of approximately 9% compared to the prior year. We also continue to make progress on our key R&D initiatives during the quarter, in line with our established timing goals. First, for Amiselimod, in April, we met with the FDA for an end of Phase II meeting and a Phase III planning meeting for mild to severe ulcerative colitis, UC. In addition, we were also pleased for Amiselimod to have been accepted for a podium presentation at Digestive Week on May 19th. Second, we completed enrollment for our second global Phase III trial for RED-C in late April, which is slightly ahead of our goal of completion by the end of the first half of 2024. And third, we are pursuing approval of CABTREO for Canada and anticipate this could occur in the second half of the year. Overall, we continue to feel good about the progress we have made on our R&D pipeline and are progressing according to the timelines we shared in February. Turning to our litigation with Norwich. On April 11, 2024, the U.S. Court of Appeals for the Federal Circuit affirmed the U.S. District Court of Delaware's August 10, 2022, judgment and also the May 17, 2023, decision that had denied Norwich Pharmaceuticals motion for modification of the court's final order. We are pleased that the Federal Circuit maintained the judgment preventing the approval of Norwich's ANDA for Xifaxan until October 2029. On April 5, 2024, we filed a patent lawsuit against Amneal Pharmaceuticals following the receipt of a notice of Paragraph IV certification stating that Amneal had submitted an ANDA to the FDA seeking approval to market a generic version of Xifaxan. This action formally initiates the litigation process under the Hatch-Waxman Act and triggers a 30-month stay of any potential FDA approval for Amneal's ANDA. As a leader in gastroenterology health, we continue to vigorously defend our intellectual property and are committed to advocating for the safety of patients who have benefited from continued access to Xifaxan. We look forward to continuing to serve our patients as every patient deserves better health outcomes and the chance to make the most of life. On the Granite Trust matter, we continue to expect the settlement with the IRS to be finalized in the coming months. As we have previously indicated, the anticipated outcome of the settlement does not have a material impact on the company's results or cash flows. We continue to focus on our balance sheet and liquidity and ended the first quarter with approximately $1.5 billion of liquidity. In Q1, we repaid over $300 million of debt including the $250 million of bonds with 2025 and 2026 maturities as noted on our year-end call. Turning now to the potential full separation of Bausch + Lomb. The full separation of Bausch + Lomb continues to be a strategic priority. We continue to evaluate strategies regarding the potential full separation, with the objective of ensuring that any transaction results in two appropriately capitalized companies. The outcome at the Court of Appeals in the Norwich matter represents a significant milestone toward the full separation of B&L. Any decision regarding if and when a separation occurs or its structure will be based on and subject to an assessment of all relevant factors and circumstances. Any potential separation will also be subject to shareholder and other applicable approvals.

Thanks, Tom. Hello, everyone, and thanks for joining us. We closed the first quarter with consolidated revenues for Bausch Health of $2.15 billion, up 11% on a reported basis and 8% on an organic basis over the same quarter last year. First quarter revenues for Bausch Health, excluding B&L, were $1.05 billion, up 4% on a reported basis and 5% on an organic basis over the same quarter last year with strong growth in Solta and low to mid-single-digit reported and organic growth in our other segments. Turning to segment revenue performance, starting on Slide 12 with Salix. First quarter Salix revenues increased $3 million on a reported basis to $499 million, driven by TRx growth in our key products, including Xifaxan 550, Relistor, and Trulance. Revenues grew $12 million on an organic basis, reflecting the impact of divestitures and discontinuations of certain non-promoted products. Xifaxan continued to represent over 80% of Salix segment revenues this quarter and saw strong growth in underlying demand. Xifaxan revenues in Q1 increased 8% compared to the prior year period. Retail prescriptions grew 3% in Q1 versus the prior year. We saw another quarter of solid growth in TRx for IBS-D and the long-term care channel for HE. Extended units grew 4%, which included double-digit growth in nonretail units attributable to outpatient clinics. Relistor delivered 10% growth over the prior year period with solid TRx growth of 3% and a benefit from favorable net pricing relative to Q1 of the prior year. Trulance revenues declined 7% year-over-year as solid TRx growth of 9% compared to Q1 of last year was offset by net pricing pressure. We also continued to experience meaningful net pricing pressure in our non-promoted portfolio in this segment. International revenues were $265 million during the quarter, an increase of 7% on a reported basis and 2% on an organic basis compared to the prior year period. Organic growth was led by Canada. The LatAm and EMEA were flat on an organic basis, LatAm was impacted by the timing of government purchases with private channel sales showing growth, while in EMEA, growth in key promoted products was offset by the effects of competition on certain of our non-promoted products. Solta Medical revenues were $88 million during the first quarter, an increase of 21% on a reported basis and 23% on an organic basis over the prior year period. Solta's growth was led by China and South Korea, and to a lesser degree, the remainder of Asia Pacific. Importantly, the U.S. returned to growth this quarter with a 14% increase in revenues over the prior year, and we are continuing to invest in our sales force and related tools to drive sustainable growth in this key market. Diversified revenues were $202 million during the first quarter, an increase of 3% on a reported basis and 6% on an organic basis compared to the prior year period. In Dermatology, revenue grew by 16% on a reported basis and 25% on an organic basis in the quarter over the prior year period, as we continued to focus on returning this business to consistent growth. Growth in the quarter benefited from favorable net pricing comparisons quarter-over-quarter, which we expect will moderate for the remainder of the year, while volumes for our non-promoted products continue to be pressured. As Tom noted, we are pleased with the early response in the market to CABTREO since its late January launch and expect it to become a more meaningful driver of growth in our dermatology business as the year progresses.

Thank you, John. We continue to build on our strong global portfolio of businesses and remain highly focused on delivering against the objectives we laid out last quarter, including driving a results-oriented culture of accountability, delivering on our revenue, adjusted EBITDA and adjusted operating cash flow commitments. Executing with operational excellence and a cost-focused mindset across the enterprise, intensifying our focus and operating rigor behind R&D and business development and continuing to evaluate strategic alternatives. Achieving the full separation of Bausch + Lomb remains a priority. These priorities help support our ambition of being a globally integrated healthcare company trusted and valued by patients, healthcare providers, employees, and investors as we relentlessly drive to deliver better health outcomes. I would also once again like to extend my thanks to the entire Bausch Health team for their hard work. They have worked tirelessly and are all in to position our business for the long term. Every patient deserves better health and the chance to make the most of life. This drives us with urgency and efficiency to deliver the products patients need most to enrich their lives. On behalf of the entire Bausch Health team, I thank you for your interest and support of our company. With that, we will now take questions. Operator, please open the line for Q&A.

Your first question is from Glen Santangelo from Jefferies.

Tom, just a couple of quick ones for me. You reiterated a number of times that you remain committed to the full separation and you highlighted the Norwich decision as being a significant milestone. What are the milestones or major milestones that might exist? And then as you think about the strategies for a full separation, is it in your mind? Is the tax-free spin still the way to go? Or are there other strategies that you might be evaluating? And then maybe I just had a quick follow-up on the balance sheet.

Okay, Glen. Thanks for the question. Clearly, the Norwich appeal decision is an important milestone, and we are really happy about that and really pleased with the outcome. As you know, there are many factors here that we need to consider. When we look at the timing of the potential distribution, the most fundamental point is making sure we have appropriately capitalized companies. As we go through this process, it is indeed a priority for us. As you can see from our priorities for 2024, achieving the full separation of B&L is key, and we are ensuring that both companies are well-capitalized before making any decisions.

And Tom, maybe just to follow up on that point on the balance sheet. When you think about the leverage on RemainCo, we've gotten a lot of pushback from investors highlighting the leverage related to the RemainCo post the spin. How do you think about what the appropriate leverage ratio might be? I mean, you haven't sort of commented in a while on any of those leverage targets, but it seems you remain committed to using various tools and strategies to kind of maybe work that debt level down. So any thoughts on how we should think about that through the balance of the year?

Yes. Look, Glen, let me take the first point of that, and then I'll hand it over to John. Overall, you saw this quarter in the last four consecutive quarters, my key focus is really driving growth and performance. That always helps us be able to retire debt. The business is healthy and is doing well. You saw the performance of Solta, and we feel great about the growth in the U.S. The diverse portfolio of products, coupled with executing on our R&D pipeline, positions us to continue to improve our balance sheet. Over to John for specifics.

Glen, it's John. Thanks for the question. To the point of how we think about a leverage target, we are focused on two appropriately capitalized companies. It's about balancing our leverage with our maturity profile. We have a host of tools at our disposal, and we are focused on growing the business in a very cash-generative environment. We are guiding to $775 million to $825 million of adjusted operating cash flow this year, and we will utilize all available strategies to manage our profile effectively.

Your next question is coming from Michael Nedelcovych from TD Cowen.

Great. Thank you for the question. As has been noted, I think this is the first time, at least in the recent past that management has explicitly connected that look for Xifaxan to the likelihood of completing the full separation of Bausch + Lomb. So that begs the question of when Xifaxan's outlook will be secure, if we just consider the Amneal challenge, and take the 30-month stay at face value, that would mean persistent uncertainty until almost 2027 which puts us right at the doorstep of full generic competition for Xifaxan. So I'm wondering how it will be possible to complete the Bausch + Lomb separation under those circumstances?

Yes, Michael, thanks for the question. It's good to clarify because there's been a lot of talk regarding Amneal. Xifaxan is a significant product, and its performance is satisfactory; it continues to grow. The appeal decision of Norwich reflects our confidence in our legal position. While the Amneal situation was anticipated, our legal team is actively managing this. We have multiple patents to consider, and the team is diligently working on this. I cannot speculate on future strategies, but certainly, we are optimistic about managing these challenges.

May I ask a follow-up?

Sure.

Are you preparing for Norwich to file a new ANDA just for the IBS indication? You suggested we may see others just now. And is there anything in the settlement with the other generic companies that would prevent them from doing the same thing?

Currently, we've just received the ruling and affirmation of the denial of the motion; Norwich is off the market until October of 2029. While I can’t speculate on what Norwich will do in the future, we're closely monitoring the situation and are prepared for any scenario.

Your next question is coming from Douglas Miehm from RBC Capital Markets.

First question, just in the past, the company has discussed whether or not in its approach to the distribution or the separation you would comment on whether it potentially would be a return of capital or butterfly. Is there anything that you can update us on as to the potential approach that the company may take in the event you do pursue the separation?

Yes, Doug, thanks for the question. We have talked about that in the past. At this point, no decision has been made. However, we remain focused on ensuring that the outcome is deemed tax-free for shareholders. We are keeping all options open and evaluating them as we progress.

Okay. And then second thing, just maybe you could give an update on the stock drop situation. I know you've been trying to resolve that, but we are getting close to a court date, I believe, on part of that? And then finally, I know this is really not that important or material. But why is the IRS situation taking so long relative to when you thought you may be able to resolve that?

Doug, the IRS matter is indeed moving slowly. I'll ask John to elaborate on that, and then I'll come back to your question on the opt-out actions.

Doug, yes, we’d love to have the settlement finalized and put behind us as well. We're working with the IRS as quickly as we can. It’s a complicated matter, and we still expect that it will not have a material impact on our results or cash flows. We need to go through the process and see how it unfolds from here.

And returning to your first question regarding the opt-out actions, we are indeed approaching a trial date, and our legal team has been working diligently on this. We’ve settled 16 out of the 37 pending actions, and our litigation team remains focused. We are seeing success with some claims being narrowed as we progress.

Your next question is coming from Umer Raffat from Evercore.

Maybe a couple here, if I may. First, is there any regulatory body, U.S. or ex-U.S., or a creditor that needs clarity on Xifaxan within the 24 months post-separation? Is that an important gating factor for potential investors? That's point number one. And number two, for some of your debt liabilities coming up in '25 or so what are the plans? Are you intending to go down a very aggressive path? And finally, do you envision any possible scenario where the spin has to be held off completely to take care of the amount of debt as well as the Xifaxan situation?

Yes, Umer. Thanks for your questions. I'll let John comment on the debt liabilities in a moment, but I don't recall any specific regulatory bodies needing clarity on Xifaxan as we move forward post-separation. The focus is firmly on ensuring we have two appropriately capitalized companies, and our priority is definitely the full separation of Bausch + Lomb. Managing our plan effectively is a priority.

Umer, we are focused on our 2025 and 2026 maturities. We have various tools at our disposal and significant liquidity that will aid us as we work through these debts. Our goal is to manage our leverage while ensuring that we maintain a healthy profile.

Indeed, we will evaluate our strategies to handle both the debt and the other regulatory situations, but our priority remains achieving a successful separation while ensuring financial health.

Your next question is coming from Chi Fong from Bank of America.

This is Chi on for Jason Gerberry at BFA. I guess on the first one, now that you secured the Norwich ruling, has the company been in discussion with claimants in the fraudulent conveyance matter about a potential settlement? And I have a couple of follow-ups after this.

Yes, Chi, I can't comment specifically on our discussions, but we remain open to various options moving forward.

Yes. A couple of follow-ups. One on the SG&A. So as we look at Q1, the spend ratio looks a little high in the mid-30s. I'm wondering if there's any Q1 seasonality to drive the ratio higher than usual? Or if not, how do you see that SG&A spend ratio evolving in the coming years?

Yes, Chi, are you looking consolidated?

Yes, consolidated.

Yes. The high spend ratio on the BLCO side is mainly fueled by significant A&P investments supporting their product launches. We do expect this spending to moderate as we progress through the year.

Okay. Got it. My last question is about the pipeline. Regarding Amiselimod, were there any unexpected points of feedback from the end-of-Phase II meeting? As you prepare for the FDA meeting, I understand you are still in discussions with international agencies. Do you have any initial thoughts on your Phase III strategy as you aim to address the full range of mild to moderate ulcerative colitis? Additionally, I believe you mentioned that you are still considering a Phase II trial for Crohn's disease. I’m interested if the recent Phase III trial indicates anything significant.

Yes, Chi, thank you for the pipeline questions. Our feedback from the Phase II meeting was positive, and we are well-prepared for the EU planning meetings, which are upon us. We aim to secure our strategies to tap into the potential UC market. We are aiming for a Phase III start later this year or early next year, while discussions for Crohn's are ongoing.

We've reached the end of the question and answer session. I'll now hand the conference back to CEO Thomas Appio for closing remarks. Please go ahead.

Yes. I want to thank everyone for their insightful questions today. We had a solid first quarter, marking our fourth consecutive quarter of growth. Our focus is on building on this momentum in the coming quarter, and I want to convey that the Bausch Health team is fully committed to executing on our priorities. We look forward to keeping you updated and appreciate your continued interest and support. Have a great day.

Thank you, everyone. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.