Bausch Health Companies Inc. (NYSE:BHC) Q1 2023 Earnings Call Transcript May 4, 2023

Bausch Health Companies Inc. misses on earnings expectations. Reported EPS is $0.52 EPS, expectations were $0.72.

Operator: Greetings. Welcome to Bausch Health First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Mark Maico, Investor Relations. You may begin.

Mark Maico: Thank you, Holly. Good morning, and welcome to Bausch Health’s first quarter 2023 earnings conference call. This is Mark Maico, Investor Relations for Bausch Health. Participating in today’s call are Thomas Appio, Chief Executive Officer of Bausch Health; and Tom Vadaketh, Chief Financial Officer. Before we begin, I’d like to remind you that our presentation today contains forward-looking information. We would ask you to take a moment to read the forward-looking statements at the beginning of the slides that accompany this presentation, as they contain 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 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 is 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 will focus on Bausch Health, excluding B+L. 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. For the benefit of those who may be listening to the replay or archived webcast, this call was held and recorded on May 4, 2023. With that, it is my pleasure to turn the call over to our CEO, Thomas Appio. Tom?

Thomas Appio: Thank you, Mark. And welcome to those of you joining the call this morning. It has been almost a year since I took over as CEO of Bausch Health. While our business faces challenges, we have some great franchises and we are continuing to balance the constraints of a tough balance sheet with the need to continue to invest and grow the business and the pipeline. With the IPO of Bausch + Lomb in May last year, we assembled a seasoned, resilient executive leadership team with a track record of hard work, dedication and accountability. While we have had some bumps in the road, we have accomplished a lot in the last year, and we are hopeful and realistic for the future of our company, powering up the potential and creating a great healthcare company.

The team and I have been able to focus on improving the remaining Bausch Health businesses. Firstly, through operational excellence and focused investments in key businesses that have growth opportunities such as Salix, Solta, Dentistry and International business. Starting in the back half of 2022 and continuing this year, we are increasing our investments in sales, marketing and R&D to accelerate growth in Salix. I will touch more on this in a few minutes when we take a closer look at the performance of the business segments. Our International business consists of a branded generic business in the EMEA and Latin America and a branded business in Canada. Taking together, this business is a profitable and growing business. To maintain sustainable long-term growth, we have to continue to bring in new products into the portfolio, as we have done historically through business development and licensing deals, which in this space are not typically capital intensive.

Our neurology, dermatology and generics business operate in a challenging space. Together, over 70% of the revenue from these businesses are from products that lost their exclusivity and are subject to generic competition, which continues to put pressure on both volumes and pricing. Our approach has been to manage these businesses for optimal profits and cash generation. We have a great platform and a talented team and we will continue to review opportunities to add to the portfolio. Secondly, we have intensified our focus and operating rigor behind R&D and business development, which is critical to the success and health of our company. We are accelerating certain aspects of our planned R&D effort and Tom Vadaketh will discuss this shortly in his commentary on the financial performance.

Let me share several pipeline developments, which you can see on Slide 7. For amiselimod, the Phase 2 trial is progressing and is expected to be completed in the second half of this year. Amiselimod is a new oral S1P receptor modulator, which targets the treatment of mild to moderate ulcerative colitis. Turning to rifaximin, we are focused on developing novel formulations to address unmet medical needs. We are accelerating our investments related to RED-C program, which stands for Reduction of Early Decompensation in Cirrhosis. This is a global program and the treatment is targeted at preventing the first occurrence of hepatic encephalopathy, which we call HE for patients with early decompensation cirrhosis. Two global Phase 3 studies are currently underway with clinical trial sites expected to be opened in more than 15 countries by the end of Q3 and the enrollment is on track.

We have completed scientific advisory meetings with the Medicines Evaluations Board in the Netherlands, with Health Canada and with plans to meet with the authorities in Japan and China later this year. In Solta, the next generation Fraxel, a fractionated laser device for skin resurfacing is on track for FDA submission later this year and we are excited about this device for skin rejuvenation. Clear and Brilliant Touch with Canada and — with Europe and Canada submissions planned in 2024 and Asia Pacific in 2025. We are also working on the next generation VASERlipo system that is planned to be released in late 2024 and on future features for Thermage FLX as well as additional security measures to prevent the use of counterfeit tips. In dermatology, adding to our established acne portfolio, the FDA has accepted our New Drug Application for IDP-126 with an October 20, 2023 PDUFA date.

If approved by the FDA, IDP-126 would be a first-in-class triple combination treatment for acne vulgaris. Additionally, our submission in Canada is planned for the second quarter of this year. We are actively looking for business development opportunities for our U.S. and international businesses that will synergize with our current capabilities and also looking at new therapeutic areas. We are proud of our R&D team and the work they have done to progress our pipeline and we will continue to focus on obtaining approvals for these products. Now let me turn to the first quarter. Turning to Slide 8. I am pleased with the first quarter of the year. We delivered a solid performance in line with our expectations. Total reported revenues declined by 2% and organic revenues were flat compared with the prior quarter for Bausch Health excluding B+L.

I am pleased to share that for three out of our four business segments Salix, International and Solta, grew versus last year on both a reported and organic basis. Let’s take a closer look at the first quarter performance of our business segments as shown on Slide 9. Starting with Salix, which posted reported and organic revenue growth of 7% in the first quarter with increased demand and encouraging XIFAXAN script growth across all channels. We are very pleased with the performance of the Salix business in this quarter. XIFAXAN is a fantastic option for healthcare providers that their patients — for their patients and we have increased our marketing investments in XIFAXAN for both of our approved indication IBS-D and HE. The increased investments in targeted consumer activation is currently being deployed across a range of media channels, such as connected and addressable TV as well as many digital and social platforms.

As a result, we are seeing very encouraging signs of increased consumer engagement. In addition, we have also expanded our institutional sales footprint by 40%. The increased sales force allows us to engage with new integrated delivery networks, their associated hospitals and clinics, and to continue to educate new healthcare providers on the importance of initiating therapy for AT patients to reduce the risk of reoccurrence and rehospitalization. We expect these efforts will help to drive future growth. We are implementing AI-enabled solutions to improve our commercial engagement. These solutions leverage artificial intelligence and machine learning to help our commercial teams optimize their interactions with physicians and direct efforts to the right opportunities at the right time.

AI has the potential to significant improve how we interact with our customers and meaningful expand the number of patients getting on the right treatment. As part of our continued investment and to improve HE and IBS-D patient care, we are implementing an advanced analytical-driven medical approach. This approach leverages multichannel medical engagement, including a meaningful expansion of our specialized medical field team to prove care for thousands of HE and IBS-D patients. It will help us execute — educate physicians to address the largest patient care gaps and track the positive impact on patient lives over time. Turning to International. Sales grew 5% on an organic basis and 1% on a reported basis with organic growth in all three regions.

Key markets such as Poland and Canada saw double-digit growth for the period. In Europe, our sales and marketing teams are driving growth through HCP education and enhanced digital engagements. And in Canada, we are driving growth of our promoted brands while focusing on the launch of RYALTRIS. Solta grew organically by 6% in the quarter with strong customer demand in Asia Pacific markets excluding China. We are cautiously optimistic for the remainder of the year for return to growth in China following the lifted of the COVID restrictions. In the U.S. we are focusing on growth drivers, which will include expanding DTC campaigns and building top and sales marketing teams. As I said before, Solta is a great business for BHC. With our global footprint and our product mix between capital equipment and consumables, more than 70% of Solta’s revenues are from consumables, which gives us together a good platform for future growth.

Turning to Dentistry, which is part of our diversified segment. We delivered 4% organic growth for the quarter. We have refocused our commercial effort on our core product ARESTIN and antibiotic used in the combination with scaling and root planing procedures to treat patients with adult periodontitis. The periodontal treatment market is expected to reach $12.2 billion by 2031, up $7.6 billion in 2021. With this market, we are driving demand with the private practice dentist segment, which is the largest portion of the market and the corporate DSO dentist, which is the fastest growing segment. In Diversified, sales for this segment decreased by 21% on an organic and reported basis in the quarter with declines in neurology, dermatology and generics.

We are striving to stabilize the business in our promoted and non-promoted products within this segment. This year, we intend to make additional investments in the marketing and advertising of APLENZIN and expand our consumer awareness campaign for JUBLIA, which both saw increased scripts. Again, I am pleased with the performance in the first quarter, which was in line with our expectations. We are reiterating our guidance for Bausch Health excluding B+L for this year, and as always remain committed to delivering long term value for stakeholders. Let me take a few minutes to talk about some key priorities. The process of delevering our balance sheet is ongoing, and in the first quarter of 2023 for Bausch Health excluding B+L, we reduced our debt by approximately $100 million, including revolver repayments.

We have made significant progress in delevering our balance sheet over the past year, reducing debt since the B+L IPO by $3.3 billion and we will continue to effectively manage and enhance our capital structure. With regard to the Granite Trust, as you know, we reached a tentative settlement with the IRS during the first quarter and we expect final resolution of this matter later this year. Regarding the XIFAXAN proceedings, as a reminder, the court’s current decision prevents Norwich’s ANDA from receiving final FDA approval until October 2029. Norwich advised the court that he has sought to remove the HE indication from its ANDA and has filed a motion to modify the judgment to prevent — to permit the FDA to approve their ANDA before 2029.

We have opposed this motion and await decision from the court. Lastly, we continue to believe the separation of Bausch + Lomb make strategic sense with the end goal of having two independent strong financially stable companies. With that, I will turn the call over to Tom Vadaketh, who will provide further details on our quarter performance. Tom?

Tom Vadaketh: Thanks, Tom. Hello, everyone, and thanks for joining us. My comments today will refer to organic growth and adjusted results. We closed the quarter with consolidated first quarter revenues for Bosch Health of $1.9 billion, up 4% on an organic basis over the same quarter last year. First quarter revenues for Bosch Health excluding B+L were $1 billion and flat on an organic basis, with growth in our Salix, International and Solta businesses. Let me discuss each segment in greater detail as shown on Slide 11. First quarter, Salix revenues increased 7% to $496 million. This increase was largely due to higher demand for XIFAXAN 550, TRULANCE and RELISTOR, coupled with relatively favorable changes in channel inventory this quarter for XIFAXAN 550 and TRULANCE in comparison with the channel inventory changes in the prior year.

XIFAXAN revenue grew 7% in the quarter and overall demand grew 4%. In the first quarter, we continued to see an uptick in non-retail demand at institutions, such as hospitals and outpatient clinics, increasing our market share. We also saw a slight increase in demand from long-term care facilities, but we believe the shift in the HE patient journey post-COVID with patients going directly home from the hospital rather than to a long-term care or step-down facilities ongoing, and we are keeping a close eye on this trend. As Tom said, we have increased our investments in Salix during the quarter and we plan to invest further in the remainder of 2023. We are also pleased with the sales performance of RELISTOR and TRULANCE, which posted increases of 29% and 19%, driven by total script growth of 22% and 10% respectively in the first quarter versus the prior year.

International revenues were $247 million, an increase of 5% on an organic basis during the first quarter, led by strong growth in Canada and Poland of 11% and 15% respectively. We also saw double-digit growth in a number of key brands. Solta Medical revenues of $73 million increased 6% on an organic basis in the first quarter. Our Asia Pacific business grew 7% with strong demand despite a sales decline in China due to the effects of COVID-related government restrictions in the early part of the first quarter, immediately following the opening up of the market from COVID. Excluding China, the region grew 35%. In the U.S. sales were slightly down driven by lower volumes. We are continuing the expansion of our DTC campaign in the U.S. and the expansion of sales teams in Europe.

Diversified revenues were $197 million, down 21% on an organic basis in the first quarter. For neurology, lower sales were mainly driven by lower demand for WELLBUTRIN, as well as net pricing pressure on APLENZIN, although APLENZIN script growth remained positive at 4%. In dermatology, JUBLIA sales were impacted in part by a shift in patient coverage mix, which reduced net pricing, the effect of which is higher in Q1, as patient deductibles reset at the beginning of the year. JUBLIA scripts grew 17%. These decreases were partially offset by our Dentistry product ARESTIN, which had sales growth of 5% in the quarter. We continue to expect challenging market conditions in the neurology, dermatology and generic businesses for the balance of the year, and remained focused on stabilizing this part of our portfolio.

Lastly on Slide 12, Bausch + Lomb revenues were $931 million, up 8% on an organic basis in the first quarter, with strong organic growth across all B+L segments. Turning to the P&L for the quarter on Slide 15, I’ll first refer to results on a consolidated basis and also provide some additional color for the performance of Bosch Health excluding B+L. The first quarter consolidated adjusted gross margin was 70.1%, 120 basis points lower compared with the prior year. At Bausch Health, excluding B+L, the adjusted gross margin for the first quarter was approximately 79.3%, 90 basis points lower than last year. The decrease was mainly driven by favorable net pricing adjustments in the prior year. On the B+L side, the unfavorable change in gross margin was mainly driven by higher costs of inventory, product mix and pockets of supply challenges.

Consolidated adjusted operating expenses for the first quarter were $834 million, an increase of $129 million or 18% with higher SG&A and R&D expenses. For Bosch Health excluding B+L, operating expenses increased by approximately $76 million while B+L reported an increase of $53 million in operating expenses. Selling and marketing increased for Bosch Health excluding B+L due to the investments we are making in the Salix sales force, go-to-market channels and increased advertising and promotional activity. The increase in consolidated adjusted G&A costs reflects the impact of the separation and the costs to stand up two public companies. Adjusted G&A for Bosch Health excluding B+L increased by $29 million driven by the favorable impact in the prior year of a settlement we received relating to a contractual dispute and TSA fees received from B+L in Q1 2022.

We’re in the process of separating B+L’s IT infrastructure from the rest of the company and continue to make significant progress reducing our reliance on transition services. Also of note, in our pharma business, we successfully migrated our U.S. and Ireland operations to a new Enterprise Resource Planning or ERP platform, meaning that all major markets are on dedicated systems. The consolidated R&D expense increased 13% and represented 7% of net sales, flat compared with the first quarter of last year. For Bosch Health excluding B+L, R&D expenses increased by approximately $16 million, primarily for Salix, due to the focus on our clinical programs and regulatory activities to support our mid and late stage product development. First quarter consolidated adjusted EBITDA was $605 million, which includes $17 million of adjusted EBITDA attributable to the B+L minority interest.

This was a decrease of 18% versus last year. For Bosch Health excluding B+L, adjusted EBITDA was $462 million, a decrease of 18% from last year, reflecting the factors previously described. On a consolidated basis, the first quarter adjusted EBITDA margin was 30.2%, compared with 38.2% last year. Adjusted EBITDA margin for Bosch Health excluding B+L was 46% and for Bosch + Lomb was 15%. Let me briefly touch on the GAAP interest expense we are reporting in the quarter. The accounting required for the debt exchange last year significantly impacted our GAAP interest expense, lowering it by $74 million this quarter. As you may recall, a substantial portion of the interest on the newly issued debt has been recorded on the balance sheet as a premium, which will be reduced as interest payments are made.

Contractual interest costs for the quarter based on principal balances was approximately $381 million on a consolidated basis and $330 million for Bosch Health excluding B+L. Turning to cash flow, adjusted cash flow from operations on a consolidated basis in the first quarter was $70 million versus $325 million last year. For Bosch Health excluding B+L, the adjusted cash flow from operations was $94 million which was in line with our expectations. Adjusted cash flow includes adjustments for the payment of separation costs, business transformation costs, and also includes payments of the full contractual interest. This quarter’s cash flow was affected by the unfavorable timing of certain working capital movements, as well as higher interest payments due to the lumpiness of interest coupon payments.

Now let’s turn to our balance sheet on Slide 16. As Tom mentioned earlier, the process of delevering our balance sheet is ongoing. And in the first quarter of 2023, we have reduced our debt for Bosch Health excluding B+L by $105 million including revolver repayments. As slides 17 and 18 show, total debt for Bosch Health excluding Bosch + Lomb at the end of the quarter was $16.5 billion which consisted of $15.5 billion of restricted debt issued by Bosch Health excluding B+L, and $1 billion of senior secured notes issued by the unrestricted subsidiary created in the third quarter of last year. Excluding B+L debt, approximately 85% of our debt is fixed. Approximately 70% of the company’s debt on a consolidated basis is fixed. Our 2023 guidance for Bosch Health excluding B+L is unchanged, and can be viewed on Slide 20.

For Bosch Health excluding B+L, we continue to expect revenues in the range of $4.45 billion to $4.6 billion representing growth of 2% to 5% on an organic basis. Full year adjusted EBITDA for Bosch Health excluding B+L is still expected to be $2.3 billion to $2.4 billion. As a reminder, our EBITDA expectations reflect increased investments versus last year. We continue to invest in sales and marketing activities to drive growth in our key brands in our Salix, International and Solta Medical segments. These investments include expanding our Salix institutional sales force footprint, the first DTC marketing campaign for HE and exciting campaigns as we launch products like RELISTOR and UCERIS in Canada. We expect to see the benefit of this spending later in 2023 and into 2024.

As Tom mentioned earlier, we are pleased with the progress we are making on our product pipeline and our EBITDA expectations also reflect increased R&D spending to maintain this progress through the rest of the year. The performance for Bosch Health excluding B+L in the first quarter was in line with our expectations. As I mentioned in our call last quarter, the first quarter of the year is typically weaker than the subsequent three quarters, due to the annual resetting of health insurance deductibles in the United States, which impacts the patient out-of-pocket cost. While we don’t provide guidance by quarter, our expectations are for stronger growth in quarters two through four, relative to the first quarter, when we also anticipate the benefits from our sales and marketing investments will start to materialize.

Moving below EBITDA, our full year effective non-GAAP tax rate is expected to be approximately 15%. We expect our contractual interest cost to remain unchanged at approximately $1.3 billion. Lastly, we continue to expect Bosch Health excluding B+L to generate approximately $625 million in adjusted operating cash flow. As I said earlier, adjusted cash flow includes adjustments for the payment of separation costs, the payment of the full contractual interest and also includes estimated cash tax payments inclusive of a tentative Granite Trust settlement. I’ll now hand the call back to Tom.

Thomas Appio: Thank you, Tom. In summary, we are building on the momentum from the second half of 2022, as we continue to focus on our core businesses, driving growth through operational excellence and our new high performance, results-oriented culture. We will make investments in key businesses that have growth opportunities such as Salix, Solta, Dentistry and the International business. We continue to invest in our R&D pipeline, including our global development programs for RED-C as well as the continued development of amiselimod. Our mid and late stage R&D pipeline is active and exciting. And we are looking forward to sharing more details. When I took over as CEO, I told you I wanted to create a fit-for-purpose company and we will continue on that journey, looking to simplify our business, invest wisely and grow profitably.

We will also improve our capital structure and I’ve already made significant progresses in delevering the balance sheet. Together with this, gives us the ability to better focus and invest in our core business. I want to thank the global Bausch Health team for all their resilience and motivation, working each day to build our special company, driving performance through hard work and accountability, powering up our potential, elevating people’s lives each and every day that use our great products. On behalf of the entire BHC team, I thank you all today for your interest in and support of Bausch Health. With that, we will now take questions. Operator, please open the line for Q&A.

Q&A Session

Operator: Certainly. [Operator Instructions]. Your first question for today is coming from Glen Santangelo at Jefferies.

Operator: Your next question for today is coming from Douglas Miehm at RBC Capital Markets.

Operator: Your next question is coming from David Amsellem at Piper Sandler.

Operator: Your next question for today is coming from Jason Gerberry at Bank of America.

Operator: We have reached the end of the question-and-answer session. And I will now turn the call over to Tom Appio for closing remarks.

Thomas Appio: Okay. Well, what I would say is, as I said, I am really pleased with the performance in the first quarter, and we are looking forward to powering up our potential and delivering long-term value for stakeholders. I would thank everybody for joining today, and we look forward to having future discussions on our company. So have a great day and we will talk to you soon. Thank you.

Operator: Thank you. This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.