It's with Bausch Health Companies today. We have both Thomas Appio, who's the Chief Executive Officer of the company, and also Jean-Jacques Charhon , who is the Chief Financial Officer. It's interesting, you haven't been here for many years.
Right
It's a pleasure to have you back. I know you've both been involved in some significant heavy lifting over the last couple of years to right-size things again. Maybe I thought what would be helpful is just to level set for us and give us an idea where we stand with the company in terms of various metrics before I move into some more in-depth questions, if that's okay.
Yeah, sure. All right, as Doug said, it's been a lot of heavy lifting over the last few years since the IPO of BLCO. First let's talk about just the execution from a commercial standpoint. As you saw last quarter, the execution, 12 consecutive quarters-
Yeah
of growth on the top and the bottom. I think one of the things that probably the investment community, I don't think we get probably enough credit for, appreciation for, is the team that we've built and the execution on all these assets that are part of Bausch Health. Clearly, our Salix franchise, led by XIFAXAN.
We have a fantastic team that we've built there. They're executing on all cylinders. If you look at, of course, I talked about many times of the engine that we built in terms of our commercial excellence. Really pleased and happy with where we've come from an execution standpoint of our Salix franchise and, of course, our international franchise, which always continues to perform and grow nicely on the top and the bottom. I think the other thing that the investment community probably doesn't appreciate as much is Solta.
Yeah
business is an exceptional business for us. Of course, you've seen the outstanding growth there. We just completed the acquisition of our distributor in China, which gives us scale in China. I think that you saw the results of the first quarter. We expect, of course, the EBITDA to continue to improve, and Jean-Jacques Charhon can talk about that, of the one-timers that we had in December and in January. That asset continues to grow and perform globally.
both from an Asia-Pacific standpoint and from a U.S. standpoint. I think that asset has the opportunity to continue to power growth for the future. We just received in China what called triple A trademark status, which if you know what that is, Thermage has received triple market status, triple A status, which not many companies get. There's only approximately 190 companies in all of China that have that. Clearly, consumers will see that, and it is the trademark, the gold standard of skin tightening. That's a great achievement that we just got over the last few weeks. I'm going to pass it off to Jean-Jacques Charhon to talk about some of the heavy lifting that we've done from a capital structure standpoint, because I know you're interested in that.
I will also, before I hand it off to him, our legal team has done an outstanding job of defending our intellectual property. As we announced on the 1st quarter earnings call in terms of where we are with the opt-outs, and all the U.S. opt-outs are settled. A lot of work has been done from a legal perspective. I'll turn it over to Jean-Jacques Charhon to talk about the dramatic change of the capital structure.
Yeah. Thank you. As you know, Bausch Health is going through some transition. We're in the process of finalizing the path to complete the separation between Bausch Health and Bausch + Lomb. The portfolio is also going through a transition. We are assuming that we'll maintain market exclusivity associated with XIFAXAN until the end of 2027. That represents a good proportion of our revenue, a good proportion of our cash flows, and so therefore, from a financial priority standpoint, really the company is focused on three elements. The first one is maximize cash flow between now and the end of 2027, and obviously, the commercial execution that Tom has been referring to has been a very important aspects of it. Number two is really setting up our portfolio post-XIFAXAN early for success.
What we're doing with our international segments, what we're doing with Solta, as Thomas Appio was referring to, is of utmost importance because that's going to be an important element to it. We're obviously also, as you've seen from our press releases, focusing on some potential selective inorganic opportunities to really supplement our pipeline. The third piece of it is really how do we set up the process, the timeline for maximizing the value of our stake in BLCO?
The reason why this is so important that when you think about our capital structure and the net leverage we currently have today, it's obviously not fit for purpose when you think about the portfolio post-XIFAXAN. We are over-levered, and we're going to have to de-lever the balance sheet further. Some of that will come from organic cash flow that we'll be generating over the next two years. Clearly there'll be a gap, and that gap will have to be filled in one of three ways. You can either decide to raise some new equity, which obviously would be very expensive and highly dilutive given where BHC is trading right now. Obviously that's last option. You could try to capture some of that discount, but as you've seen over the last couple of years, our debt has been trading up.
When I joined as the Chief Financial Officer of the company, we had about a debt discount, about $3 billion on $16 billion of gross debt. Now we're under $1 billion. It hovers here and there, but it's mostly that discount is the differential between the coupon and our cost of capital. There's not a lot of, I would say, distressed debt discount associated with that. There's not really much to grab there. The last source of funding is really proceeds from asset sales. Most likely candidate here is obviously BLCO.
That's why the refinancing that we did last year, which was about $9.6 billion, if you add up what we did in April, and then the debt exchange we did in December, was really designed to provide ourselves with additional runway so we can let BLCO and the management team execute on their Vision 2027. They had an investor meeting in November of last year, where they lay out financial targets for the next three years. We're very confident in their plan. The idea is this refinancing not only provide financial flexibility around resource allocation and potentially make some investor along the way, but also provides more time for the BLCO team to execute on that plan before we start monetizing our stake should we decide that's the best path to get the capital structure in order.
Okay, perfect. Let's drill down on a couple things. Can we go straight to operating cash flow? I think you've guided to $1.2 billion- $1.275 billion this year. If we adjust for CapEx of $50 million and the legal settlement, that was $160 million. We get somewhere between $1 billion-$1.1 billion, let's call it that. When you think about 2027, if we look at the $160 million that's related to this legal settlements, and the IRA headwind that's coming for XIFAXAN, is it fair to say that cash flow probably be roughly the same year-over-year?
Yeah, we haven't provided any guidance associated with cash flow for 2027, but I think the way you lay it out makes sense.
Yeah.
There'll be ups and minuses versus 2026. I think you highlighted the fact that legal settlements are now behind us.
Yeah.
The last installment of the settlement associated with the opt-outs really was paid out in the first quarter. We're happy about that. To your point, with the new IRA rebate, there'll be a reduction that will offset a lot of that. We continue to see growth or anticipated growth in the rest of our portfolio, so that'll be also a partial offset to the IRA rebate. I think, assuming that cash flow is going to be roughly similar to what we have in 2026, is not unreasonable. Obviously assumes that we maintain a market exclusivity for XIFAXAN until the end of 2027.
Just moving on from there, Tom, you've done a great job with XIFAXAN. We do have a little bit of a price increase in there, but the growth in prescriptions has been very strong. Can we talk a little bit about that lingering Medicaid benefit and is growth going to really approximate what we're seeing with prescription growth and adding on a little bit more?
Yeah, I think that the team has done an outstanding job with XIFAXAN.
Yeah
for the last four years on both indications. OHE. The sales and marketing team have really executed there. As I said earlier, our AI engine, which has really been able to deploy our field force and get much more out of our field force, to be able to drive growth. Now as we look, as we exited Medicaid and 340B, if you look at where we're playing today, not in those spaces, we're still seeing growth. JJ can talk about what's lingering there, some of the volume that's coming through on that other channel. We believe that, of course, as we look at what we can bring to physicians and patients, that we can continue to grow in where we are competing today.
Okay. Jean-Jacques Charhon, want to comment on the old one?
The way I think about XIFAXAN revenue, I would break it down into two pieces. The revenue associated with the channel we're still in today, which are basically the commercial channel and Medicare, and then Medicaid and 340B, which we exited starting on October 1st of last year. Volume and pricing dynamics are fairly consistent in the channels we've been in over the last few years, and we're not really seeing any major differences-
in terms of script trends and also price potential. Now, if you look at the revenue associated we make in 340B, we were getting a lot of scripts, but not a lot of revenue, as you might expect, as this was a heavily discounted channel. The residual revenue that we've got at the end of last year and the first quarter of this year were a little bit ahead of what we're expecting. Obviously, there was some erosion that was going to happen that was anticipated, but the residual revenue has provided some temporary tailwind for us. We expect that to decrease gradually over time throughout the remaining of the year. Obviously, on the Medicaid side, 340B is a little bit more complicated because some of those patients are being covered by other channel.
I think the optimization that the team has done for both the commercial channel we're in, but overall, the mix of business that we are has been outstanding and has explained why we continue to enjoy some very strong growth in the first quarter.
There has been discussion recently around the two Norwich trials that are now combined. I have to say that my belief when the judge made his original ruling on a drug product was that this is going to be a January 1st, 2028 situation. Now I'm hearing that it could be a little bit sooner than that based on the potential outcome of these cases. We still have the outstanding 180-day exclusivity at Teva.
Under what circumstances, in your view, could they lose that?
Yeah. Right now, the case is with the Federal Circuit in D.C.
Yeah.
The appeal, we're still waiting for the decision. As we said at the last earnings call.
Yeah
Assuming or estimating any time after April. Of course, in the meantime Teva has, as I said on the earnings call as well. They received their a pproval. As we look at it, we're waiting on that case. It's also that case, there's also the second case in the New Jersey District Court that is there as well. There's no trial date set for that, and those patents are different in terms of what the patents were on the earlier trials, earlier cases. We're continuing to monitor and wait. We believe we're going to defend our intellectual property and we have been over the last four years. Anyway, we'll see what the courts decide. Clearly, Teva getting approval is a nice step.
Yeah. There's no doubt about that. If they don't market it within 75 days, there's still the secondary that would cause them to forfeit, but there is still the secondary factor about the ongoing litigation, and we're going to have to see how that falls out. Could that be the trigger point here for them losing?
Right now, you're in the D.C. District, okay? You have what we call Norwich 2.
Yeah
Which is that case in New Jersey. There's many factors. It's multifactorial playing out here on these two cases. Again, there's no trial date set for the New Jersey case.
Okay.
I don't want to speculate of what's going to occur with the Federal Circuit in D.C., but then there's the second case. I don't know how, as there has no trial date been set in New Jersey. I don't know how they're viewing it or what they're looking at the present time.
Okay. Just to wrap that all up, is there any information that could come out of the Supreme Court ruling between Hikma and Amarin that could inform what may happen with respect to skinny labels here?
Yeah. That's a good question. The skinny label has been at issue.
Yes. I know
there. I think what I just would say is that in the end, we believe in our intellectual property, and we're defending it. We'll have to wait and see what the Federal Circuit says.
Okay. I'll get to Bausch + Lomb in a second.
Yeah.
I did want to speak a little bit about some of the other businesses. Like Solta has been doing extremely well. We saw the growth that you reported in Q1, exceptionally strong, 52% volume growth, et cetera. As we look through the remainder of the year, and I know that that's likely going to fall a little bit, but how do you see that business growing over the next several years?
Yeah. Doug, as I've said many times, I love this business, in terms of as a portfolio that we have within Bausch Health. I think there's two really strong aspects to this business. Number one, our capital versus consumable. 30% of our business is capital, but 70% is on the consumable side. It's very durable, and it's cash pay. Of course, a premium positioning of the product. If you look at what we're trying to do globally, of course, we have a fantastic business in Korea. Of course, now acquiring our distributor in China, that gets us scale, gets us direct to the patient and to the provider, and what we can do there. I expect a nice growth of our business in China as we move forward.
JJ can comment on the EBITDA of what we're thinking about in terms of the one-timers that we had in December and January. I believe that with this acquisition, we can continue to see a nice business there. We have an outstanding leader in China, and she runs Greater China. We're looking at that region to continue to perform. If you look at the U.S., the growth is good. I'm looking for hopefully getting some step change growth with the new launch of our Fraxel.
That's a new product that we launched last year, which I think of course is an outstanding laser, and has really great treatment efficacy. Our focus in Europe. Historically, the European business has not been a focus prior to me becoming the Chief Executive Officer. Our focus now is probably on two to three core markets that can drive growth there as well. Jean-Jacques Charhon might want to comment on how we see the profitability of this business going forward.
Yeah. If you think about our growth in the first quarter, and particularly in China, where we said we grew on a reported basis about 190% year-over-year, you have to break it down into three drivers. Number one, our volume was particularly strong in the first quarter, about 50% growth year-over-year. Number two, we had a price increase associated with the integration of our full service distributor, which was about 70% or so, we had some FX tailwind as well. We can all debate about whether the 50% is going to be sustainable for a long time, but the 70%, it's kind of a reset of our pricing level and therefore our margins in China. I'm not sure the market really did the math around what that means.
Ultimately, how could this translate into a significant increase into our enterprise value just by this transaction. We had some depressed margin in the first quarter due to the fact that the COGS of the inventory we bought back from our distributor was step-up in value. We were going through that still in the first quarter, but we're anticipating that to be fully cleared by this quarter, by the second quarter. That is a major change in the dynamic of the business, and the trajectory that we're going to be seeing. As we indicated on our earnings call, China has reclaimed the number one spot in terms of the major geography in Solta. We're very optimistic about our ability to continue to expand coverage or to accelerate the expansion of coverage and be in charge fully of demand generation in that market.
Margins are anticipated to be stable with obviously a much higher pricing level.
I would also, when we take a look at the integration and how well it's going in China, this is a market that we look at where the product is positioned as a premium price. Look, it is the gold standard. I was just in China in December where we met 150 of our key customers and KOLs. I think that when you look at our ability now to go all the way to the consumer and to the provider, I don't think the investment community is appreciating what has been accomplished on this deal. Then I mentioned at the beginning getting the triple A trademark on Thermage. That's where I've lived there for many years.
Having the consumer, the trust in the brand, and having that triple A status will really help us differentiate us from the competition that is in China today, either internally or coming in externally from other markets.
Okay. Just to wrap up then, need to spend some time on Bausch + Lomb.
Yeah.
When you think about the value of that asset there, and when you look at the margin profile of that company and what is expected to happen, it likely should be trading at a higher multiple, especially given the quality of the pipeline, which they just talked about at their investor day in Q4 last year. What do you think is more important right now, increasing the flow to that business or seeing that margin profile increase over the next little while? Added to that, is this something that could be sold outright to a third party, or would you hope to do this in a more packaged way and selling portions of it over time?
I'll take the first part, and I'll hand it off to Jean-Jacques Charhon to talk about that. BLCO had their investor day. We see Bausch + Lomb as a great asset for BHC. Their investor day was very successful in terms of not only what they have today in their commercial engine, but what they have in their pipeline in all of the segments that they compete. We really believe in Vision 2027, and what they can accomplish, and also the strong management team they have to execute on it. We believe it's a great asset for us, and I'll turn it over to Jean-Jacques Charhon to just talk about how we're looking at the valuation of it.
Yeah. Listen, from a process standpoint, all the options are on the table.
The objective here is to maximize the net proceeds, and if we decide to use that as a way of completing the separation between the two companies. I think the expectation is that the margin improvement will be gradual, but a little bit back-end loaded. Therefore, we are patient. This is why the refi was so important last year, because it gave us the ability to really wait until the margin improvement would be realized, and the market really rewards BLCO for it. We're confident about the plan. I think we're going to have to be patient and see really what happens.
Okay. Well, listen, it was great to have you here.
Thank you.
It's nice to have you back.
Yeah.
Good luck with your meetings.
Thank you, Douglas. Really appreciate it.
Thank you.