Bausch Health Companies Inc.

Good morning, and welcome to the Bosch Health Company's fourth quarter earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. And now I should turn the conference over to Art Shannon.

Please go ahead. Thank you very much. Good morning, everyone, and welcome to our fourth quarter and full year 2020 Financial Results Conference Call. Participating on today's call are Chairman and Chief Executive Officer, Mr. Joe Papa, and Chief Financial Officer, Mr. Paul Herony. In addition to this live webcast, a copy of today's slide presentation and a replay of this conference call will be available on our website under the Investor Relations section. Before we begin, we'd like to remind you that our presentation today contains forward-looking information. We would ask that you take a moment to read the forward-looking statement legend at the beginning of our presentation as it contains important information. This presentation contains non-GAAP financial measures. For more information about these measures, please refer to slide two of the presentation. Non-GAAP reconciliations can be found in the appendix of the presentation posted on our website. Finally, the financial guidance in this presentation is effective as of today only. It is our policy to generally not update guidance until the following quarter and not to update or affirm guidance other than through broadly disseminated public disclosure. With that, it's my pleasure to turn the call over to Joe.

Thank you, Art, and thank you, everyone, for joining us. Today, I will begin with the 2020 highlights. Paul Harradine, our CFO, will then review the fourth quarter and full-year financial results and discuss our 2021 guidance. I'll then discuss our 2021 strategic focus, which includes executing our business recovery, unleashing growth drivers, and accelerating strategic alternatives to drive shareholder value, before opening the line for questions. Let's begin at slide five. In a year with unprecedented business disruption due to COVID, we finished the year strong and outperformed the high end of our latest 2020 guidance by generating revenue that exceeded $8 billion. And most importantly, strong cash flow of over $1 billion helped us to repay approximately $900 million of debt. During the COVID-related downturn, we were focused on executing on our business. We grew market share for key promoted products. We managed operating expenses to optimize 2020 EBITDA. We invested in our pipeline for future growth. And we exited the year with strong momentum carrying us into 2021 and are well positioned to benefit from recovery-related tailwinds and capitalize on key growth drivers and catalysts while pursuing alternatives to accelerate shareholder value creation. You'll hear more from Paul, but excluding the impact of any potential disasters we may announce, we are targeting approximately $1 billion of debt paid out in 2021. And earlier today, we announced that Icon Enterprises will add two new board members to Bouch Health Care to help us further our goal to accelerate shareholder value creation. Turning to slide six, the full-year fourth quarter results demonstrate that operational recovery is in progress. After experiencing significant COVID-related declines earlier in 2020, fourth quarter revenue was down only 1% compared to the prior year quarter. I want to call out a few highlights. Our vision peer business grew in the U.S. during 2020. Our iVitamin franchise continued to drive strong growth, and we launched confused Sci-Hi daily lenses in the U.S. and Ultra One Day in Australia, Hong Kong, and Canada. Sci-Faxon quarter revenue hit a record high of $411 million in the fourth quarter, and reported revenue for Sci-Faxon Trulance and Relater all grew in the 2020 versus last year. Fermage revenue grew by 47% in 2020 compared to 2019, driven by strong demand in China and expansion into other geographies. Thanks to a great Bausch Health team effort in 2020, our supply chain continued to meet demand for all of our customers, we grew market share with our key brands, we managed OpEx to optimize EBITDA, and we generated more than $1.1 billion of cash from operations during 2020. And we are seeking to accelerate the spin of B&L, our iHealth business, that we believe will unlock shareholder value. With that, I'll turn it over to Paul to cover the financial results in more detail. Thanks, Joe. I'm going to focus mainly on our quarterly results as they show our continuing recovery from the impacts of COVID. On slide seven, you see revenue by segment and business units within the segments for the quarter and the full year. I'll start with B&L International. Overall, the segment was flat on an organic basis versus Q4 2019. The top performer in the segment was the international pharma business, up 12% organically. as that portfolio of products was less impacted by COVID. In fact, certain products in this segment saw increased demand, including Zythro and our broad-spectrum anti-parasitic ivermectin. We saw organic growth in almost all countries and regions led in order by Eastern Europe, Egypt, LATAM, Poland, and Russia. This business was the star of the quarter under challenging circumstances, and the business heads there, including Fernando Zarque, Kate Kuhn, Amin Wadi, Case Hyman, Vincenzo Abruscato, and Monty Villaguta, and their leader, Tom Appio, deserve a lot of credit. Next up is the global consumer business. It was down 1% organically. There's a theme across the B&L consumer, B&L vision care, and B&L surgical businesses, and that is that the recovery in the U.S. is coming faster than what we're observing outside the United States. In the consumer segment, the U.S. business was up 3% organically versus Q4 of 2019, while the OUS business was down 2%. Driving growth in the U.S. were our iVitamins and Lumify. Outside the U.S., resurgences of COVID, the associated impact of social restrictions, and changes in consumer behaviors slowed the recovery in various geographies. Global Vision Care was down 1% organically, up 5% in the U.S., and down 3% outside the United States. In the U.S., the growers worked the recently launched infused daily disposable side-eye lenses, bio through one-day torque, and ultra-torque lenses. Outside the U.S., it's the same thing as I just described for consumer, recovering from COVID, but at a slower pace than we saw in the U.S. Global Surgical was down 7% organically, flat in the U.S. versus Q4 2019, but down 9% OUS. U.S. eye care professionals adapted more quickly to get back up and running with COVID protocols in place than outside the United States. Also, the recovery in the U.S. has been more of a linear progression while OUS surgical activity was strengthening in October and then weakened, especially in Europe, in November and December as new waves of COVID cases emerged. Finally, Global OptoRx was down 10% organically, and here the U.S. is lagging the recovery outside the United States. The U.S. was down 15% organically versus Q4 2019, while OUS we were down only 4%. In the U.S., despite the rebound in surgical procedures, patient flow into doctors' offices is still well below 2019 levels, and that has certainly impacted volumes of our OptoRx products. The impact of the Lord Max LOE also contributed to the quarter-over-quarter decline. So that's B&L International revenue. On to Salix, where revenue was up 2% compared with Q4 of 2019. Our key promoted products were all up versus Q4 of 2019, with Syfaxan up 4%, Truliance up 33%, and Relastor up 7%. Syfaxan IRXs have not yet recovered to pre-COVID levels. Extended unit TRX in the quarter were down 3.5% versus Q4 of 2019, and that's a good proxy for unit demand, end unit demand. However, our ZyFax and sales volume in the quarter was up 2% as retailers rebalanced their inventories during the quarter after substantially reducing them in the depths of COVID. Note that the fluctuations of ZyFax and channel inventories were sorted out during the year, and we ended 2020 with appropriate levels based on current sales volumes. realized that selling price was up 2%. Trulance continues to grow nicely, volume up 45%, which is broadly consistent with a 40% increase in TRXs versus before 2019. It was offset by a 14% decrease in realized net pricing. Improved managed care coverage comes at the cost of increased rebates, but we expect that the expanded coverage will be a cost-effective aid to delivering high Trulance volume growth in the future, a strong finish to the year for Salix. orthoderm segment. First, I want to note that our colleague Scott Hirsch is now leading the segment, and I'm personally excited about the changes that are underway to reposition our medical derm business to capitalize on the strengths of our orthoderm colleagues and product portfolio. We'll talk more about this in the coming quarters. In Q4, the med-derm business was down 22% organically. Roughly 10% of that decline was due to the losses of exclusivity on products including solidine, acania, elodel, and xavirinx. Our promoted brands, particularly those early in their life cycle, continue to be impacted by less patient office visits. Global Solta, under the skillful leadership of our colleague Tom Hart, continues its string of impressive cores, posting 31% organic growth. Solta grew in all regions, APAC, U.S., EMEA, Canada, and Latam. China alone accounted for more than half of the organic growth. Finally, Diversified was down 9% organically, with 8% of that decline coming from LOEs in the neurology business. Setting aside the LOE drag, the neuro business had a solid quarter driven by growth of the Wellbutrin and Plensin franchise, Librax, and Pepsin. The 15% decline in generics revenue was mainly a function of a very strong performance in Q4 of 19. Dentistry continues to recover from the effects of COVID and was down only 4%. So that's revenue in the quarter. Total company revenue was down 1% organically. We finished the year gathering momentum, and we're carrying that forward into 2021. Turn to slide eight, and I'll walk down our P&L for the quarter. We covered revenue. Our growth in profit margin decreased by some 50 basis points versus Q4 of 19. Mix was, as always, a factor, and unfavorable manufacturing variances and hits to cost of goods sold precipitated by COVID played a role as well. Selling, advertising, and promotional expenses were 8% favorable to Q4 of 2019 on a constant currency basis. As you look back at 2020, you see that in Q2, we pulled back dramatically on OpEx spending as we worked to conserve cash and protect earnings. In Q3, we began to ramp up promotional activities, and I'm going to say this is the important point. In Q4, just as our revenue had not yet returned to pre-COVID levels, our promotional efforts were also not back to full strength. I'm bringing this up here for context when I talk about 2021 guidance later. Adjusted G&E was favorable to Q4 last year by 4% on a constant currency basis, and those expenses also do not reflect full efforts on some foundational projects, for example in IT, that are important to resume with full force. R&D was 4% higher on a constant currency basis as we were able to restart activities that were paused. The net result? We posted adjusted EBITDA of $911 million in the quarter, up 2% on a constant currency basis from the prior year quarter. I'll call that good stuff. Please flip to slide nine. The full year 2020 was so colored by COVID that the comparison versus 2019 is not especially meaningful. But there are some things here worth mentioning. We estimate, excuse me, we estimate that the COVID impact for the full year at revenue was roughly $740 million. But for COVID, we would have met our original 2020 revenue guidance. The thing I'm most proud of is that the BHC team was able to react quickly to reduce expenses, conserve cash, and weather the worst of the COVID storm. We prioritized the safety of our colleagues, adapted to find ways to serve patients and our customers, and we were in a state of readiness to get back to driving our business forward as things began to open up. The payoff of these efforts is on slide 10. In Q4, we generated $394 million of cash from operating activities and $1.111 billion for the full year. Those are both on a GAAP basis. Adjusted for the settlement of legacy legal settlements and some separation costs, our cash from ops was $475 million in the quarter and $1.235 billion for the year. Our company is a strong cash generator. We convert a lot of our earnings to cash in part due to our being a Canadian company. Last quarter, there were some folks that were concerned about our level of cash generation. Hopefully, our Q4 results put those concerns to rest. As a result of our strong cash generation and efforts to better utilize our cash around the globe, as Joe said, we were able to repay slightly more than $900 million of debt in 2020. And I'll call that pretty good in this year of years. Let's go to slide 11, the balance sheet summary. Total debt at the end of the year was $24.2 billion. And I want to point out that the $1.8 billion of cash includes the $1.21 billion to settle the U.S. securities class action. So net usable cash at year end was some $600 billion. On slide 12, you see the schedule of our debt maturities, no maturities or mandatory amortization until 2024. Our active management of our debt complex was an asset for us back in the spring when liquidity concerns were understandably high. So that's Q4 in 2020. Let's turn to our guidance for 2021 starting on slide 14. Our guidance calls for revenue between $8.6 and $8.8 billion and adjusted EBITDA between $3.4 to $3.55 billion. First, and to be very clear, our revenue and operating earnings in 2021 could have been quite different but for COVID. We're fortunate to be a diversified company across a number of different businesses and geographies, and each of those businesses have and will recover from the impacts of COVID at different rates. We made great progress in Q3 and Q4 of 2020, but we're not all the way back. We also expect adjusted cash generated from operations to be approximately $1.5 billion in 2021, roughly the same as what we generated in 2019. And we're targeting approximately $1 billion of debt paydown during the year. On slide 15, we show a bridge from 2020 actual results to our guidance for 2021. But I think it's also helpful to look back at the full year 2019 that was undisturbed by COVID. 2019 reported revenue was $8.6 billion and adjusted EBITDA was $3.571 billion, an adjusted operating margin of 41.5%. At the midpoint of our 2021 guidance ranges, we'd have an operating margin of 40%, 150 basis points less than we posted in 2019. Why? Well, there are three main factors. First, our guidance for gross margin in 2021 of roughly 72% is some 70 basis points less than the 72.7 we saw in 2019. That's due to mix and a bit of a COVID hangover on manufacturing costs that will flow through 2021. Second, our R&D spend in 2019 totaled $471 million, and we're guiding the circle of $525 million in 2021. $54 million more and represents 6% of revenue at the midpoint, versus 5.5% in 2019. And finally, our SD&A as a percent of revenue is expected to be higher in 2021 as we reprime the promotional pump to drive our revenue to recapture our pre-COVID revenue growth trajectory. I want to point out that our guidance of $2.6 billion for SG&E is a big increase versus 2020, but if you compare it back to 2019, the $2.6 billion represents roughly 2% growth per annum off of what we would submit was a tightly managed year. Finally, I call your attention to the expected growth track on 2021 revenue and profit from LOE assets. We're looking at a roughly $105 million drag on revenue in 2021. This is substantially less than we've had to overcome in prior years. In 2016, our company was facing a mountain of LOEs coming at us in the condensed time frame, and so we started disclosing the expected impacts to you so you could follow along. Obviously, this made it more difficult for us to post growth. In the last three years, the growth drag ranged from $290 million to $360 million. The great news is that the impact of the bolus of LOEs has dramatically declined, and importantly, looking out over the next five years, LOEs will be quite manageable. The LOEs have been a long road for us, but this governor on our road is mostly behind us. Back to you, Joe. Thank you, Paul. Let's get started with the Bausch & Lomb International highlights on slide 17. The chart on top of that shows that recovery is in progress. In global vision here, recovery in the U.S. is ahead of the rest of the world with reported revenue growth of 2% compared to 2019 driven by line extensions for BioTrue One Day and Ultra. In global consumer, despite the pandemic, our iVitamin franchises and Lumify grew organically. Both revenue and procedures in global surgical are approaching pre-pandemic levels, and we expect delayed cataract surgeries from 2020 to create a tailwind for 2021 and beyond. Results of TRX has grew by more than 40% in 2020 compared to last year. Finally, as Paul mentioned, international RX was a standout with strong organic revenue growth of 6% compared to last year. You can see the strong signs that recovery is in progress from the charts on slide number 18. Starting on the top left, field consumption for U.S. VisionCare shows recovery in progress for the last seven months. Next, by Zolta TRXs also show a positive, consistent trend. Lumify recovery has been in progress since April of 2020. And finally, Stellaris Elite procedures in the U.S. and international surgical revenues are now similar to pre-COVID levels. Growing market share was our focus during the COVID downturn, and on slide 19, we showed that market share gains we achieved. Vysolta is up 40 basis points. Lodomax SM is up 160 basis points. And ProLensit is up 180 basis points. On the bottom left, we showed a strong positive trend in market share for our intraocular lenses in the U.S. And finally, on the bottom right, U.S. consumers also gained share in key segments. Moving down to slide 20, Infuse is our daily side-high lens, which was launched in the U.S. in August. It's a significant opportunity. We estimate the U.S. market for these lenses will grow from $1 billion today to approximately $3 billion in 2030. The global opportunity is also significant, and we expect global revenue for Bausch & Lomb side-high daily lenses to exceed $250 million. We paired and fused with Oslo Protectants and Electrolyte, and we are encouraged by the results. The lens is doing exceptionally well with patients who experience contact lens dryness. We have great results from a recent online survey on page 20. 94% of patients agree that Infuse helps keep contact lens from feeling dry. This data supports that Infuse addresses one of the big issues in the sci-fi daily market, and we believe these lenses will be an important growth driver. Let's turn to sales on slide number 21. With organic revenue growth of 2% in the fourth quarter versus last year, we are seeing clear signs that recovery is in progress. Let's start with our largest product, Syfaxon. As I mentioned earlier, Syfaxon TRX has grew sequentially by 2% compared to the third quarter of 2020. Trulance TRX has grew by 47% in 2020 compared to the overall market growth of about 6%. Finally, Relastor TRXs grew by 9% in 2020, compared to a market decline of 4%. On slide 22, we've shown the strong recovery trend for Syfaxon, Trulance, and Relastor TRXs. On slide 23, we show the GDI market share gains we achieved relative to last year. In terms of TRX market share, Syfaxon is up 80 basis points, Trulance is up 170 basis points and Relastor is up 160 basis points. One additional point to note on Trulance, URX market share also increased from 5.5% at the time of the acquisition by Bausch Health in March of 2019 to 12.1% URX share in December 2020. We believe this is a great leading indicator for future Trulance TRX for share gains. Now onto orthodermalogics on slide 24. A few highlights to note. Notwithstanding the impact of COVID, SALTA had a great 2020. Thermage reported revenue grew by 47% in 2020 compared to last year, which was driven by China and expansion into new geographies. We expect the aesthetic market to continue to grow, driven by the new Zoom culture and by consumers who have the ability to invest in self-care. 2021 growth catalysts include continued market penetration in China and the U.S., as well as geographic expansion into Europe. Another growth catalyst is the U.S. launch of Solta's Clear and Brilliant Touch Laser, a treatment that can help prevent the worsening of fine lines and wrinkles. Julia also grew in 2020 compared to last year, with reported revenue up 3% and TRX growth of 18% compared to a flat market. Finally, our psoriasis products. We believe there is much more to do here, but to be clear, Duovre and Selic both grew substantially in 2020 versus last year. Duovre TRXs grew 53% compared to 5% market, and Selic reported revenue grew by 39%. The charts in slide 25 show the recovery in orthodermalogics. The Lodge revenue had a great performance in 2020. It benefited from increased demand for aesthetics. The Julia TRX trends showed solid recovery since April of 2020. And lastly, Duobre TRXs began to recover over the summer. We highlight the gains in TRX market share we were able to achieve for key promoted brands. Duobre up 40 basis points, Julia up 140 basis points, and an exit up 70 basis points. Turning now to slide number 27, we have identified the key growth drivers for our business in 2021 and beyond. First, we expect a ramp-up and additional approval for the SightHide daily lenses. We've now launched these lenses in Japan, U.S., Hong Kong, Australia, and Canada, and we anticipate launching in Europe over the next year. Next, we expect a tailwind going into 2021 from a backlog of cataract surgeries that were delayed in 2020 due to COVID. In the U.S., we estimate that about 650,000 cataract surgeries, or roughly 16%, were delayed in 2020. While outside the U.S., we estimate that approximately 20% of the surgeries were delayed, creating a potential tailwind for 2021 and beyond. and we are expanding the sales force of the Thermage franchise into Europe. And finally, given the momentum which we head into the year, we expect to see strong performances in recovery of leading brands, including Syfaxis, Ultra, Preservision, Lumify, and Visalta. We also have a number of near-term catalysts in upcoming R&D pipeline, which is outlined on slide number 28. We expect to initiate a phase two trial for the MSLM on our S1P modulator for patients with mild to moderate ulcerative colitis. We expect a readout of Phase 3 results for NOVO3, Investigational Treatment for Dry Eye Disease. We've also published the NOVO3 Phase 2 data for dry eye disease, and the data is outstanding, and importantly, met all the primary endpoints. We're also making progress with our rifaximin lifecycle programs. In addition to our program for sickle cell disease, we recently received positive feedback from the FDA on a new rifaximin formulation for the prevention of the complications of cirrhosis, and we are proceeding straight to a Phase III study for what we refer to as the RED-C trial starting in the second half of 2021. In addition, we are exploring several COVID-focused treatments. To be clear, we're not a vaccine company, but we have found ways to contribute to the ongoing efforts to combat the disease. With that in the background, let's move to slide number 31. I want to give a brief update on the progress we are making on a previously announced intention to separate Bausch & Lomb into an independent company. First, we took this action because we saw an opportunity to unlock shareholder value, especially relative to our peer iHealth companies that we see for B&L. We've been making good progress on our goals since our announcement in August 2020. We are on track for the financial segmentation reporting to be complete by the end of the first quarter of 2021, and we expect all internal objectives necessary for the spin of B&L to be achieved by the end of the third quarter of 2021. At the same time, our operational focus is on taking action that has the potential to expedite the spinoff. As I mentioned in 2020, when we hired strategic advisors, we also received a number of inbound calls expressing interest in our great businesses and creative ways to unlock value for all of our stakeholders, which may include divestments. As we have previously stated, improving our leverage ratio continues to be a priority, and we are focused on that. We are planning to increase our EBITDA, as Paul mentioned, which will increase cash, decrease debt, and decrease leverage. We also believe that improving working capital will also help us to decrease debt. And we believe pursuing a spin-off that is preceded by an IPO process could also potentially accelerate the timing of our B&L spin. To be clear, we are and have been actively pursuing all opportunities to expedite leverage improvement and deliver shareholder value. And to answer another investor question, to be clear, we are not planning to issue Bausch Healthcare equity at these levels. To wrap up, we exited 2020 with great momentum and remain strategically focused on executing on our business, capitalizing on key growth drivers and catalysts to grow EBITDA, improving working capital efficiency, deliver our company, and unlock shareholder value. With that, operator, let's open up the line for questions. Thank you.