Q1 2020 Earnings Call

[music].

Good morning, welcome to the Bausch Health first quarter 2020 earnings call.

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Please note. This if that is being recorded I'd now like turn the conference over to Arthur Shannon. Please go ahead.

Thank you Brent good morning, everyone and welcome to our first quarter 2020 financial results conference call participating on today's call, our chairman and Chief Executive Officer, Mr., Joe Papa Chief Financial Officer Mr., Paul Everything in addition to this live webcast a copy of today's slide presentation. 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 a presentation. Today contains forward looking information we would after you take a moment to read the forward looking statement legend at the beginning of our presentation I think it contains important information.

Presentation contains non-GAAP financial measures for more information about these measures. Please refer to slide to the presentation non-GAAP reconciliations can be found in the appendix to the presentation posted on our website finally, the financial guidance in this presentation as effective as of today only it is our policy generally not update guidance until the following quarter and.

Got to update or affirmed guidance other than through broadly disseminated public disclosure would that it's my pleasure to trying to call over to Joe.

Thank you are and thank you everyone for joining us today I'm going to begin today's call with some comments on our response to covert 19 and briefly summarize the first quarter results all hair Dean our CFO will then review the first quarter in more detail and update our 2020 guidance I'll conclude with some closing remarks before.

For opening the line for questions.

Beginning with slide five.

Have you started to see the impact cobot 19, and the unprecedented market disruption. It was creating our first priority was to make sure that our people were safe we took appropriate measures to protect our supply chain stability to meet customer demand, we reached out to help our customers, we minimize disruption to our R&D projects and we protected our financial stuff.

Realty our team did a great job, but then money business continuity plans across 100 countries and enabled us to remain focused on supporting our customers and health care patients globally. In fact, we have over 10000 colleagues on the supply chain front lines have been and continue to work hard for me.

Make sure that Bausch helps products remain available for the patient and consumers who rely on them. It big Thank you.

So all of our supply chain plays that enable us to continue meeting customer demand importantly to date, we've not seen any material cobot 19 related to supply disruptions, we have access to multiple sources apiay intermediates many of our products at this time the availability of apiay into.

Immediate has not had is not expected to have a material impact on our supply chain.

With respect to our largest product Saxon we have five months supply on hand enough active ingredient manufacturer. Another five months supply finished goods.

We've also been able to minimize disruption of our commercial capabilities in R&D efforts, we have been supporting health care professionals virtually we're in person interactions are suspended and we're working with health authorities and investigators to protect our clinical trial participants and personnel.

Also we believe the steps we took over the last several years to manage our capital structure have placed us in a strong position to weather the storm from as liquidity perspective, we have no amortization payments for debt maturities until 2022, and then we have an undrawn revolving credit facility to sum up we have.

Taking actions to keep our colleagues safe.

Our supply lines intact and to lay the foundation of our company work through the code 19 uncertainties.

With these measures in place our goal was to fulfill our mission of improving People's lives with our health care products on slide six is outlined the actions we've taken first and foremost we're working to advanced science to find solutions for cobot, 19th we have initiated clinical trial programs in Canada evaluating investigational use of Nebulized anti virus.

Virazole in combination with standard of care therapy to treat hospitalized adult patients with respiratory distress.

And the sales team is working to initiate trials to evaluate satisfaction in combination with established therapies to potentially address the symptoms of gastrointestinal distress in pulmonary compromise associated covered 90.

Second Bausch health is actively donating medicine and healthcare products to assist in the global fight against coded 19, including Clark win as it there my son, Eyedrops daily contact lenses and Nebulized virus off.

We will remain focused on doing our part health and this unprecedented global health pandemic and providing resources to support global health care systems, frontline healthcare workers and the patients and their care.

I am extremely proud of the job that our team has done an facing these challenges and making sure that our business to continues to operate during this period with minimal disruption I. Thank the entire by shell team for their continued focus and dedication over this critical period moving now to slide seven I want to address the estimated impact it.

Hi, Good Nineteena has had on our first quarter results Paul will cover this in more detail, but at a high level, we estimate that coded 19.

Adversely impacted first quarter revenue by roughly $35 million or approximately 2%. This included a positive impact of $30 million from pantry loading, including a global consumer end use vision care as customer stocked up on supplies in advance of the shutdown and it was offset by a negative covered 19 impact to revenue of approximately 65 million dollar.

Yes.

This proposed the postponement of elected medical procedures as directed by public health authorities effect in our global Solta and surgical business units as well as our ophthalmology Rx business were pre and post operative prescriptions declined our international vision care business was impacted by retail store closures by decline and contact.

Lens were due to decreased social interactions.

Finally medical office closures in the US resulted in prescription declines in late March which affected our derm and dentistry business unit.

With these points in mind, let's briefly review the first quarter results on slide eight.

While total company result was flat compared to the prior year. There were a number of first quarter highlights to note our largest segment Bausch and Lomb international delivered 14th consecutive quarter of overall organic revenue growth. Despite headwinds from covered 90 sales reported mid single digit organic growth. Despite approximately 40.

Million dollars of L., we lots of exclusivity headwind primarily from a presale satisfaction Trx is grew by approximately 6% and retail extended units saw approximately 6.5% growth first the first quarter 2019, trulia generated $19 million revenue in the first quarter and Trx grew by 50.

Two per cent compared to the prior year quarter Relistor revenue increased by 19% as result of growth in the oral formulation and new market access formulary wins, we're also able to repay approximately $220 million of debt during the quarter using cash generated from operations on the right. We have called US a notable key.

Developments first after we settled with Cabot early in 2018 earlier. This week, we resolve the outstanding satisfaction IP litigation with Sandoz under the terms of agreement all intellectual property protecting surfaxin remain intact, and we preserved market exclusivity until 2020.

Hey.

We also had some commercial access improvements due to new formulary wins, resulting in low to Max SM increase part D access to 45%, 55% respectively on the R&D front, we have completed the acute key study for EMV, Celmod, which evaluated cardiac safety profile topline results were.

Positive and we expect to initiate a phase two study and the second half of 2020.

The Rifaximin study for avert hepatic encephalopathy was also reported favorable topline results great news that will help inform further research on our next generation indications at formulations. Finally, despite cobot 19 related headwinds, we expect that our plan 2020 launches will remain on track, including the.

Launch of the site high daily lenses in the US, which we are preparing for the second half of 2020.

Overall, we believe these first quarter highlights demonstrate that we have built a sustainable and durable business that is well positioned to weather. The uncertainties created by covered 19 with that I'll turn it over to Paul.

Thanks, Joe we're off to a great start to the year and then coping 19 through us into a world of uncertainty.

The balance of 2020 and about the potentially lasting impacts of the virus on the way, we promoted products in 2021 and beyond.

Sitting here today, it's unclear with a new normal might look like but I'm confident that with our portfolio of durable brands, we will adapt and prosper.

What were slide 10, showing our revenue by business reported revenue was roughly flat versus Q1 2019, FX was a 90 basis point headwind. So constant currency. We grew 1% organically we are flat as a synergy acquisition closed during Q1 to 2019.

Both Salix and BNL international posted organic growth the bulk of the coal with 19 impacts on our Q1 results were in the Asiapac region. However, social restrictions in the US beginning in March became an immediate headwind for certain of our us businesses as well.

The BNL International segment was plus 2% on an organic basis Copa diabetes negatively impacted our vision care surgical and also Rx businesses, while consumer in international farmer saw some pantry loading the increased revenue in the quarter as consumers in the us in other regions observe how social restrictions played out in Asia.

They took steps to ensure that a stocked up on products. They want to have on hand through a lock down period.

Global vision care was down 3% organically. This was a tale of two environments nearly half of our global lens business and is in the Asiapac region and it was devastated by Cobot 19, China was down some 66% versus Q1.

2019 organically.

Overall vision care outside DNS us was down 16%.

The U.S. was another story U.S. vision care business was up 24% versus Q1 or 2019, the ultra monthly Silicon Hydrogel brand family was up 49% in the US aided by the mid March into the mid 2019 launch of the multifold local toward.

I had two one day lenses continued to deliver impressive growth plus 23% of the west versus Q1 2019.

The read through here is that as we gear up for the launch of the daily Silicon Hydrogel lenses in the US which is still on track to age 2020, you are seeing that our vision care business led by John Ferris has in place a high performing team capable of driving attractive growth in a very competitive category.

Dino consumer was up 12% organically outside the United States, plus 4% in plus 24% in the US we benefited from consumers pantry loading during the quarter.

In the us Lou if I sales in the quarter were up $9 million at 91% versus Q1 of 2019 and Louisville fight was not one of the brands with significant pantry loading.

Preservation sales in the US were up 26% from Q1 2019, driven by impactful DTC campaign and successful promotional activities with Costco.

Two multipurpose solution was plus 32% us versus Q1 to 29 team my takeaway from the pantry loading as the consumers intend to stick with the or BNL consumer products. They loaded up ahead of sheltering at home and I expect that many found in will find ways to continue to purchase our consumer products, whether that's on trips to the pharmacy.

The home delivery or internet fulfillment, some brands will be more resilient than others, but overall the reasons for optimism for a global consumer portfolio through the situation.

BNL surgical was down 6% organically outside the U.S., we were down 8% organically and soft in many markets, but particularly China with surgical revenues were down more than 40%.

In the U.S., we were actually doing quite well until March and ended up down 2% organically.

Global Opto Rx was down 16% organically down 10% organically outside the U.S. and down 18% in the U.S.

Outside United States, the cobot impact in China was a big factor in the U.S., which accounts for roughly 60% of global Opto Rx revenues two of our major products are most often use pre and post eye surgery at low to Max and per lens.

Those grants are rapid declines in Trx is in March at surgeries began to be postponed continued erosion from the yellow we have low to mid suspension was a big factor versus the prior year quarter as well on the plus side prior to the cobot impact being dealt us myself that had been showing improved momentum in trx. This sales reached 30.

$10 million in the quarter, plus 56% versus Q1, or 2019 and that was with only about 30% Med D coverage beginning July 1st our Med D coverage provides ulta will step up to roughly 45%. So things are looking up to a result.

International Pharma was plus 9% or plus 24 million organically versus Q1 to 2019.

Canada, Poland and other eastern European countries delivered the growth.

I want you to note that our international pharma businesses are being in eastern Europe, The Middle East, Canada, and Latin America, our international pharma businesses in Asia Pac in Western Europe, a much smaller.

It was very little Kogut impact on international Farmer during Q1, and we're expecting these units to be relatively resilient.

On the sailings Salix was up 32 million or 7% on a reported basis, a major grows reside Saxon plus $69 million or 23% and truly its which was acquired in March of 2019, which was up 13 million bucks quarter over quarter, Elouise, including a presale, you cerus, where a growth drag in this segment.

$40 million in Glumetza declined as expected by $17 million or roughly 45%.

Oh, the 23% growth to sex acts and 6% came from increased net selling prices relative to Q1 of last year.

The impact of the price increase that we took in January offset by associated increases in rebates.

The 17% increase since I've facts and volume came roughly half from an excuse me from increased in consumption and half from an increase in wholesale and retail channel inventories relative to Q1 of 2019. There was no plan to increase channel inventories. This was just normal fluctuation from quarter to quarter.

Truly its trx growth was driven by increased promotional effort as well as improved managed care coverage.

A quick shout out to the Salix team led by nickel or kalen, Josh coil, our key brands and the dji space rely on the addition of do patients to sustain and grow prescriptions roughly half of Xifaxan I rexs are for the acute indication of IBSD and truly it isn't a clear growth phase so both rely on adding new patients to the fund.

Lets accident truly anti rexs have been fairly durable through the last eight weeks and that speaks to the pre co bid success of our Salix team building awareness and support for our brands amongst physicians.

Through the first four weeks of April that's actually Trx remain at roughly 90% and truly it's better than 95% pre cobot levels.

You also George segment was down 5 million or 4% on a reported basis medical Durham was down 18 million or 18% passing that coming for price and half from volume.

We had strong growth of do Jublia and modest growth from the oil brief but those are more than offset by decline in royalty income from Carrick in a number of other products.

The onset of cope with 19 of the U.S. heady rapid and dramatic impact on our portfolio of met derm products.

Global Solta grew 37% organically versus Q1 of 2019 pretty good.

But total was up much more than that early in the quarter before cobot 19 took the wind data so sales.

Note that some 60% global sold to revenues are from the Asia Pacific region.

Finally, the diversified segment that was down 27 million or 9%.

Neuro was down 24 million versus the first quarter last year Elouise accounted for 31 million dollar decline and that was partially offset by well butane in uplands in that together grew 14% versus Q1 to 2018.

Yes, generics business was flat with Q1 last year and dentistry was down roughly 16% the onset of Covidien US also had a rapid and dramatic impact on our dentistry business. So that's the revenue story of the quarter. So let's move to slide 11 to cover the rest of the BNL.

Our gross margin improved 80 basis points from Q1 of 2019. Most of this improvement can be traced to say like segment, where gross margins increased over Q1, 2019 by 330 basis points as we paid lesser royalties on glumetza in a presale due to lower sales and a royalty on xifaxan net sales expired in Q3 at 20.

T.

Selling advertising and promotional expenses were unfavorable 7 million or roughly 3% on a constant currency basis to the addition of sales resources in connection with the synergy acquisition and higher selling costs in the U.S. vision care group that supported the excellent growth at that team is delivering.

DNA expenses were $35 billion unfavorable to Q1 of 2019, mainly due to increased IP and legal costs noted as I've said in the past our June a run rate is something like $150 million per quarter. So we're right around that level in the prior year quarter was at a low level and less reflective of our go forward run rate.

R&D was up $5 million as we continue to build out our R&D organization to support a brought a plate of development projects. So quick summary.

Revenue was down 4 million.

80 basis points better gross margin gets you to plus 13 at the gross profit line Opex growth Rose 47 million, mainly due to an unfavorable club for Gionee and that gets you to minus 34 declined that EBITDA.

Excuse me adjusted EBIT day, and down 38 million at adjusted EBITDA versus Q1 of 2019 couple of things below the operating line that interest expense was favorable by 13 million going the other way our income tax rate on adjusted pre tax earnings increased from 6.3% to 10.4% relative to the.

Aspect that 8% rate that reduced adjusted net income by roughly $8 million.

I'll point out at our quarterly tax rate can be quite volatile in normal times in a world. We are forecasting the balance of 2020 is more challenging than normal even more so we continue to believe that the tax rate on an adjusted earnings will be 8% for the full year Twentytwenty turn to slide 12 in the quarter, we generated 261 million a cash from operations.

That's down 152 million compared with Q1 of 2019. The biggest factor was an increase of working capital primarily due to the cold related delays in collections from accounts, mainly in Asia Pacific. There was also a shift in the timing of cash interest payments due to our refinancing activity and finally, we made a licensing payment in the quarter for an agreed.

We executed in Q4 last year turn to slide 13. This shows the progression of our debt balance over the last four quarters. The settlement of the U.S. Securities litigation funded with unsecured debt raise in December last year set us back on reducing the quantum of our debt in improving our leverage ratio. However, it was the right thing to do and we will get right back to partner.

Prioritizing the use of available cash to reduce our debt I reported back on the February call that the December 30, Onest 2019, net debt balance was inflated by the timing of the December debt raise in the use of those proceeds.

In on if you see the our December 31, 19 net debt pro forma for the deployment of those funds was roughly 24.2 billion or the same basis, our pro forma balance at March 30, Onest. The net debt balance is roughly 24 billion about 20 200 million lower sand the pro forma net debt at year end.

Turning to slide 14 site 14, as a slide we had relegated to the appendix, but in light of the importance of liquidity Nicole would world I want to speak to where we are sitting here today, we have over a billion dollars available under our revolving credit facility and no debt coming due this year or in 2021, our next debt maturities in the for.

First quarter of 2022 importantly, all of our debt coming due in 2022 is of a secured nature. That's an important distinction as a senior secured debt markets are a more predictably available source of capital the risks associated with refinancing the twentytwenty to maturities with secured debt are lower than if those.

Maturities were unsecured let's shift gears and cover guidance for the full year Twentytwenty.

Well Kogan 19 had a modest impact on our Q1 results our expectations of the impact for the full year are meaningful.

We have a which we are a diversified healthcare company, we have different businesses and operate in many geographies around the world.

Each of our businesses will be impacted to different degrees as covert 19 plays out. In addition, the tight until the cobot impact bottoms out and the shape of the recovery curves will be different in each and every one of the markets, where we do business.

On slide 16, we group our businesses into four buckets from those businesses that we believe will be east impacted to those that we think will be most impacted by covered 19 bear in mind that the BNL International segment that represents roughly 50% of our excuse me, 56% of our total revenue in 2019 or.

Operates in more than 100 countries and that the mixes of revenue within each of those countries are very different for example in Asia Pac more than 40% of the regions revenues come from vision care in North America Vision care is only 5% of total revenues the progression of cobot 19 in each and every country will be different.

Depending on the nature in effectiveness of local steps taken to control the spread of the virus within the U.S. the recoveries unlikely to be uniform across all regions as a little long winded there, but I think it's important when you think about the range of outcomes for us in Twentytwenty.

Flip to slide 17, where we list our major assumptions with respect to covert 19.

I'll start with broad assumptions first we are assuming that health authorities will use the learnings from the initial outbreak and recovery to be far better prepared to deal with a potential resurgence of the virus in the fall.

We assume that in the event of a fall resurgence, we will not see significant social restrictions put in place by local authorities.

Second we are assuming the global economies will recover as the covert 19 situation resolves over the balance of Twentytwenty.

With respect to our business. It does this impact and recovery assumptions, we see the greatest impact on our businesses. During Q2 due to the shelter in place directives closing of retail outlets healthcare providers closing offices and post pulmonary elective surgeries, we expect the recovery to begin in the latter part of Q2 and continue into Q3 and.

Q4.

We expect that all of our businesses have the ability to returned to pre covert levels. Some perhaps as early as late twentytwenty, but most certainly in twentytwenty, what several of our business units will recover more slowly, particularly BNL surgical our medical dermatology business and our dentistry business on slide 18, we show.

Our revised guidance for 2020, the uncertainty around the depth of the covert impacts and the shape of recovery Chris for each of our businesses presented challenges for us for sure we.

We develop multiple scenarios based on various assumptions regarding the impacts of over 19 on our businesses based on our review the range of outcomes and therefore, our guidance ranges are wider than normal.

I want to point out that FX rates have been very volatile since we provided guidance back in February and reduce our revenue expectations for 2020 by some $160 million and adjusted EBITDA by 70 million.

For currencies account for the bulk of that change the euro the Russian ruble Canadian dollar and the Mexican peso.

Our revised guidance ranges are for revenue of $7.8 billion to $8.2 billion and adjusted EBITDA of $3.15 billion to $3.35 billion. We're now expecting SGN aid to be down roughly 200 million on a reported basis with about $25 million that decrease due to FX. So in light.

To the reduced revenue expectations for 2020, we took steps to reduce our full year 2020, yes, cheney by roughly $175 million on a constant currency basis.

Finally would reduce revenue and profit expectations, we've reduced our guidance or cash generated from our operating activities to roughly $1 billion.

With liquidity a topic that is top of mind I want to state emphatically that we are in excellent shape.

And at the low end of our revised guidance ranges, we're still strongly cash flow positive we remain comfortable compliance with the terms or our debt agreements with substantial covenant cushions.

We have a $1.25 billion revolving credit facility under which we have ready access to more than $1 billion and we have no scheduled debt payments until the first quarter of 2020, assuming 2022.

Before we turn into 2020 guidance bridge. Please note we are revising our revenue.