Bausch Health Companies Inc. (BHC) Q2 2020 Earnings Report, Transcript and Summary

Good morning. My name is Christine. I will be your conference operator today. At this time, I would like to welcome everyone to the Bausch Health Companies Second Quarter 2020 Financial Results Conference Call. All participants will be in listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions]. At this time, it is my pleasure to turn the floor over to your host. Mr. Shannon, you may begin your conference.

Thank you, Christine. Good morning, everyone, and welcome to our second quarter 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 Herendeen. 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 would like to remind you that our presentation today contains certain 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 2 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 for joining us today. I'm going to begin today's call by sharing our current perspective on the COVID recovery process and briefly cover the second quarter highlights. Paul Herendeen, our CFO, will then review the second quarter in more detail and update our 2020 guidance. I will conclude by covering the core priorities we have identified to drive Bausch Health future before opening the line for questions. But before I address these topics, I'd like to comment on this morning's announcement that we have decided spin off our eye health business as an independent, publicly-traded company. The spinoff will establish two separate companies. It's fully integrated, pure play eye health company built on the iconic Bausch + Lomb brand and a long history of innovation and an international diversified pharmaceutical company with leading positions in gastroenterology, dermatology, esthetics, neurology, and in international pharma business. Four years ago, we initiated a multi-year plan, first to stabilize and then to transform Bausch Health into a company positioned to deliver long-term organic growth. Over that time, we have divested approximately $4 billion of non-core assets, paid down over $8 billion of debt, resolved nearly all of the significant legacy legal issues and managing the loss of exclusivity on a $1.4 billion product portfolio, while also investing in research and development, new product launches in core franchises with attractive growth opportunities. Our board and management have been working over the last 12 months to determine how best to unlock value across our businesses and believe that separating into two highly focused and attractive standalone companies is the way to accomplish that goal. We've looked at the value of our peer eye health companies like Alcon and Cooper, and believes that Bausch + Lomb would compare very favorably when investors have an opportunity to make a judgment about the relative value with the standalone business. We also believe that now is the right time to begin the separation process, which requires us to complete several steps before a spinoff can occur. Because this process is in the very early stages, there are many details that have not yet been determined, such as leadership, capital structure and the anticipated financial impact. Our goal is to be in position to execute the spin off as soon as practicable once all the necessary conditions have been satisfied. We look forward to providing updated information and additional detail as the spin off process progresses. With that, let's turn to slide five. Overall, we have successfully managed our supply chain and continue to make the essential products that are needed by our customers and patients during COVID. COVID has impacted each of our businesses, but the amount varies by business and geography. For example, we are seeing variability by geography in the speed and magnitude of the recovery process. In the United States, recovery appears to be pressing more quickly in our B&L Surgical, Vision Care and Ophtho Rx business. In fact, Consumer business was less impacted by COVID than our other business units. In B&L Europe/Asia, recovery has been more gradual as consumers have been slower to return to normal habits despite reopening. Another example of COVID variability is Salix. XIFAXAN, hepatic encephalopathy, prescription volume saw less COVID impact versus XIFAXAN prescriptions for IBS-D. Given these conditions, we will continue to focus on investing in our key promoted brands to increase market share, optimize our cost structure and invest in new technologies like e-commerce. Turning to slide 6. A lot of data on the slide, but let me highlight a few key points. Overall organic revenue declined by 21% during the second quarter, but even during this challenging time, many of our brands and products were able to grow and gain market share. Starting with Bausch + Lomb, an organic revenue decline of 24% was driven by reductions in elective surgery and reduced wearing contact lenses with COVID-19. However, several key launch products, VYZULTA and LOTEMAX SM, each had strong Rx growth, up 42% and 125% respectively compared to last year. Most importantly, we continued to receive new product approvals. 510 clearance for INFUSE, our SiHy daily lens in the US, occurred and also an approval for Bausch + Lomb ULTRA in China. Moving to Salix. While organic revenue declined by 21%, the segment had an LOE drag of approximately $39 million during the second quarter. We saw strong TRx growth from TRULANCE and RELISTOR which were up 50% and 6% respectively compared to the second quarter of 2019. And XIFAXAN was impacted this quarter by COVID-related office closures, but script declines have started to reverse as of June 2020. In Ortho Dermatologics, the closure of dermatology offices to stay at home orders resulted in an organic revenue decline of 5% for this segment. Dermalogics however grew reported revenue by 12%. JUBLIA had TRx growth of 7% compared to last year and received an expanded indication to treat patients as young as six years old. We also launched ARAZLO in the US during the quarter. With respect to DUOBRII, we did receive notice on July 23 that an ANDA has been filed. We have orange book listed patents for DUOBRII covering our product until 2036. We remain confident in the strength of DUOBRII related patent and will vigorously defend our intellectual property. A few additional highlights. Christina Ackermann and her legal team recently solved two pending legacy legal matters. The SEC's investigation of the company's former relationship with Philidor and certain of our company's legacy accounting practices and public disclosures during the time period of 2014/2015. Also, we resolved the Canadian securities class action litigation, which is subject to court approval. Despite COVID headwinds, we've paid approximately $100 million of debt in the second quarter using cash generated from operations. The second quarter highlights demonstrate that we have a global, diverse portfolio of durable products and strong brands that are well positioned to grow market share and return to growth as the world recovers from the pandemic. With that, I'll turn it over to Paul.

Thanks, Joe. The story of Q2 2020 versus Q2 of 2019 comes down to one word, and that's COVID. Please turn to slide 8. COVID was the primary driver in substantially reduced revenue across all of our business units. Overall, organic revenue declined 21%. All four segments declined, led by B&L International, down 24%; then Salix, down 21%; then diversified, down 17%; and finally, Ortho Derm with the smallest decline relative to Q2 of 2019, it was down 5%. Within B&L International, as expected, Global Surgical suffered the greatest impact from COVID as non-essential surgeries essentially stopped in many markets. Global Surgical was down 48% overall. It was down 49% outside the United States and down 44% in the US. We'd expected that the O-US surgical markets would begin to improve as the second quarter played out, and they did, but at a slow pace. Meanwhile, in the US, we saw quite a deep dip and then a pronounced recovery with US surgical revenue in the month of June down only 10% versus June of 2019. I'll talk a bit more about the pace of recovery of various businesses and geographies when I get to guidance. Ophtho Rx was down 42%, not surprising due to the weighting of the products in this business that are used pre and post eye surgery. 60% of Ophtho Rx is in the US. And as we saw in the surgical business, the US part of the Ophtho Rx recovered nicely off of the floor that we saw in April. Global Vision Care on an organic basis was down 37%, down 43% in the US and 34%. O-US. Outside the US, we had thought that Vision Care would show more life as social restrictions were eased. However, in the Asia Pacific region, which represents just less than 50% of our global Vision Care business, there have been some resurgences of COVID and the governments there have been quick to reimplement significant restrictions, albeit on a local level. More importantly, we are seeing that consumers in Asia Pac and, to some extent, in Europe remain reluctant to go out to retail stores, are staying home more and not wearing their contact lenses while at home. Another overlay is that many of these economies are under pressure and consumers are constraining spending. That's all O-US. US Vision Care fell to a very low level in April and then snapped back in June. Looking ahead, while there were and are plenty of headwinds in the US Vision Care business, we carried a bit of momentum into Q3 associated with the buzz surrounding the launch of our daily silicon hydro gel lens – that's INFUSE – and by eyecare professionals' acceptance of virtual engagement with BHC sales reps. We're pretty proud of this. We were early in the process of finding ways to remain engaged with ECPs during the depths of the pandemic, and we believe that those efforts strengthened our US Vision Care teams' relationships with ECPs. B&L Consumer was down 11% on an organic basis, down 15% outside the United States and only down 4% in the US. In the US, we did see some pantry loading in Q1. So, that took a little off the top of Q2 revenues. On a consumption basis, both LUMIFY and PreserVision grew versus Q2 of 2019. The O-US consumer business correlated with the softness we saw in our O-US Vision Care business in our renu and Biotrue solutions, which are big parts of O-US consumer, lost quite a bit as they followed the lower utilization of contacts that I just spoke of. Finally, International Pharma. As expected, this was more resilient than other parts of our company, and was "only" down 7% on a constant currency basis. Even within that, there was high variability as we had strength in Latin America and Africa/Middle East, but that was offset by weakness in Canada, Western Europe and Eastern Europe. Moving on, Salix was down 21%. XIFAXAN was down 12% as volume declines overwhelmed the impact of improved net realized pricing. Volume was down primarily due to – this is for XIFAXAN now, was down primarily due to the COVID-19 pandemic, including – but also included reduced channel inventories relative to the prior-year quarter at the retail level, not the wholesale level. In recent weeks, XIFAXAN Rx trajectories have been improving as GI offices reopen and our Salix sales teams are able to complete more face to face calls. COVID took the top off of TRULANCE's terrific growth trajectory. And even still, Rxs in Q2 of 2020 were up 50% versus Q2 of 2019. Even with COVID, TRULANCE is emerging as a great storyline for us. This was an opportunistic acquisition orchestrated by our colleague, Scott Hirsch, and then our Salix team is leveraging our strong position in the GI space to gain share at a great clip in the competitive IBS-C category. TRULANCE year-over-year revenue was flat as we had to take reserves for additional rebates in conjunction with some recent managed care wins for TRULANCE, but the improved access should position TRULANCE to continue an impressive growth trajectory. A few other items of note in Salix. On the good side, RELISTOR revenue was up 8% versus Q2 of 2019. Going the other way, the Apriso was a major growth drag. It was down $33 million versus Q2 of 2019. And Glumetza was down $25 million or about 60% on a huge volume uptick, but at very, very low realized net pricing. I think we foreshadowed that pretty well for you. The Ortho Derm segment was off 5% with medical derm down 4% and Solta down 7%. In med derm. volumes fell off dramatically as derm offices were among the earliest to close down and slowest to ramp back up. We did benefit in the quarter from dramatically improved gross to nets for ELIDEL and SILIQ. While Solta was down 7%, the Thermage FLX platform continued to deliver growth, although the pace of growth was clearly slowed by COVID. Finally, our diversified segment was down 17%. The neuro business was off 13%. Hidden in there was continued solid performance of WELLBUTRIN and APLENZIN which together accounted for about 55% of neuro's revenues. We expected these brands to be resilient in the COVID world, and they were, with WELLBUTRIN growing 7% and APLENZIN plus 10%. The rest of the neuro story is around LOEs. That's Cuprimine, Isuprel, Mephyton, Xenazine and Syprine. Generics was off 11%, mainly due to the impact of COVID-19 and dentistry was off 69% as dentist office were among the first to close. So, total revenue was down 21% organically. We realized a small increase in net pricing relative to Q2 of 2019, and that was offset by the dramatic volume declines driven by COVID. Turning to slide 9 and I'll walk down the P&L. Gross margin was unfavorable in Q2 of 2019 by some 230 basis points due to unfavorable variances triggered by COVID-related volume reductions. This is something that will persist throughout 2020. Within operating expenses, SG&A were favorable by some $137 million versus Q2 of 2019, with a good chunk coming from selling, advertising and promotion. Obviously, in a shutdown situation, we held back on promotional programs, with a few exceptions for high value initiatives that were opportunistic on our part. Selling, advertising promotion went down $123 million. Part of that was reduced sales incentive comp and distribution costs, both of which are down based on lower revenues. We also saw lower T&E with fewer sales reps actually in the field. G&A was down modestly versus Q2 of 2019 due to lesser outside services. And R&D was down $9 million due to lower project spend as some clinical activities were forced to pause. So, adjusted EBITDA was down $258 million and here's a shorthand way of how you could think about that. Reported revenue was down $488 million. COVID accounted for roughly $500 million of decline. LOEs accounted for another $78 million. And FX, another $27 million. So, buried in there, we had some underlying growth of our non-LOE assets of some $117 million, but it was just obscured. Gross margin, as I said, declined 230 basis points. So, gross profit declined some $350 million due to the revenue decline and another $40 million due to the decline in gross margin. The favorable OpEx variance of $137 million offset a bit of the reduced gross profit, but adjusted EBITDA, as I said, was down $258 million versus Q2 of 2019. Turn to slide 10, the cash flow summary. In the quarter, we generated $200 million of cash from operations. Importantly, we remain on track to generate roughly $1 billion of cash from operations in 2020. Turn to slide 11, the balance sheet summary. We changed the presentation here to split out secured and unsecured debt. The takeaway here is that we continue to enjoy excellent liquidity. Our revolver was undrawn at the quarter close. And as you saw on the prior slide, we generated cash from operating activities in a very challenging quarter. We have a bit of senior secured capacity to work with, if needed, but if you turn to slide 12, we don't have any debt maturities or mandatory amortization until 2023. So, we don't really have any pressing needs on the financing front right now. A few other factoids of note. 80% of our debt is fixed rate and our average cost of borrowing is 5.95%. Now, I know that rounds to 6, but it is pretty remarkable for a company as levered as we are. On to the guidance slide on slide 14. Before I get into the changes, I think it's worth a minute to talk about how we set guidance back in May. We modeled scenarios by type of revenue and by geography, including ranges of assumptions around the time of easing of social restrictions and then the shape of the recovery of our various revenue streams. Those scenarios point to a wide range of outcomes. 90 days later, the pace of recovery has generally trended to the lower part of the range of our expectations from back in May. Interestingly, the pace in certain of our US businesses has been on the stronger side. However, two regions in particular, Asia Pac and Western Europe, while recovering, are recovering more slowly. Our thesis back in May was that the markets that saw the earliest onset of COVID would be the first to begin to recover and move back towards pre-COVID levels. Now, as I said, certain of the US businesses – that's Vision Care, Surgical and Ophtho Rx – snapped back and they ended up in the upper end of our forecasted ranges back in May. Salix, meanwhile, is tracking closer to the midpoint of our prior expectations, being May. Outside the US, the shape of COVID recovery, and especially in Asia Pac and parts of Europe, are trending near the low end of the range of our May expectations. So, net-net, the high end of our May guidance range for revenue was no longer in play. And we now expect our full year revenue to be in the lower half of the guidance range that we communicated back in May. Specifically, the revised ranges between $7.8 billion and $8 billion. Similarly, we reduced the top end of our guidance for adjusted EBITDA with the new range being between $3.15 billion and $3.30 billion. We continue to believe that Q2 will be the quarter most impacted by COVID. Relative to what we thought back in May, we now believe that Q3 and Q4 will be more impacted relative to what we thought back in May. And it appears it will take a bit longer to get back to pre-COVID levels. That's what takes the top off of our revenue and adjusted EBITDA guidance ranges. Importantly, and as you'll hear in Joe's remarks, in each of our businesses, we believe we can continue to hold or grow share in segments that are currently depressed by COVID, so that when the COVID impacts subside, our franchises are positioned to return to their pre COVID levels and then to grow from there. I mentioned in the discussion of Q2 results, our gross margin was down due to COVID driven impacts on manufacturing variances. That situation is expected to persist through the balance of the year and we've adjusted our guidance for gross margin, down from roughly 73% to roughly 72%. A quick word about operating expenses. We've taken steps to reduce operating expenses to both protect operating profit and to preserve cash as we work our way through this situation. At this point, our SG&A guidance is some $300 million less than what we were planning back in February. Turn to slide 15, the guidance bridge. Just two things to point out in this slide. Currency moved in our favor since May, 100 million at revenue and about $30 million at adjusted EBITDA. Second, and for the avoidance of doubt, the roughly $100 million reduction in SG&A in the guidance bridge relative to our May guidance – that's relative to our May guidance. And as I mentioned, in total, from the beginning of the year, we've reduced our full year expected SG&A by some $300 million. One last thing. I'm really excited to talk about our intention to split into two businesses. Yeah, we'll be busy laying the groundwork to facilitate the spin of B&L and I look forward to our discussions regarding the exciting prospects for both companies. Lots more details on that to follow. That's it for me. Back to you, Joe.

Thank you, Paul. In a world of COVID uncertainty, our overall Bausch Health response is straightforward, focus on key brands and new product launches, grow market share, and manage OpEx to optimize EBITDA. Turning to Bausch + Lomb's Global Vision Care on slide 17. Once again, a lot of data with a few key points. The pandemic reduced consumption of contact lenses on a worldwide basis. But new fits are starting to come back after significant declines due to office closures in the second quarter. The chart in the bottom left shows average weekly change in field consumption in the United States. Our B&L recovery is in process. To be clear, the recovery in Europe and Asia is proceeding more slowly. Even during this period of disruption, we were able to grow market share for some lenses. On the right, we showed the gains in the Biotrue one day lens family, up 100 basis points versus last year in the daily disposable category. And in the frequent replacement category, the ULTRA family grew market share by 130 basis points. And finally, despite COVID, we're obtaining product approval and launching great new products to meet consumer needs, such as ULTRA monthly lenses in China, ULTRA one day lenses in Canada and Hong Kong and INFUSE daily SiHy lenses in the United States. On to slide 18, many asked about INFUSE. INFUSE is the only silicone hydrogel daily disposable lens with a next generation INFUSE ProBalance technology that helps maintain ocular homeostasis and reduce the symptoms of contact lens induced dryness. For example, INFUSE lens maintained 96% of moisture for a full 16 hours, which is more than the leading SiHy daily disposables available today, and has the lowest modulus which is associated with a comfortable lens experience. Turning now to Global Consumer on slide 19, a few highlights. Global Consumer behavior was impacted by the response to COVID-19. The chart on the left shows the percent change in total US Bausch + Lomb consumption year-to-date on a year-over-year basis before, during and right now as we emerge from COVID stay at home orders. The second key development, we are accelerating our e-commerce events and seeing results. On the top right, e-commerce grew year-over-year by 80% over the last 12 months, up 99% over the last six months, up 112% in the last three months. Despite COVID, our eye vitamins, Ocuvite and PreserVision, grew 3% organically year-to-date compared to the prior-year period. And compared to the second quarter of 2019, LUMIFY revenues grew by 36%. And finally, the chart on the bottom right shows the Bausch + Lomb gained US market share in key segments – redness relievers, multi-purpose solutions and eye vitamins compared to a year ago. Turning now to Global Surgical on slide 20. A worldwide postponement in elective surgical procedures persisted during the first part of the second quarter, but we started to see signs of recovery in the second half of the second quarter. On the left, we show the recovery of international surgery where revenue has about 70% of the pre-COVID levels. And as a comparison, in the US, we began to see a substantial recovery during the latter half of April/May, and the number of Stellaris Elite procedures has reached approximately 95% of pre-pandemic levels. Second, COVID has clearly impacted the surgical market, but we are maintaining or growing market share. US B&L cataract procedures in the second quarter of 2020 slightly outperformed the COVID impact market, declining 51% versus the prior-year period versus an overall market decline of 53%. Similarly, retina procedures in the US declined 32% in the second quarter of 2020 versus 2019 compared to overall market decline of approximately 35%. The enVista Toric IOL, which was launched in the US just prior to the lockdown, is also gaining market share. This is helping B&L increase IOL market share in the US, which has improved to 11.1% versus 10.4% share a year ago or plus 70 basis points. Turning now to Global Ophtho Rx on slide 21. As expected, the COVID related decline in surgeries also impacted global Ophtho Rx. TRxs began to recover in mid-April and we continue to drive momentum in our promoted brands, but we clearly lag 2019 performance. On a year-over-year basis, VYZULTA total prescription volume was up 42% in the second quarter compared to the market, which was down 3%. LOTEMAX SM also had a standout quarter. TRxs grew by 125% compared to the prior quarter and market share increased by 198 basis points. Turning now to Salix on slide number 22. Once again, COVID is clearly impacting the market. We are maintaining or growing our market share. Overall, XIFAXAN average weekly TRxs grew by 5% in quarter one and declined on average by 7% from the end of March through July. Recovery has begun though in late May and still remains in process. However, XIFAXAN TRx volume was down 8.8% in the second quarter of 2020 versus 2019 compared to an overall market decline of 9.2% during the same period. We've also provided year-over-year data for TRULANCE prescription data, averaging weekly TRx growth of 46% during the first quarter. TRULANCE weekly TRxs grew to 52% during the second quarter. TRULANCE TRx volume was up 50% in the second quarter of 2020 versus 2019 compared to an overall market growth of approximately 6%. Finally, RELISTOR prescription volume grew 6% in the second quarter of 2020 versus 2019 compared to an overall market decline of minus 5% and RELISTOR oral prescriptions grew by 12% in the second quarter. Move now to Ortho Dermatologics on slide number 23. Medical derm saw declines in prescription during the second quarter due to COVID-related office closures around the United States. The shift toward telemedicine favors keeping patients on existing medications. On the left, we show TRxs for US promoted brands. The average weekly change of 23% in the pre-COVID period was driven by DUOBRII launch, JUBLIA and acne portfolio. COVID hit DUOBRII, BRYHALI and the acne portfolio starting in March. JUBLIA showed growth and all brands appear to be covering since approximately early May. Despite COVID headwinds, Thermage revenue grew by 12% and recovery is still in progress. Finally, to wrap up on slide number 24, our business were impacted by COVID year-to-date today and we expect uncertainty around the pandemic to persist through the recovery period. However, we are focusing on positioning our businesses for growth in 2021 and beyond, driven by mega trends such as globalization in the world's aging populations that should increase demand for our products. Second, we're investing in key promoted brands where we have demonstrated that we can gain market share even under challenging conditions. Third, we're improving operational efficiency through what we've heard internally as Project CORE to optimize our cost structure and enable us to generate strong cash flow. Finally, we recognize that e-commerce will continue to be an important sales channel for our customers who prefer the ease and convenience of online shopping, and we are strengthening our e-commerce capabilities. In conclusion, I believe our team has done a great job resolving the legacy issues that company was facing and we are now actively moving towards the next step of our transformation. We have a plan to manage COVID-related uncertainties and we believe that both the spin-off of Bausch and Lomb will provide even more opportunities for both businesses. With that, operator, let's open up the line for questions.

Thank you. [Operator Instructions]. Our first question comes from Chris Schott with J.P. Morgan.

Just a couple on the separation. So, I know the potential of the separation is something we've discussed in the past, but elaborate a little bit more in terms of why now in terms of the decision? What got you comfortable to kind of move forward with this at this point? My second question on this is I know the numbers aren't finalized. But how do you think about the magnitude of dyssynergies from a separation? Is this something that's going to be meaningful? When we look at the business, it seems like these two operate fairly independently and would suggest maybe there's not huge dyssynergies, but just any color there would be helpful. And then maybe just one final really quick one on this is, can you remind us – as we're looking at your corporate expenses, what percent of those go to B&L and what percent are associated with the pharma business? Thanks so much.

I'll take the first one, the why now, and maybe you can help on the dyssynergies and percentage of B&L on the corporate expense side. So, Chris, great questions. Why now? So, we've been working at this for four years. What we felt we had to do is we had to get ourselves into a position where we can divest the non-core assets, about $4 billion, pay down a lot of debt, about $8 billion plus of pay down, manage the portfolio that we had – we knew we were going to lose exclusivity on about a $1.4 billion portfolio. We had to get through all these legacy issues that were part of what we faced as a company, the legal issues that Christina and her team solved, the Salix litigation, the Allergan litigation, the class action lawsuit both in the United States and Canada, the SEC Philidor accounting. The great news is those are now behind us. We also, though, knew that we had to get both businesses in a position for growth. And what we did is we invested behind R&D for new products, invested in CapEx for these new launches like ULTRA Toric, we invested for daily SiHy capability. So, a lot of activity had to happen before we could get ourselves into position to do that. We now feel that we are in that position to do that. And we reflected on our portfolio. We said that we find ourselves with a portfolio of products that are somewhat an artifact of history that were put together through a number of acquisitions. And we said, what's the best way to get these portfolio of businesses to a place where we could grow these businesses organically over the long term? And we felt that by putting them and separating them, so each of them can make those types of judgments and decisions and focus with the right long-term decision. And that's really the simplicity of the timing question. There's a lot of work to do to be clear, and we'll keep the market updated. But we felt now is the right time to start. And the activities have been done by the Board and the executive leadership team. But as you start to pull apart and separate two businesses, it takes a lot more than 20 people to do that. You really start – need to engage the organization. And once you start to do that, you've got to be forthcoming. You've got to share that information, be very transparent with investors, which is what we've always tried to do. So, that was the logic of why now, why announce it now, realizing there's still a lot of work to go forward in the future. Paul, maybe you can take the second part of the question about the dyssynergies and the B&L as a percent corporate expense side.

Chris, obviously, very good questions. First, we're not providing a spot estimate of what the dyssynergies would be in the separation of the companies. And while you point out that they do look like they operate relatively autonomously, in reality, you've got to take a look at what we're defining as the eye care business for the future. It's our Global Vision Care, Global Consumer, Global Surgical and Global Ophtho. Currently, those businesses share a fair amount of infrastructure with our international pharma business. And so, there will clearly be some dyssynergies associated with having to build up infrastructure to support those businesses when they are separated. Of course, there are also the expenses associated with standing up all of the enabling functions that will be necessary in order for the eye health business to stand on its own. So, can't give you a number today. But I would submit to you that if you were to look at levels of G&A and R&D for similar sorts of businesses, you can come up with a pretty good estimate of what fully loaded G&A and R&D particularly would be because those are the ones where you're going to see the dyssynergies. With respect to corporate expenses, similarly, you'll get to the same answer. If you go back – if you use 2019 as a guide, I believe there was circa $450 million of corporate expenses, both R&D and G&A that were not allocated. What I would suggest is that you can, in a relatively straightforward way, go back to that 2019 information and make your assumptions about how that R&D might have flopped on to what we're defining as the eye health business to go forward. Again, to be crystal clear, it's not the segment. In fact, there's actually some additional products that would be moved from other businesses into that business. So, it's not as straightforward a process as you might imagine. As we start to refine these things, we will certainly be helping you to think about what the fully loaded P&Ls would look like for the eye health business going forward.

Our next question is from Gregg Gilbert with SunTrust Charities. Please go ahead.

Good to see you taking some action here. I was hoping you could walk us through the mechanics of how and when you can affect the separation in as much detail as you're willing to provide today, at least to level set expectations of how soon or not soon this could actually happen. And then, within RemainCo, if I could call it that, does international pharma fit with the remaining pieces? I know each piece is a little bit different, but that one is distinctively international compared to the other pieces. Thank you.

The question on the timing aspect, we are working through that timeline. But the best way I can answer it right now without giving any specifics relative to exactly our timeline, I'd say is – we looked at all a lot of precedent company transactions, and usually it's somewhere in that year and a half timeframe. It usually takes somewhere around a year-and-a-half. It's going to take some time. There's a number of issues to work through to, obviously, ensure that it's a tax efficient structure, to ensure that the organizational design is correct. So, we've outlined a lot of the steps that have to go into this in terms of a timeline. I don't want to put a specific timeline right now as we go through it. But I do think that the best way for us to answer the question right now is the – looking at some of the precedent transactions. On the question of RemainCo and international prescription, does it fit with other pieces? One of the things that we do think is an opportunity is that we're going to look at what we're doing with international pharma because this is very diverse, but it does include products in dermatology, neurology, in gastroenterology. We've looked at that portfolio. So, we do think there's opportunities to, for example, globalize our Salix businesses. As you know, when we acquired TRULANCE and dolcanatide, we did also acquire global rights to those products. So, there are global opportunities for products like our gastroenterology business. I think you know we're developing next generation rifaximin opportunities. Some of those opportunities we also believe will be international opportunities. So, I do think there's an international opportunity. I won't dismiss that there are some parts of the international pharma that are going to be different than our current Salix gastroenterology business. Our med derm business as well. So, we'll work our way through that, try to make the right decisions to once again focus on driving long-term shareholder value for our shareholders.

Our next question comes from Umer Raffat with Evercore.

I'll primarily focus on the B&L separation as well. But before I do, can I just clarify for everyone? Paul, I think on slide four, it says pro forma B&L newco is $3.7 billion. I believe that was supposed to be around $4.9 billion. I just wanted to confirm that. But my question is, so thinking of this B&L newco as a $5 billion business, the one thing that does catch our eye is, it was supposed to have $1.2 billion in a perhaps non-ophtho business, the international Rx. And I noticed you guys are adding an additional $140 million or so on top of that after some changes today. My question is, is it fair to assume that the international segment works at something north of 60% operating margin. I'm just trying to break out the operating profit drivers of this B&L business, just to understand how we should think about valuing it because it's not inconceivable market when I think of those as separate or not. And maybe you could speak to that. Thank you very much.

Paul, you want to take that question?

Yeah, I do. And Umer, please stay in line here because I think the – on slide four, the business to be spun out is the $3.7 billion. I did not understand your question regarding the first part of your question. So, I apologize for that. But let me let me address first what else is in there? There are parts of – for example, if you were going to stand up your eye health business and you put together a global supply chain, within that global supply chain, there are assets that are produced there that ought to be then sold by that eye health business. And the easiest example to think about that is we have a fairly meaningful portfolio of generic products to ophthalmic Rx products. So, revenue that previously would have mapped to diversified and shown up in the generics line, which are ophthalmic products which should map to the eye health business. There are a few other minor items that result in kind of the addition to the eye health and the subtraction from BHC. But I would say that is the primary difference between those two things.

And the margin, Paul, from the international?

On the margin, I'm going to point back to something I said. It was probably 18 months ago or so. I'd have to go back to see exactly what call it was on. But when people were trying to tease out – like, thinking about international pharma as it was part of the B&L international segment, people often asked, well, does it distort the segment, how should we think about it, and what I said was, if you use the EBITA contribution margin of the aggregate B&L international segment with international pharma in there, that blended margin was approximately the same as the margin that you would have seen if you could tease out international pharma. I think that gives you what you need. You see what I'm saying?

Thank you, Paul, for that. We'll obviously be providing more information as we make this spinoff happen. But we're excited about what this means in terms of really unlocking what we think is a great iconic brand with Bausch + Lomb.

Our next questioner is Akash Tewari with Wolfe Research.

And kind of similar to what people have asked before. When you've talked about spinning up eye care, it always seemed like the timing wasn't right, given the current debt structure. What changed internally with your thinking? And was there any external shareholder pressure? And would you consider having the spinoff occur two to three years down the line and potentially also doing an equity linked transaction to maybe lower the debt of the spinoff? Thanks.

I think that I back to the why now. I think there's a lot of things that we felt we need to clear, currently resolved, as we were thinking about direction of our company. As I mentioned, we felt that we had a number of issues to resolve before we could make this move. We've now resolved those issues, we've resolved those legacy legal issues. And we feel now's the time to start. Do I absolutely understand it's going to take some time? As I said before, looking at precedent transactions, I think it's somewhere in that year-and-a-half timeframe. But let's start now. We'll continue to work through some of those other questions like our capital structure to ensure that we launch this with the best results for both businesses. As you know, we're going to continue to work very diligently to pay down debt. And that's an important part of it as we grow EBITDA with our total businesses. So, except that there's still some things we're working our way through – but as you can imagine, as you start to go down this path, in order to unlock this value, we needed to open this up to a lot more people in our company. We wanted to maintain, obviously, transparency with the market. Therefore, our view was – we'll announce it now, we'll take the appropriate steps, we'll work through all these questions, and, obviously, go forward. But this is something that's been ongoing for, as I mentioned, about 12 months. Our board and the management team have been working on this question as to how best to unlock value for our shareholders. And we feel now is the time to announce it. We still have some additional work to do to be clear, but we're looking forward to unlocking the value of the B&L franchise for the future.

I'd actually like to follow on because I think, Akash, you framed it – it's a terrific framing kind of question. I think the way we approach this is that, to preserve the maximum value for BHC's shareholders through the separation process, it requires that we consider balance, solve for a number of variables, including those that are based on our current leverage. And to be clear, our goal is that both B&L and BHC will emerge from the spin process with appropriate capital structures that will allow each of them the financial strength and flexibility to drive future value. And an important consideration in executing that is time. The passage of time helps as we continue to generate cash and delever. I want to reinforce something that Joe touched on is, why now, it's like it was very important that we solve and resolve many, many legacy issues prior to being able to kind of announce and move forward with this. And not the least among them was to resolve those – the legacy liabilities that our colleague Christina Ackermann, our General Counsel, and her team have done a fantastic job of settling those things out, so that we can put those in the rearview because that enables us to think about separating into the two companies where both will be well positioned without overhangs in order to be able to do to drive forward from there. The other thing I do want to stress as well is with respect to the timing, say the same things as Joe, but I think it's important. Us announcing this today is entirely consistent with the way Joe and I have approached financial reporting from the time we got here, which was to be as transparent as possible, so that you, external parties, can follow along and decide whether we are doing the right things. This was equally important for us to announce today because in order for us to proceed with this process, and to have it be successful, we will need the full support of our soon-to-be spun out B&L colleagues, as well as all of our BHC colleagues to get this done. Prior to this announcement, there was a very small group of folks within our company that were focused on this activity, and we took it as far as we could without disrupting our businesses, meaning making this announcement. Today is the day that we say this is what we're going to do. We strongly believe it's the right thing. It's the right thing for our shareholders. It's the right thing for each of those two companies, so that each can be positioned to maximize the value of their competitive positions. And so, we're really excited about this. I think everybody will wish that we had more information, specific information, but work with us here. We will be providing it in the same transparent manner as we worked through this process. And when we get to the end, I think what you're going to see is two very attractive companies standing on their own with great prospects.

Our next question comes from David Amsellem with Piper Sandler.

So, I know that you haven't provided specifics on the capital structure. But I do think that at least some qualitative commentary on the capital structure would be helpful as we navigate this period. I guess my question here is, given that the eye care business has always been perceived as durable over a long-term period, doesn't have the major exposures to losses of exclusivity, is it fair to say that that's going to be a business – that business is going to shoulder more of the debt than the remaining pharmaceutical business, which does have some durability question marks, albeit nothing as dire as what we saw the last few years? I guess, just from a sort of whitespace perspective, can you just help us in terms of how you're thinking about it? And again, I know these are early days, but I think it would be helpful to at least address it in some way. Thanks.

I'll start, but, Paul, please feel free to also add your comments. I think the important point that we're thinking about this is, let's figure out how best to unlock these businesses that came together as an artifact of history. Do they need to be together? No, we do not believe that to be the case. Let's separate them out. Let's put the appropriate focus and investment behind each business and ensure that we can make each of these business successful. Do we absolutely have to work our way through that capital structure question that Paul mentioned on a previous question? The answer is absolutely yes. But our view is that, over the long term, this is the right thing to do for our investors. We think the B&L business will compare very favorably with companies – great companies like Alcon, like Cooper. We think those comparisons will be important as people measure the future success of this business. So, that was the overriding principle. We didn't feel that these businesses, as we reflected on it, needed to be together. Let's separate them. Let's let both businesses go out and be successful on their own. And that's our approach. Do we absolutely recognize capital structure is an important question. The answer, yes. We're going to deal with that in a very efficient manner. But the only thing I will point out, David – I know you follow very closely – is that we do feel very good about the progress we've also made on the loss of exclusivity products. We've worked our way through that. The majority of those are behind us. And now, we feel we've done a very good job in managing the XIFAXAN challenges to the patent. You probably recall that we've settled both with Teva, the world's largest generic company and arguably the third largest company, and Sandoz in terms of a 2028 date. So, we do think we've got the longevity of XIFAXAN that will allow us to manage our way through this and to ensure that once again Bausch healthcare business with a focus on international pharma, gastroenterology, aesthetics, dermatology, neurology will also be very successful. So, I probably don't want to make any more specific comments about how we'll allocate debt, et cetera, but I do think we will manage that in a way that is best for both businesses to optimize? Paul, I don't know if you want to add as well.

I thought that was great. But, yeah, I'd say that the key thing, David is that each of those two businesses needs an appropriate capital structure. I don't think – we were certainly not going to guide to what does the cap structure of the spinco look like today and what does it look like. There are too many variables sitting here on August 6 to come into play. And I think the time is one of is those variables. There are a number of ways that we can proceed with this that can accelerate the time. While I'm on the topic of time, I'd say that the mechanical things associated with gearing up and laying the foundation to separate the two companies is something that we can and will go very fast with. The bigger challenge, as I said a moment ago, in trying to answer Akash was – it's to preserve the maximum value for BHC shareholders through this process. You've got to consider and balance a lot of things and time is one of them.

Our next question comes from David Risinger with Morgan Stanley.

So, Paul, I was just hoping to ask a question on debt covenants. So, what do the debt covenants currently indicate in terms of maximum value that can be exited? I had read an SEC document that had indicated – I guess it was the 10-Q from March that the company had approximately $12.3 billion of basket buildup capacity. So, I'm hoping that you can put that into context. And just provide some more color on how you plan to overcome the debt covenant issues. Thank you.

This is a question we're surely going to get from many of our folks on the leverage finance side. Suffice it to say that we're announcing that we're going forward with this because there is a path under all of our existing agreements in order to be able us to conclude this transaction. Not going to get into the specifics of calculation of baskets and what goes where, but, clearly, was a consideration in thinking about the prospective separation into an eye health company and to BHC – into B&L and BHC. We've done the math. We've done our homework. And it is absolutely something that we can do. And I'll just leave it at that.

Our next question comes from Ken Cacciatore with Cowen and company.

Just my one question is, it seems it would be a lot easier to just sell this legacy business. So, just wondering, is this process that you're undergoing to basket and separate and tease out operationally, does it make it easier to sell? Is that part of the optionality ahead of – to the end stage of a spin? And can you just give us any color if that was pursued and just simply you weren't able to do, and so this is the right appropriate next step? Thank you.

The best way I can answer that question, I think, is the board and management looked at all the alternatives. And as we evaluate all the alternatives, we believe that this approach is the best way to move forward. It is within our control. It is something that we can manage – we can ensure it happens. Obviously, there are things that we'll need to do and there's a lot of work that we need to do, but this is totally within the control of the team that is moving this forward. As I said earlier in the call, we knew that – as we wanted to be very transparent with the market, we needed to involve more people in our company to get this done. But that was going to mean that we had concerns about leaking information or anything along those lines. So, we said let's be transparent, let's announce it, recognized that it's going to take us a year-and-a-half or thereabouts in terms of basing on precedent. We haven't given a specific timing for ourselves, but precedent tells us about a year-and-a-half. Let's get that all up and running. This is totally within the control of management and, therefore, we believe this will be the best way to proceed. Obviously, as we arrived, we've always said we will consider all alternatives to drive shareholder value for this company. We believe this is the correct way as we sit here today, totally within management control. If other things occur, we're always going to make sure we do the right thing for our shareholders. So, to be clear. Thank you, everyone, for joining us today. Paul, did you want to make any other comments on that?

I have like 30 seconds. I think you've covered it, but I'd like to double cover it, if I could. Ken, as it has been since we got here, all alternatives are on the table at all times. Clearly, any alternative is on the table. And importantly, taking this step does not foreclose any of the options that might present themselves that could – and could potentially accelerate our ability to deliver greater value to our shareholders. So, this is it. You used the word optionality. This is something that provides additional options to us as we look forward. We're really excited about this. As I said earlier, this is the right thing to do. And we're committed.

Thank you, Paul, for those comments. Let me just try to conclude. As I mentioned earlier in prepared remarks, we think it's a very exciting day. It's an opportunity to take Bausch health care to the next step by separating into two public, independent companies. We are very excited about what that means in terms of unlocking the value in the Bausch and iconic brands and look forward to sharing with you more information as we move forward. But thank you, everybody, for joining us and we look forward to answering additional questions that you may have in the future. Have a great day, everyone.

And that does conclude today's conference call. We appreciate your attendance. You may disconnect your lines at this time and have a great day.