Bausch Health Companies Inc. (BHC) Q3 2020 Earnings Report, Transcript and Summary

Good morning. And welcome to the Bausch Health Third Quarter 2020 Earnings Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Art Shannon. Please go ahead.

Thank you, Sara. Good morning, everyone, and welcome to our third 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 to 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. We want to spend the bulk of today's call focused on the business fundamentals. So I'll start with our current perspective on COVID-19 and briefly cover some of the third quarter highlights before turning the call over to Paul Herendeen, our CFO, to review the financial results in detail and discuss our 2020 guidance. We'll finish with updates on how our businesses are recovering and on the previously announced plan to spinoff Bausch + Lomb before opening the line for questions. Beginning with Slide 5. Although COVID has impacted the market over the past seven months, we have been able to adapt to the challenges of current market conditions by following the strategy we outlined on our last call by specifically focusing on our key promoted grants, managing our operational expenses and investing in innovation and new growth technologies like e-commerce. For example, we are continuing to innovate. We launched INFUSE, our SiHy Daily lens in the USA. We are conducting clinical trials on our NOV03 product for dry eye disease, and rifaximin received FDA Orphan Designation for sickle cell disease, a very exciting development. And we are also conducting COVID focused research that may help advance science. Ribavirin is being studied as a possible COVID-related therapeutic in Italy and Canada. And our Ivermectin product is being studied as a COVID therapeutic in Latin America. Our Global Solta business is well-positioned to capitalize on emerging trends such as the new Zoom culture, which we believe is driving the demand for our aesthetics, which is a key driver for Solta as seen in third quarter revenue growth compared to the third quarter 2019. Finally, our efforts to accelerate and strengthen our e-commerce capabilities resulted in more than a 100% increase in the e-commerce sales of our U.S. consumer business products year-to-date compared to the same period in the prior year. Moving to Slide 6, the impact of the global pandemic is still present. But our third quarter results demonstrated that the Bausch Healthcare operational recovery is in progress. Our team worked hard throughout the third quarter to make sure we had ample supply of our products for patients and customers and to manage our operating expenses. Our total company organic and reported revenue declined by 3%, compared to the third quarter of 2019, Bausch + Lomb had an outstanding quarter relative the second quarter of 2020. In our therapeutic businesses, Salix, dermatology, international and neurology, all demonstrated 20% to 30% sequential growth relative to the second quarter of 2020. Thanks to a great team effort and the continued engagement of over 21,000 employees of Bausch Health Companies, we were able to preserve cash while supporting each of our businesses, including investments in R&D to build and advance our new product pipeline. With that, I'll turn the call over to Paul to cover the financial results in more detail.

Thanks, Joe. We had a nice bounce back quarter as all of our businesses recovered to varying degrees from the depths of the COVID impact that we saw in Q2. Overall, revenue was down 3% organically from Q3 of 2019 and up 28% sequentially from the second quarter. Considering the many ongoing challenges, that's an encouraging indicator that our businesses are on the road to regain pre-pandemic levels of revenue and profitability. We're a very diverse company by types of revenue and by geographic footprint. While our businesses are rebounding, the pace has been more rapid for some and more muted for others. The differences are based on the types of revenue, for example, surgical versus consumer products; and geography, with parts of the U.S. B+L business recovering more quickly than those same businesses outside the U.S. Adjusted EBITDA of $948 million in the quarter was quite strong and in fact was up 4% on a constant currency basis compared with Q3 of 2019, important safety tip though. The operating margin you see in Q3, that's adjusted EBITDA divided by revenue is not sustainable. As we continue to recover, we will allocate more resources to promotional activities to drive the return to sustainable revenue and profit growth above pre-COVID levels. For the avoidance of doubt, we expected our fourth quarter operating expenses will be considerably higher than what you see on the board in Q3. We're very proud of how quickly we're able to reduce operating expenses to preserve cash, and to protect as best we could near term profits. With recovery from COVID underway, it's time for us to ratchet up our promotional support for our many growth opportunities and to renew our investments in R&D. We will obviously have to monitor this given the dynamic situation, but that's how we see things today. Okay, let's talk about Q3. Of course, COVID-19 was a story driving reduced revenues. If you turn to Slide 8, this shows revenue by segment and business unit compared with Q3 of 2019. Reminder when we talk about organic growth, we mean on a constant currency basis and adjusted for the impact of acquired or divested assets. Total company revenue was down 3% organically with B+L/International flat, sales down 10%, ortho going down 3% and diversified down 2%. There were some bright spots that I want to highlight and some areas where our recovery from COVID is in process but coming at a slower pace. Within B+L/International, the star of the quarter was our international pharma business, up 9% organically from Q3 of 2019 on very strong performance in our LatAm and Eastern European regions. In Mexico, we saw a surge in demand for a product called Ivermectin, a broad-spectrum antiparasitic is being used for the treatment of COVID. Next up with Global Consumer, plus 2% organically with the U.S. leading the way, it was up 11% and that was on strength in PreserVision up 17%, Biotrue Multi-Purpose solution up 9% and a large one-time purchase as we collaborated with one of our key accounts to include our Soothe dry eye product in an exclusive one-time offer to their customers. Consumer revenues outside the U.S. were down 5% organically, as various regions recover at different rates. For example, consumer revenues in LatAm, Eastern Europe and Canada all grew organically versus Q3 of 2019, while China was flat and Russia and France saw meaningful declines versus the prior year quarter. To be clear, Global Consumer like all our businesses showed major improvement in Q3 versus Q2, but the degree of recovery is very different depending on the region. Global Vision Care was down 2% organically but was up 20% in the U.S. and that was on strong sales of our ULTRA family of monthly silicon hydrogel lenses. U.S. Vision Care benefited from the rebalancing of channel inventories in the quarter as demand picked up, so bear that in mind as well. In the quarter we sold less than 2 million of INFUSE lenses, but we're very excited about the long-term prospects for INFUSE. As we developed INFUSE our goal was designed -- to design lenses with real points of difference relative to competing lenses. We succeeded and now enter the fastest growing segment of the U.S. and International Vision Care markets with lenses made using next-generation materials to deliver exceptional performance. Sold in the U.S. under the INFUSE brand name and outside the U.S. as ULTRA ONE DAY these lenses are expected to be a growth driver for us for years to come. Of course, there were talented people behind this important project, including Jim DiBella, [Joe Hobbs] [ph], Bill Reindel and Vicki Barniak among others. Driven by our people, B+L Vision Care is coming on strong. International Vision Care was down 13% organically driven by the Asia Pac region where contact lenses are sold mostly in retail settings. Even though social restrictions were eased, consumers remained cautious due to concerns over COVID in the states of their economies, and that resulted in restrained spending and generally less lens utilization. Global Surgical declined 7% organically with the U.S. surgical business down 3% and international surgical down 9%. The U.S. is recovering more quickly than the OUS surgical markets. While some markets in Western Europe were flat or slightly positive to Q3 of 2019, the Asia Pac region in the UK were not yet back to pre-COVID levels. To wrap up the B+L/International segment Global Optho Rx was down 9% organically, down 9% in the U.S. and down 10% outside the U.S. The continued erosion of the LOTEMAX franchise in the U.S. due to the LOE was the biggest factor in the decline. In the U.S. versus Q3 of 2019, VYZULTA was up 32%, PROLENSA up 35% and LOTEMAX SM up 37%. The U.S. Ophtho Rx business also benefited from a rebalancing of channel inventories. Outside the U.S. the decline versus Q3 of 2019 mirrors the decline in surgical revenues, as many of our Ophtho Rx products are used pre and post-surgery. On to Salix, Salix revenue was down 10% organically, the LOE of APRISO and the expected decline in GLUMETZA together accounted for about 8.5% of that 10% decline. XIFAXAN was down 3% from Q3 of 2019, down 4% in volume and up 1% in net price. The 4% volume decline is consistent with the year-over-year decline in XIFAXAN extended unit TRxs. On the plus side, despite the environment, TRULANCE delivered 57% growth versus Q3 of 2019. Salix also benefited from the rebalancing of channel inventories as demand picked up in Q3. Sequentially, Salix revenue was up 23% versus Q2, in fact, and XIFAXAN revenue was up 21%. The Ortho Derm segment was down 3% organically versus Q3 of 2019. The beat goes on for Solta, up 53% organically on very strong revenue out of the Asia Pac region, and that was led by China. The Solta aesthetics business, especially the Thermage platform has been remarkably resilient in the face of COVID. Our thesis is that consumers of higher socio and economic standing saw their travel options limited and chose to invest in their appearance, particularly how they appear on HD video. Solta’s leader Tom Hart has done a marvelous job of best setting Solta on a path that even COVID could not derail. I want to give a tip of the hat to our B+L colleague Kay Hough. We play a team sport here and Kay reached across reporting lines and pitched in to help drive Solta’s impressive performance, especially in China. Thermage sales were up 70% and Thermage TIPs were up 79% compared with the year ago quarter, all I can say is wow. Medical derm was down 29% versus Q3 of 2019, LOEs and royalty revenues accounted for roughly 20% of that 29% decline. SILIQ, BRYHALI, DUOBRII and ALTRENO, all grew versus Q3 of 2019, but could not overcome the declines across the balance of the portfolio. With so many of our med derm products relying upon the flow of new patients into dermatologists’ office -- offices, this business has been and continues to be more impacted by COVID than other of our businesses. Diversified was down 2% organically from Q3 of 2019, Neuro was up 8% on strength in WELLBUTRIN, APLENZIN, ATIVAN and PEPCID. In the quarter, neuro saw an improvement in realized net selling prices for WELLBUTRIN. This was driven by aggressive management of managed care contracts for WELLBUTRIN that has resulted in strong realized net selling prices throughout 2020, but especially in Q3. A quick forward look, managing rebate for a product like WELLBUTRIN is a dynamic situation. We're enjoying a good year in 2020, but expect that WELLBUTRIN in 2021 will revert to levels more consistent with what you saw in 2019. For ATIVAN in the 2019 and into early 2020, we had some supply challenges with ATIVAN. As we reestablished supply, we refilled the channel with inventory and are now able to meet demand and that was a helper in Q3. PEPCID is an interesting one. As RANITIDINE was pulled from the market, demand for PEPCID and generics of PEPCID surged. The generic companies were not able to ramp up supply as quickly as BHC, so our brand PEPCID has enjoyed a nice strong year-to-date in 2020 and effectively in Q3. As supplies of generics increase, our sales revert to lower levels. Great work by our commercial and manufacturing colleagues and that allowed us to capitalize on this fugacious opportunity in 2020. The 12% decline in generics revenue was mainly due to comparison with a very strong Q3 a year ago. Dentistry was down 21% versus Q3 of '19. Dentistry is recovering at a consistent pace and is up from $8 million of revenue in Q2 to $19 million this quarter. Let's turn to Slide 9, the quarterly P&L. I've covered the revenue, let’s start with gross profit. Our gross profit margin decreased 120 basis points from Q3 of 2019. This is in part due to mix, but it's also reflective of COVID driving negative manufacturing variances, and other hits to cost of goods sold. Mix in these manufacturing variances will be a headwind to our gross profit margin, as we move ahead into Q4 and into 2021. In operating expenses, here you can see the results of our efforts to conserve cash and soften the earnings flow as we work our way through COVID. Selling, advertising and promotion costs were down $54 million on a reported basis, compared with Q3 of '19. G&A expenses were down $28 million and R&D was down $20 million. As the third quarter progressed, we began the process of ramping up activities that will help us return our revenues to pre-COVID levels, and then we'll grow from there. The level of expense management during Q3 was necessary, but we think it would be unhealthy for us to continue to constrain commercial, functional support and R&D spending at these levels. The short-term benefit of the constrained spending is that we put a very strong adjusted EBITDA number on the board, $948 million. Flipping the Slide 10, the cash flow summary. On a GAAP basis we generated $256 million of cash from operating activities. That number was reduced by $48 million due to the settlement, meaning the actual cash payment of legacy legal settlements in the quarter. That's mainly the SEC matters. I bring this up, because sitting in our $1.988 billion of cash is $1.21 billion of cash to settle the U.S. stock drop case. When those funds are paid, it will reduce our GAAP cash generated from ops. So bear that in mind. We remain on track to delivering roughly $1 billion of cash from operations in 2020, adjusted for the payment of legacy legal liabilities, and in the future, separations and related payments. On to Slide 11, the balance sheet summary. One call out here. During the quarter, we used $100 million of cash generated from ops to reduce debt. Year-to-date to today, we repaid $420 million of debt, and we recently announced that on November 30th we will repay another $150 million of notes. From a liquidity standpoint, we remain a solid cash generator even in a COVID world. And at September 30th, we had no borrowings outstanding under our revolving credit facility and the ability to draw $1.1 billion if needed. On to Slide 12. We have no debt maturities or mandatory amortization of term loans until 2023. From a liabilities management standpoint, we're in very good shape. On to Slide 14. We are keeping our revenue and adjusted EBITDA guidance ranges unchanged from our last update in August. Note that these ranges are broader than we would normally have with only 2 months remaining in the year. That said, these are not normal times. Even as we prepared for this call, various geographies returned to lockdown or lockdown-like stages. Parts of Europe, including Germany, France, Ireland and England have announced lockdowns of various lengths and restrictions. This is a very fluid situation and we're monitoring it closely. One item to call out is the expected increase in continued consideration, milestones and licensing agreements going from roughly $80 million to $100 million. The increase is mainly due to the Allegro and Eyenovia transactions. As you see on Slide 15, better expected performance across our businesses are expected to offset the impact of unfavorable FX and more rapid than expected erosion of the LOE assets. Last thing for me. If you take the midpoints of our guidance for the full year, less the year-to-date results, you'd expect our Q4 revenue to be just south of $2.1 billion and our Q4 adjusted EBITDA to be just less than $850 million. Here are a few things to consider as you look at the Q3 to Q4 progression suggested by our current guidance. First, revenue. In Q3, there were a number of favorable items that won't persist into Q4, including: one, the rebalancing of channel inventories in many of our businesses as demand picked up from the Q2 COVID floor. Note that this is not pipeline expansion. It's the natural increase in the dollar value of channel inventories that you see when the sales grow as they did from Q2 to Q3. Two, in the B+L segment, we had the one-time Q3 order in U.S. consumer. Three, in B+L, we had the COVID-driven but perhaps less durable increases in sales of Ivermectin and Bedoyecta in our international pharma business. Four, in diversified, we have the non-durable portion of the improved net pricing for WELLBUTRIN. And finally, number five, also in diversified, we have the bump in revenue from the reestablished supply of ATIVAN and the lift from PEPCID. While we expect that all our businesses will continue their recoveries, the items I just highlighted and others, will dampen the progression of revenue from Q3 into Q4. At gross margin, I highlighted that mix and unfavorable impact to cost of goods sold due to COVID will carry forward into Q4 and even into 2021. We're guiding to a full year margin of roughly 72%. With a year-to-date margin at 72.4%, that implies a gross margin of a little less than 71% in Q4. Finally, I mentioned that we are resuming more typical spending in SG&A and R&D and our guidance suggests that we will substantially increase spending in Q4 with SG&A forecast to be up some $60 million from Q3 and R&D to be up some $24 million. Put all these things together, an adjusted EBITDA from Q3 to Q4 based on the midpoint of our guidance is expected to be just south of $850 million. That's it for me. Back to you, Joe.

Thank you, Paul. I will now give an update on the Bausch Health recovery in progress on slide number 17. The highlight here is U.S. Vision Care, where reported revenue grew by 20% compared to the third quarter of 2019, driven by the Bausch + Lomb ULTRA lenses. The chart on the top right shows the change in field consumption in the U.S. year-over-year, which started to recover in June after significant declines in April and May. While the recovery in Europe and Asia is proceeding more slowly, International Vision Care is also returning to pre-COVID-19 levels. I want to spend a minute on INFUSE. Our SiHy Daily lens, which launched in the U.S. in August, launching a product during the pandemic requires innovative thinking and the ability to adapt. Joe Gordon and his team deserve credit for a great launch at a challenging time. The INFUSE lens is doing exceptionally well with patients who experience contact lens dryness. Approximately 77% of new fits are from existing lens wearers and who are switching from another lens, and roughly 23% are from new contact lens wearers. Of the patients with contact lens dryness, 73% agreed INFUSE helped minimize the symptom of contact lens dryness. We plan to launch daily SiHy lenses in Australia, Hong Kong and Canada in the fourth quarter. Turning now to Global Consumer on Slide 18. The chart on the left shows the percent change in U.S. Bausch + Lomb consumption year-to-date on a year-over-year basis before COVID, during the stay at home orders, and now we see a recovery in progress. Turning to LUMIFY on the other side of the page, we also see a recovery in progress. We also received FDA approval for Alaway Preservative-Free antihistamine eye drop at the end of September, the first and only OTC preservative-free formulation eye drop of its kind. Moving now to Global Surgical on Slide 19. Although the recovery in the surgical business has been somewhat slower, both cataract and retinal procedures grew versus the third quarter of 2019. We've shown U.S. data for Stellaris Elite procedures, both the retinal and cataract in the chart on the left. International Surgical revenue is also seeing a recovery in progress. On Slide 20, Global Optho prescription business. COVID had a limited negative impact on VYZULTA even during the period of February through July, as you can see from the TRx trends on the chart on the top right-hand side. VYZULTA is now approved in 7 countries, and we are excited about its future prospects. We also completed several business development deals that will help build out our eye health portfolio in the areas of macular degeneration and myopia. I'll highlight two now. First, we acquired an option to purchase all of the ophthalmology assets of Allegro, including the global rights for Luminate which is an investigational treatment expected to help reverse vision loss due to dry macular degeneration, an area of significant unmet medical need. The Phase 2 top line data show a promising improvement in visual acuity with 48% of patients gaining more than 8 letters at week 28. We also acquired an exclusive license in the U.S. and Canada for Eyenovia for the development and commercialization of an investigational microdose device of atropine ophthalmic solution, which is being investigated for the reduction of near sightedness in children ages 3 to 12. There's clinical evidence for the use of low-dose atropine as a way to prevent progressive myopia in children, and we believe Eyenovia’s delivery technology is particularly well suited for this application. On Slide 21, we've backed out our systemic approach to rebuild our B+L product development portfolio in areas of unmet medical need. Based on Bausch + Lomb integrated eye health platform, we can develop solutions for areas of unmet medical needs more efficiently than many of our other healthcare companies. We are focusing on three primary areas: myopia, dry eye and macular degeneration and working to build a comprehensive package of new treatment offers for each disease. First, let me talk about myopia, which is a global megatrend driving demand for eye health solutions. Studies have predicted that 50% of the world's population or 5 billion people will have myopia by 2050. In addition to the exclusive license from Eyenovia I mentioned earlier, we recently acquired an exclusive license for Myopia Control Contact Lenses designed by BHVI. Myopia is a leading cause of visual impairment in children, and we plan to pair this novel contact lens design with our contact lens technology to develop potential treatments to slow the progression of myopia in children. We are also pursuing the Arise Orthokeratology system, which is a cloud-based lens fitting software that enables eye care professionals to produce highly customized lenses to treat myopia. Dry eye is another therapeutic area with a huge unmet need. More than 16 million patients in the U.S. are diagnosed with dry eye disease, and contact lens dryness is experienced by about half of the 45 million lens wearers in the United States. To combat this problem, we licensed Novaliq investigational treatment for dry eye disease associated with Meibomian gland dysfunction. It has a unique mechanism of action that differentiates it from other agents for dry eye disease. And as I mentioned earlier, we're expanding the launch of the INFUSE daily SiHy lenses, which may help reduce the symptoms of contact lens dryness. I'll not repeat my comments on age-related macular degeneration, but as you can see, we are strengthening our B+L product portfolio. Turning now to Slide 22 for an update on Salix. Let's start with our largest product, XIFAXAN, which has been slow to recover from the impact of COVID-19. Declines have primarily been driven by the IBS-D indication, which is more episodic and more reliant on new patients than the HE indication. Gastroenterologists have been prioritizing the backlog of colonoscopies and endoscopies over regular office visits where new IBS-D patients would be diagnosed. In primary care, patient priority has changed in a COVID-19 environment with less urgent visits being delayed or deferred until conditions normalize. That said, we are seeing signs of recovery with XIFAXAN, 5% TRx growth from the second quarter to the third quarter of 2020. I also want to highlight that Rifaximin recently received FDA Orphan Designation for the treatment of sickle cell disease. Early data demonstrated that Rifaximin may be beneficial in reducing the debilitating pain from vaso-occlusive crisis that sickle cell patients often experience. We expect to start a Phase 2 trial in the first half of 2021 with a novel, and let me repeat that word, novel Rifaximin formulation for sickle cell patients. Finally, we were able to resolve the XIFAXAN IP litigation with Sun Pharmaceuticals in addition to our prior resolutions with Teva and Sandoz. Turning now to Slide 23 for updates on TRULANCE and RELISTOR. We've plotted TRULANCE weekly TRx trend on the left compared to the same period in 2019. Compared to third quarter '19, TRULANCE prescriptions grew by 46% in the third quarter versus last year, while the market grew only 4%. TRULANCE also grew sequentially by 7%. Finally, on the right, we show the data for RELISTOR, which also gained market share and outpaced the market. Year-over-year, TRx volume was up 9% versus last year compared to the overall market, which was down 5%. Importantly, TRx growth for oral release was up approximately 14% compared to the prior year quarter. To summarize, we are seeing signs that a business recovery is in progress. Turning to Ortho Dermatologics on Slide 24. Starting with THERMAGE on the top right of the slide. With sequential reported revenue growth of 68%, we are seeing Solta recover faster than we expected, largely due to pent-up demand for aesthetic procedures, especially in our Asian business. The customer base for cosmetic procedures is expanding, and we believe the increased demand may be partly due to the fact that a portion of the population is diverting travel spend to self-care measures. JUBLIA is another example of a product that gained market share during the pandemic. On the bottom left, JUBLIA's third quarter TRx market share was up 130 basis points compared to last year. And finally, DUOBRII for psoriasis on the bottom right chart. You can see the orange light got off to a great start in 2020. But because DUOBRII is predominantly for new patients, new patient starts were impacted significantly when COVID-19 hit. But compared to non-biological products like ENSTILAR and OTEZLA, DUOBRII is battling its way back, and we're now picking up roughly one-third of those new patient starts. We are making progress, but it is still growing slower than we would like. Moving now to Slide 25. While COVID has impacted our business, we have a plan to first focus on positioning our businesses for growth in 2021 and beyond, driven by megatrends in demand for our new products. Second, we are investing in key promoted brands where we have demonstrated that we can gain market share. Third, we are improving our overall operational efficiency through what we refer to internally as Project CORE to optimize our cost structure and enable us to generate strong cash flows. Finally, we are supporting each of our businesses with investment in future growth drivers, including R&D innovation and growth technologies like e-commerce. These actions are all designed to position our businesses for the future as we continue our preparations to create 2 separate well-capitalized businesses with attractive growth opportunities. Before I wrap up, I want to give you a quick update on the planned spin-off of Bausch + Lomb on Page 27. Since announcing our intention to separate Bausch + Lomb into an independent company, our goal has been to unlock value across our 2 attractive businesses as soon as possible. Our team has been working diligently to complete all the necessary actions, which include the items listed on the right of Slide 27. We are making great progress and expect the internal organization design to be completed by the end of the third quarter of 2021. Finalizing the capitalization structure is more complicated and we are actively pursuing all available options to expedite leverage improvement. Our focus is on positioning these two strong with dissembler businesses so that the financial market see attractive growth opportunity for both entities. With that, operator, let's open up the line for questions.

[Operator Instructions]. Our first question comes from Chris Schott with JPMorgan.

Just a couple on eye care and a quick one on the separation. On eye care, one of your competitors talked about some of their third quarter lens recovery driven by an inventory rebuild. Did you see anything like that in your results? Or is this more just like a true organic kind of recovery in the business? And then second, can you talk about the dynamics in the eye care business as we look out to 4Q and beyond? I guess should we expect a continued B+L recovery in 4Q? Or could some of that take a pause with the second wave of COVID that we're seeing currently? And just my quick one on the separation, I think you mentioned the internal organizational processes completed by 3Q of '21. Could the company conceptually separate out B+L at that point, assuming your capital structure needs were addressed? Or is there a gap we should think about between when those internal processes are completed and when you could actually separate the business due to SEC requirements or other reporting requirements, et cetera?

Thanks, Chris, for the question. First, on the eye care question, on the inventory rebuild. I think, as Paul stated, I think what happens with any business, as you show growth, when a customer orders that product for a patient, they're going to expense that. But then as their revenue goes up, they're going to naturally need to buy more inventory. So while the overall inventory position has not increased, it's just natural as the volume goes up to expect to see more demand -- as more demand goes up, you're going to see more purchases. So we don't feel that there was any overall build in inventory during the quarter in terms of -- but obviously, they had to order not only for dispensing, but obviously to replace those items as they dispense more. On the second question, the dynamic of eye care businesses in the fourth quarter and beyond, I don't think we're going to give any specific comments right now other than to say we see a recovery in progress. We're excited about what that means for the continued growth of the B+L business. We are seeing a very strong recovery in progress in total. And I think the way I would phrase it across all of our businesses is that we're going to be -- continue to monitor the COVID-19 to be clear, but we are seeing that recovery in progress across all of our business. And then maybe, I think the final question, whether or not we are ready to split the company out in terms of spinning out in the third quarter of 2021, we will be ready. So safe to say if our capital structure is in place by the end of '21, we could -- it can be feasible, but we'd have to make sure we work through all the major questions out there. As we've said publicly, the best way for us to reduce the overall leverage and what we're focused on is continuing to grow our EBITDA, grow our business. And as we do that as well as actively pursuing all available options to improve our leverage, we're going to try to do this as expeditiously as possible. Paul, you probably want to add something as well.

I actually wanted to add something on the eye care piece because I think, Chris, your question was twofold, was inventory build but also pull-through important. It was both. As Joe articulated, it's the rebalancing of channel inventories as demand picks up. But importantly, end demand in the U.S. was up in a strong way. And outside the U.S., it was up in a more modest way. So we saw great improvement from Q2 to Q3 in the Global Vision Care business at different paces. I specifically called out the inventory with respect to the U.S. part of the business, because I think if a lot of folks have looked and said, gee, this is going to be something that's going to come back to us and say, well, by and large, most of our channel inventories have rebalanced to reflect the increased demand from Q2 to Q3.

Our next question comes from Terence Flynn with Goldman Sachs.

I was just wondering, you obviously talked a lot about the puts and takes going into fourth quarter. Just as we look into 2021, can you maybe expand on those as we think about that, particularly on the OpEx side? Is any of the potential savings likely to be more permanent? And then just had one quick one on the SiHy launch there. In terms of the share capture, is that mainly coming from competitors? Or is any of that people switching from any of the B+L brands?

Paul, I'll let you take the first one on the '21 puts and takes in OpEx. I think you made some comments on that. But -- and then I'll take the SiHy Daily where the share is coming from.

Sure. Yes. Thanks for the question, Terence. It's a great question. I'd say that through the COVID experience, it kind of forced experiment on many companies about how effective dollars that you deploy the various activities can be. And you see what occurs when you take them away. We would think that our OpEx intensity going forward ought to be something more akin to what you saw in 2019 versus what you're seeing certainly in Q3. I made it a point to say the level of OpEx spending in Q3 produced a nice EBITDA number but not one that would be sustainable over the long-term if you wanted to grow at the top line and wanted to grow profitability over an extended period of time. So I would think that as we look ahead to 2021, you're going to see OpEx intensity more similar to 2019 than what it will end up being either year-to-date 2020 or your estimate of what you expect it to be 2020. The rationale for that, by the way, is driven in large part by the large number of products that we have in launch phase. You asked a question about INFUSE. I mentioned it in my remarks. INFUSE is really exciting for us, and it takes promotional resources in dollars to establish that franchise and then to drive over a long period of time. And it's not just INFUSE. It's ULTRA ONE DAY outside the United States where we're launching it currently in a couple of other markets like Canada, Australia and more markets to come with INFUSE. So that's one example. But we have a large number of products that require a greater level of promotional support that certainly than what you saw in Q3 to be more consistent with what you saw perhaps in 2019.

And then on the second part of that question, the INFUSE where the share is coming from, I have the U.S. data in front of me. First and foremost, it's coming from an expansion of the overall market for -- and what's happening there. The SiHy market is the fastest-growing part of the market in terms of what's happening with that product in the United States and around the world for that matter. Number 2 of the actual percentages, as I mentioned, about 75% of them are from patient switches, 25% from approximately new patient starts. So that's the first place to start. Of the switches, it's -- we're getting about 20% of it is coming from our own Biotrue ONEday, but the remaining part of it, the 40-plus percent that's coming from competitor lenses, some of the best-in-class lenses of like an OASYS or DAILIES TOTAL. So we're very pleased with what we're seeing so far. I will also comment that we're also seeing very strong support for this product. In Japan, we're having continued record sales months in Japan. So that's also moving forward with it. So we do feel we've got a great product, and it's really helping patients, as I mentioned on the call, that 73% of the patients who use INFUSE believe it's helping minimize the symptoms of contact lens eye dryness, which is obviously an issue, and we're pleased to see this kind of results. It's very early but very pleased with what we think the opportunity is for the future in order to continue to build what we hope will be a best-in-class product for the contact lens wearers for the SiHy Daily.

Our next question comes from Umer Raffat with Evercore.

I think perhaps the first one is the obvious one from the print, which is the numbers look really good, but the cash flows are really weak, perhaps even when adjusting them for the one-time SEC provisions. So any color on that beyond? And then secondly, also, Paul, when I run the math on your leverage ratios by the time of the spin and you guys are mentioning 4 times for the Bausch and 5.5 on the RemainCo. By my math, you'd have to generate perhaps $2 billion plus via equity issuance by the time of spin. Is that consistent with the way you're thinking about it in your expectations?

Paul, why don't you take both the parts of the question, the cash flow question and the B+L leverage?

$: Point out that as adjusted EBITDA drops, you got interest which does not drop in proportion to adjusted EBITDA. I'll actually -- it's maybe productive for me to go through the math, how you get to the circa $1 billion, so you can see the pieces and then it will highlight why it's going to be in the low 30s this year versus what had been low 40s of conversion last year. Take the midpoint of our adjusted EBITDA guidance range, $3.225 billion. Interest is $1.53 billion per our guidance slide; restructuring is $75 million per our guidance slide; milestones $100 million per our guidance slide; taxes using the 8% is about $115 million or $116 million and then the piece that you can't see yet and we'll see is working capital this year so far is a use. It's a pretty substantial use. Year-to-date, it's circa $385 million. And that gets you t $1.18 billion or something like. That's just above $1 billion, which would be that 32% conversion to cash. The working capital is a challenge. Like if you're looking at this quarter, one of the biggest uses of working capital in this quarter is the increase in receivables from Q2 to Q3 if you're looking at the quarter in isolation. So that's a big number when your revenue goes up sequentially, help me, I lose track of focus, at 28% sequentially, you're going to see a big use in receivables. And as you'll see later on, you see our full balance sheet that the working capital is a big deal here. If you're looking at the quarter in isolation and why is it not a stronger cash flow quarter, it's accounts receivable. If you look at it relative to last year, I'd say it's inventory, is the big item. But again, I think the important points are, as we work our way out through this COVID situation, we do convert an awful lot of our earnings to cash. We continue to reduce debt. And as we continue to reduce debt, that conversion ratio will go up or percentage will go up because we'll reduce our cash interest costs as well. So I think our -- in the quarter, it kind of was what it was. We are on track to deliver the $1 billion or $1 billion thereabouts from ops over the course of the year. And as we continue to improve and dig ourselves out of the COVID hole, we will get back to generating even more cash, which is obviously critically important to us continuing to reduce our debt. Yes. I think on last, segueing to your other question regarding capitalization structures, I mean, importantly, you get to choose if you're spinning out B+L what the leverage is of the entity that you spin. So we suggested circa 4. And with respect to RemainCo, that is a function of where you start at the time of the spin. And of course, the things that we need to do between here and there are -- as Joe said, we need to grow our operating earnings at a rapid rate. And we need to prioritize the use of our cash in order to be able to reduce our debt to get to a leverage ratio that would enable us to affect and actually complete this spin out. The other thing that we can do, of course, is to the extent that we have the opportunity to accelerate that process by selling, if able, high multiple assets that can certainly accelerate the process. I think what I articulated last quarter was if we went ahead with something or perhaps it might have been on the Morgan Stanley Conference was that if we went forward to something like what I'll call the plain vanilla spin, where we would get key the company up, levered up circa 4 times, pay a dividend back to us, back to RemCo and then complete a 20% IPO at that point in time, and that will raise up money. That's the plain vanilla, and that is something that could be accomplished by somewhere towards the latter part of 2022. Yes, it involves raising equity at some point, and in that example, raising equity in the spun entity. I'll stop there.

Our next question comes from Akash Tewari with Wolfe Research.

So just could you break it down kind of clearly what was the contribution on -- for revenues from inventory stocking? It looks like Derm Neuro and Optho all were sequentially up. So how did that affect rev? And then can you walk through how the inventory effect negatively contributed towards cash flow from operations? And I think just going forward, you're going to have $1 billion in cash flow from operations this year. Debt pay down looks like $500 million to $600 million. As we think about 2021 and beyond, as your businesses rebound, what is the steady true free cash flow run rate for Bausch? And where do you think debt pay down will kind of average out to organically? Do you think it's going to be more in the $1.5 billion range? Or is this more kind of chronically up a $1 billion range?

Akash, it's Paul. I'm going to take the first one on contribution on inventory stocking in kind of how did that effect revenue in the quarter. How does it affect cash flow? Well, we're talking about inventory stocking in the channel. And again, this is not expansion of pipeline inventories. This is the amount of inventory that our channel partners hold in order to be able to provide a high service rate to their customers, meaning someone calls up and they want product, that they have -- they are able to deliver some 100% of the time or 98% -- at 98% of the time. So in order to do that, as demand rises, they continue to expand their inventory to provide that service level. But it generally is the same number of months or weeks on hand that they have. And so trying to quantify what was that impact in the quarter, it was certainly -- in Q3, it was certainly a tailwind in the quarter, broadly equal to what the headwind was to us in Q2 when people stopped buying inventory as demand fell. It's not an item I’d call out and say, oh, it's easily quantifiable by business, and it's this number. It's just the natural ebb and flow of channel inventories with a change in demand. The second question, I believe, was how does inventory affect cash flow from operation? I think again, we're not talking about here channel inventories. I think you're talking about our level of inventories. We've had our challenges with managing our inventories this year, 2020. If you think about where we were entering 2020, we were in great shape. Man, we had a great fourth quarter. We had a great start to the year. We had a manufacturing plan that was geared up to meet what we expected to be a strong demand year across all of our businesses and saw that fall apart in a February-March timeframe, where we have lots of inventory on hand, more inventory than we need. So as that inventory balance is high, that is a use of cash waiting -- it's cash waiting to be liquidated by conversion, from inventory into an accounts receivable and ultimately to cash. But it's been a challenge for us in 2020, and it will be a challenge for us until demand for each one of our businesses returns to a more normalized level. I think the third part of the question was 2021 and beyond, kind of what's a good cash flow runway? I over asked the question earlier about thinking about the projected cash from ops this year. And I think I went through pretty -- I think that's a decent way to think about it is we were clicking along in 2019. And for 2019, it was 42% conversion of adjusted EBITDA. Assuming a level of profitability, $3.5 billion plus, that's a pretty darn good measure of what you would expect our cash from -- generation from ops to be. Remember, though, that as we go forward and we continue to reduce debt, you have the opportunity for that 42% to improve based on the continued reduction of our cash interest costs. I think in our -- in the slide deck is -- and I don't have the slide number right in front of me, but in the back, you can see what our cash interest cost was year-to-date in 2020 versus 2019. And it's a nice improvement year-over-year if we continue to prioritize the use of our cash to the reduction in debt. So one thing that our company is -- we are many things. One thing that we are, we are a strong cash generator. I think we've proven that, especially during an unprecedented headwind from a global pandemic that we can continue to generate in this difficult year circa $1 billion from operations. So I hope, Akash, that answers. I don't -- like we'll have the opportunity to speak later if that didn't cover it.

I think the only thing I'd add, Akash, is that on Page 36 of our presentation in the appendix, you'll also see those months on-hand data, and you can see months on hand versus a year ago, just to do year-over-year, both our GI business, our derm business are down. Ophtho and neuro up slightly, but for the most part, there's really no material change. They're all at about 1 month approximately. So just to be clear on that inventory question.

Our next question comes from David Risinger with Morgan Stanley.

So I have 2 questions. First, with respect to business divestiture priorities, is there anything if you could frame for us what some businesses might be that you would consider divesting just so we have a little bit better sense for how you would envision potentially the structures of each of the 2 new companies? And then second, with respect to separating the companies, Paul, if you could comment on the standup costs to achieve the separation, the magnitude and how you'll be reflecting those in the financials?

Sure. On the first question -- part of the question, David, on the business development priorities. I think I'm going to have to stand with what we said previously. What we will do is we will look to divest assets, and we have a history of looking at this from the point of view the last 4 years since -- while I have joined the company, we divested approximately $3.8 billion of proceeds that we received for asset divestitures. We received approximately -- I think it was about 11 times EBITDA multiple for those assets that we divested over those first 4 years, majority of coming early in our time period. So we're going to look at some assets. And if there are appropriate activities out there where we think we can get a fair price for those assets that will help us to move this along, we are going to, as I said, on the call, actively pursue all options to enhance or delever this company, so that we can get to the unlocking of the value of the B+L, and we'll do it as quickly as we can as evidenced by the previous question that we said. Yes, technically, we could be ready as early as one year from last -- third quarter of 2020, so about third quarter of 2021, we could be ready. But obviously, you've got to deal with the question of the leverage, and we'll deal with that as expeditiously as possible by pursuing all available options out there. Obviously, the first one being just growing our EBITDA ourselves, and that one obviously helped the delevering significantly. There are some additional things we'll look at from a working capital point of view to help also address the ability to generate cash. Paul, on the question of the separation and the standup cost? I mean we've identified the dissynergies already, but you want to take that call?

Yes. What this reflect is really duplicative cost and the cost of actually completing the separation. I think that's what you're getting at, David. And our intention is that we would add those back in arriving at adjusted EBITDA, and we would guide to those numbers included in the line that -- in the debt where you see in the back under the restructuring and other is that’s where it would appear. I can tell you that year-to-date and expected for 2020, it's minimal. It's not a lot of money yet. But in the future, as it becomes important, we will call it out for you.

Our next question will come from Greg Gilbert with Truist Securities.

First for Paul. Curious on your comments on your willingness to issue equity, the comments you've made in the past or your open-mindedness, let's say. Can you confirm that, that open-mindedness relates to the separation timing as opposed to materially sooner than that? And then secondly, a question about Solta. How does that business fit into your long-term vision of the company? It's been a great story for some time. But I'm not sure it moves the needle enough to matter a whole lot in the grand scheme of the company unless it helps other products or businesses. So can you speak to that as a possible sort of gem of a business that could either attract additional investment to build out that franchise or possibly the opposite?

Thank you, Greg. Paul, why don't you take the equity and I'll take the Solta comment.

Yes. It's a good question, Greg. Thanks for the question. I mean, yes, I've been focused on the equity raise as attributable to the separation. Sufficed to say that where we trade today, we're not all enthused about raising capital at the company level in order to advance the process. So yes, that relates mainly to the separation versus something -- yes, versus something else. I think it's a relatively straightforward answer. Joe?

Certainly. And then on that Solta question, Greg, we are very, very pleased with what we're seeing with Solta. As I mentioned, 74% improvement in the revenue versus a year ago is outstanding. And importantly, the EBITA is even stronger. So we are very pleased with what we're seeing with our Solta business. As the question of what's happening with that, we see significant growth drivers with Solta. Number one, we still are seeing this move to aesthetics. And as I referred to that Zoom culture or people sitting on their computers and seeing their face, and they want to aesthetically improve it. Number two, we still believe there's a significant upside opportunity for us in the European business with Solta as well. We have a strong U.S. business and an even stronger Asian business. We are continuing to develop our European business. Relative to the question of where this fits in the company, we're very pleased with our overall derm portfolio in terms of how it fits, but we always will look at opportunities to -- across all of our businesses, especially as we've said with the B+L spin. We realize we have to reduce leverage. And if there's ways to reduce leverage, we're going to actively pursue them across our business because we need to do this to unlock the value of B+L as we split up two we think very highly attractive companies with both of our -- B+L spin plus the remaining BHC business, we think it will be very exciting for all of our shareholders. Thank you very much for the question Greg.

Operator, that concludes what we wanted to do today. I thank everyone for joining us and look forward to talking to you in the future. Thank you, everyone. Go out and vote today. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.