Bausch Health Companies Inc. (BHC) Q1 2021 Earnings Report, Transcript and Summary

Good morning, and welcome to the Bausch Health First Quarter 2021 Results 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’d now like to turn the conference over to Arthur Shannon, Senior Vice President, Head of Investor Relations and Global Communications at Bausch Health. Please go ahead.

Thank you, Drew. That’s quite impressive. Good morning, everyone, and welcome to our first quarter 2021 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’d like to remind you that our presentation today contains forward-looking information. We would ask that you take a moment to read the forward-looking statement legend at the beginning of our presentation as it contains important information. This presentation contains non-GAAP financial measures. For more information about these measures, please refer to Slide 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 everyone for joining us. Today, I will briefly run through some of the first quarter highlights before turning the call over to Paul Herendeen, our CFO, to review the financial results in detail and discuss our 2021 guidance. We’ll then review the recovery of the businesses and share our thoughts on driving growth in 2021 and beyond, and provide an update on the previously announced plan to spin-off Bausch and Lomb before opening the line for questions. Beginning with Slide 4, in 2021, we have three areas of strategic focus. First, continued to execute on the business recovery from COVID; second, unleashing growth drivers; and third, accelerating strategic alternatives to drive shareholder value. With that as a background, let’s move to Slide 6, where we showed our progress in each of these individual areas. Overall, our team has been able to adapt to the pandemic related challenges, and despite a few pockets of variability, recovery is in progress across our business. Total company revenue was flat on an organic basis and reported revenue grew by 1% compared to last year driven by the rebound in Global Vision Care, Salix and International Rx business. Importantly, our businesses generated strong cash flow from operations of $443 million in the first quarter. We are seeing strong performance, including market share gains and recovering from leading brands, including Thermage, TRULANCE, ULTRA, PreserVision and LUMIFY. We also have made good progress advancing science during the quarter, which resulted in the recent announcement of statistically significant favorable top line results from two Phase 3 trials. And with our focus on taking action to accelerate strategic alternative process, we repaid $200 million of debt in the first quarter using cash generated from operations and agreed to divest Amoun for approximately $740 million. Finally, we have completed the accounting work to re-segment our business, and have provided a revenue breakdown for our five current segments in the chart on Slide 7. In the first quarter, approximately 44% of the total company revenue is generated by Bausch and Lomb, and about 56% from the remaining Bausch Healthcare or what we refer to as Bausch Pharma. To summarize, we entered 2021 with strong momentum and our first quarter results demonstrate that the recovery is in progress. Our business is generating strong cash flows and our leading products are poised for growth in key markets. In addition, we are advancing science and clinical trials and taking actions to accelerate the strategic alternative process. Before I turn the call over to Paul, I want to express my sincere appreciation to Paul, who’s concluding his tenure as the Bausch Health CFO on May 31, first for his leadership of the finance organization, but importantly, for many contributions he made to the company over almost five years. He’s been a great partner and I look forward to continue to work closely with him in his new role as Special Advisor to the Chairman, and of course, we also want to welcome Sam Eldessouky as our new CFO. On behalf of the entire Bausch Health team, thank you, Paul, for your strategic focus, your unwavering commitment and for playing an instrumental role in our efforts to turnaround and transformed the company we joined five years ago. With that, I’ll turn it over to Paul to cover the financial results in more detail.

Thank you, Joe, that’s very nice of you. It’s been a privilege to be part of this team. We’ve accomplished a lot together and I’m certainly looking forward to my new role and working to unlock the value of BHC for all of our shareholders. So let’s go on the quarter. Before I discuss our performance in the quarter, it’s worth spending a minute to highlight the changes we’ve made to our segment reporting, with the new segment structure, you now see our pure play eye health business B&L and our global pharmaceutical business that I’ll call Bausch Pharma for now. We will rebrand Bausch Pharma at some point in the future. Within Bausch Pharma, we now show a segment P&L for the international pharma business. So this is the first time you get to look at the financial characteristics of a business that is diversified in every sense of the word, generates attractive margins and has the ability to drive consistent growth of revenue, profitability and cash flow over the long-term. To help you with the changes to the segment reporting, there are several slides in the appendix that map from the prior format to the current. On to the first quarter financial performance. Revenue was flat on an organic basis with Q1 of 2020. We’re not yet fully recovered from the impacts of COVID. So getting back to flat versus what was a reasonably strong Q1 last year is an important step along the way. Across our businesses, the recovery was and still is uneven. There continued to be setbacks in various regions due to tightening of restrictions as COVID flares and recedes. All in all, we are well on the road to recovery, but we’re not all the way there yet. If you turn to Slide 7, the B&L segment was down 2% organically, again, the theme is recovery. Relative to last year, the Global Vision Care business was up 13% organically with the U.S. up 4% and OUS up 19%. Of the two, the growth in the U.S. is actually more impressive that was off of a very strong quarter a year ago. In the U.S., INFUSE was a big factor with additional growth coming from Biotrue ONEday Toric and ULTRA Multifocal Toric. Interesting factoid, this was the second highest revenue quarter ever for our U.S. Vision Care business. Outside the U.S., Vision Care revenues in Q1 of 2020 were significantly impacted by COVID, particularly in one of our more important markets, China. In Q1 of 2021, OUS Vision Care revenue has rebounded nicely, and we’re up 19% organically, again against the soft quarter a year ago. The SofLens family and ULTRA SVS were major contributors. We’re not all the way back to pre-COVID levels for Vision Care outside the United States, we’re close to returning to real growth. Global surgical was plus 2% organically with the U.S. down 1% and OUS up 3%. In the U.S., the year ago quarter was a decent quarter with only modest impact from COVID. So to be close to flat at minus 1% suggests we are close to recovered. Outside the United States, while our surgical business grew 3%, we’re not as close to recovered as we’re seeing in the United States. The Asia-Pac region grew nicely off of a very soft quarter a year ago, but the recovery in Western Europe in surgical is lagging. Global consumer was down 2% organically, up 1% in the U.S. and down 4% outside the United States. The 1% growth in the U.S. is better than it sounds as you’ll recall that in Q1 of 2020 that was a very strong quarter with a great deal of pantry loading ahead of COVID. OUS, the year ago quarter was also quite strong, and we were not able to repeat that in Q1 of 2021, as revenues in Canada and Eastern Europe remained soft due to social restrictions. Finally, for B&L, the Ophtho Rx segment was off 20% organically. Reminder, the Ophtho Rx business now includes the U.S. generic versions of our U.S. branded ophthalmic offerings. The decline was driven by the performance in the U.S., where LOEs, including the recent LOE of Lotemax Gel accounted for about a third of the U.S. decline. Another third of the U.S. decline was driven by the natural degradation of the sales of the generic versions of our U.S. branded Ophtho products. And the final one-third came from decreased volumes within our branded portfolio. So that’s B&L organic revenue in the quarter. Salix revenue was up 1% from Q1 of 2020, mainly due to XIFAXAN that was down 2%, offset in part by 11% growth of TRULANCE and better realized net pricing for other assets in the portfolio. If you look at the TRx trends for XIFAXAN, we’re clearly moving in the right direction. However, Rx is in a Long Term Care setting, are recovering slower than other parts of the market. The decreased number of patients to the Long Term Care setting has impacted this market, including our XIFAXAN volumes, and especially for HE. While we’re confident that the Long Term Care business will rebound, the timing remains uncertain and will come as a sector, rebuilds confidence in patient safety. The International Rx business was up 4% organically. We generated very strong growth in the LATAM region, especially in Mexico, led by our brands Ivexterm and Bedoyecta. Egypt and Russia also grew nicely versus Q1 of 2020. This growth was offset in part by general market weakness due to COVID in Canada, Poland and Eastern Europe. In the appendix, you have your first opportunity to see a segment P&L for the International Rx business so you can see the sorts of margins we can generate in this business. Also, if you look at the top 10 products for this segment, you can see that there’s not a lot of product concentration in the international pharma portfolio. The largest product Ivexterm accounted for only 6% of the top 10 products – excuse me, 6% of total revenue and the top 10 products only 27% of segment revenue. Ortho dermatologics grew 5% organically. The Solta growth trend continues on plus 35% organic growth led by excellent performance in China and the United States, and that was mainly from the Thermage FLX platform. The medical derm business was off 14% organically. Of that 14%, 7.5% was due to LOE assets and the balance due to declines across the rest of the portfolio. It’s worth a note here, a while back we put our colleague, Scott Hirsch in charge of the ortho derm segment and he said about our review of the medical derm portion of the segment. During the quarter, we took actions to reduce OpEx in the business as we were not seeing the level of promotional response we’re expecting from those investments. That led to a full relook at the future of our med derm business. And based on that work and work that is still ongoing, we are shifting the emphasis of our R&D investment within the med derm segment, business excuse me. We adjusted our expectations for operating expense intensity, and affordably our longer term revenue outlook for this business. The result of all that work was that in the quarter, we took a goodwill impairment charge for med derm. We’re going to reposition this business in a way that we believe will be value generative. Our diversified segment revenues were down 2% organically. Our neuro business was up 3% organically as strength in government mail order volumes for branded PEPCID, ATIVAN and MYSOLINE were quite strong in the quarter. Branded PEPCID continued to benefit from the prior issues with Zantac and that was in the quarter. Within our WELLBUTRIN and APLENZIN franchise, we saw a nice improvement in our realized net selling prices, but not enough to offset quarter-over-quarter volume declines. Our generics business was off 20% with the biggest factor being the natural erosion of volumes and net pricing as additional competitors enter the market for our generic products, for example, Migranal, Apriso, Uceris and Diastat. Offsetting some of those declines were new generic launches, including Moviprep and Isuprel. We call it our generics unit, helps us to capture the economic tail associated with our brands after they lose exclusivity, and that the expected progression is a gradual decline after launch. Our generics unit does a great job of capturing value for us. Finally, dentistry posted 19% organic growth in the quarter. This business went through significant changes as its lead product, a branded prescription product called ARESTIN, was formerly covered by managed care, but that coverage essentially went away. The team converted the ARESTIN business over to a buy-and-bill model and appropriately adjusted spending on promotional inputs. After resetting the revenue base, the business is growing at the top line and even more so at the operating line, a great turnaround. So that’s revenue. Please turn to Slide 8, and I’ll walk down the quarterly P&L. We covered revenue, so let’s go right to growth profit margin that was unfavorable by 250 basis points versus Q1 of 2020. About 45% of that movement was driven by COVID factors, including write-offs and negative manufacturing variances. Another meaningful factor was FX. Many of our manufacturing inputs are denominated in euro, zloty, Canadian dollars and other currencies. Where FX was a tailwind for us at revenue relative to Q1 of 2020, it’s a headwind in cogs and in gross profit margin. Finally, our mix drove a portion of the unfavorable movement as well. Note that in our guidance, we have reduced our expectations for full year 2021 gross margins from roughly 72% to roughly 71%. Within operating expenses on an adjusted basis, SG&A costs were favorable by $53 million versus Q1 of 2020. I talked about this on the Q4 call. We’re in the process of redeploying the promotional resources that are needed to get the company out of the COVID hole and back to a solid growth mode that means filling vacancies in sales forces and supporting our sales efforts with promotional programs that would have been inefficient in the throes of COVID, but demonstrably effective in driving revenue growth in more normal market conditions. So the level of selling, advertising and promotion expense that you see in Q1 of 2021 resulted in us posting a strong operating margin, but it will not drive the sort of near-term and longer-term revenue growth that we expect from our portfolio of assets. That said we are reducing our expectations for SG&A for the full year 2021 from roughly $2.6 billion to roughly $2.5 billion as some monies not spent in Q1 will end up as savings for the full year. R&D was 10% favorable on a constant currency basis, but this was not by design. We would have spent more in Q1 if we could have done so effectively, but projects are moving a bit slower than we’d like, as we shake-off COVID. We still expect to spend roughly $525 million in R&D for the full year of 2021. Net-net, we posted adjusted EBITDA of $852 million for the quarter, up 2% on a constant currency basis from Q1 of 2020, that’s a nice 42% adjusted operating margin but as I just said, not sustainable. With the concurrent configuration of our product portfolio a solid near-term target for adjusted operating margin is more like 40%. In the Appendix there are slides that show the P&L for the B&L Segment, the segment that represents the business that we plan to spin-off. You also have the segment P&Ls for the four components that will make up Bausch Pharma which you can use to assist you in getting a sense for the Q1 results for Bausch Pharma. We have also included slides that show estimates of the allocation of corporate G&A and R&D to the different businesses. And finally, we provide splits of depreciation, share-based comp and capital expenses between B&L and Bausch Pharma. This information may be helpful as you think about the profitability and cash generating characteristics of the two businesses. If you look at the segment P&Ls that will make up Bausch Pharma, you will see a business with strong gross profit margins and high EBITDA margins. We believe that both B&L and Bausch Pharma have the ability to grow revenue organically in the mid-single digits for a number of years. The next three slides, Slides 9, 10 and 11 are self-explanatory, but I do want to take a moment to call out our strong cash generation in Q1, $443 million of cash generated from operating activities on a GAAP basis and adjusted for the settlement of legacy legal liabilities and separation related costs and payments, the cash generated was a strong $587 million. I want to provide some balance here. We’re talking about a discrete 90-day period in this 90-day period essentially everything that could go right from a cash generation perspective was in our favor. We are on track to generate roughly $1.5 billion of adjusted cash from operations in 2021, aimed to prepay roughly $1 billion of debt from cash flow. On Slides 10 and 11, you’ll see that we repaid $200 million of debt during Q1 of 2021 and then after the quarter close, we announced the repayments of another $200 billion of debt in May and June. So we’re off to a good start. And upon the closing the Amoun transaction, we would further reduce the quantum of our debt and reduce our leverage. Onto guidance, the headline is that we’re reaffirming our prior guidance ranges for revenue and adjusted EBITDA. I referenced a couple of the elements of our guidance during my remarks on the quarter. We are reducing expectation of gross profit margin from 72% to roughly 71%. We’re reducing our expected SG&A expenses from roughly $2.6 billion to roughly $2.5 billion. We’re keeping the expected adjusted cash generated from a offset roughly $1.5 billion and we’re continuing to target paying down debt by roughly $1 billion with cash generated from ops. The adjusted tax rate for the year, we increased from roughly 7% and roughly 9%. Part of this increase is based on a shift in the mix of where we are generating pre-tax income around the world with higher tax jurisdictions making up a greater percentage of total pre-tax than we had forecast. Another part of this increase is due to the steps we’re taking to reorganize our global operating model as we prepare for the separation into two companies. As we continue with that process, our estimates of the go-forward tax rates for B&L and Bausch Pharma are coming into better focus. We currently forecast the tax rates on adjusted earnings for Bausch Pharma to be in the range of 10% to 12% and B&L to be a few hundred basis points higher than that. That’s it for me, back to you Joe.

Thank you, Paul. Well let’s begin with Bausch & Lomb on Slide 15. First, we believe we have most integrated eye health business with sales in Surgical, Consumer, Ophtho Rx and Vision Care. We’ve provide the revenue breakdown for the segments core businesses in the chart on the left. While each of the businesses are in different stages of recovery, total segment organic revenue in the first quarter was near pre-COVID level, call it with few highlights, while Vision Care organic revenue grew 13% versus last year. And the U.S. growth was driven by Biotrue ONEday, ULTRA as well as the INFUSE launch. International Vision Care revenue grew by 19% versus last year. And our Daily SiHy lenses have now been launched in U.S., Australia, Hong Kong and Canada, and we just received approval in Taiwan. Global Consumer Ocuvite and PreserVision grew organically by 4% versus last year. And LUMIFY reported revenue grew by 28% compared to last year. And we continue to see strong e-commerce growth of 35% versus last year. Putting it in context, e-Commerce now accounts for 12% of the Bausch and Lomb U.S. Consumer Business, which is up from just 2% in 2017. Performance in Global Surgical was driven by international, which grew organically 3%. And finally although performance of Global Ophtho Rx was impacted by COVID and loss of exclusivity by VYZULTA TRx grew by 18% versus last year. The charts on Slide 16 show trends in key areas across the segment, all of which point to a recovery in progress for the Bausch and Lomb business. Turning now to Slide 17 for update on Salix, although Salix faced headwinds in the first quarter revenue recovered near pre-COVID levels down 1% compared to last year. Starting with XIFAXAN reported revenue decline of 2% versus last year was driven by lower prescriptions in the long-term care channel where the industry is seeing lower occupancy rates because of COVID. The last few quarters I also discussed the XIFAXAN and IBS-D prescriptions. I am happy to report that the latest IBS-D TRxs are now up 14% in the trailing 10 weeks versus last year, so we are seeing some good recovery there. Compared to the first quarter of 2020, TRULANCE reported revenue grew by 11% and TRxs grew by 21% compared to a market growth rate of 3%. TRULANCE commercial new Rx market share has nearly doubled since we acquired the product in March, 2019, up from about 5.7% to now at 11%. We continue to grow share in increased patient access to TRULANCE in both commercial and Part-D. Even better, in the next three months we expect to add access to another 32 million commercial life for TRULANCE. The charts on Slide 18, demonstrate the positive trends in the recovery we see for key promoted products. Moving to Slide Number 19, our new International Rx segment grew organically by 4% compared to last year driven by strong performance in Latin America. We’ve shown the strong track record of quarterly organic growth for this segment going back to the first quarter of 2019 in the chart on the top left, this segment have a broad and diverse product portfolio and we’ve listed the top three products for each region on the map. Moving now to Ortho Dermatologics on Slide number 20, in this segment our focus is on driving profitable growth. As shown in the chart in the left, the segment’s EBITA margin has expanded from 36% in the first quarter of last year to 50% in the first quarter of 2021. Organic revenue recovered to pre-pandemic levels and the segment grew organically by 5% versus last year, driven by strong demand in Solta which saw organic revenue growth of 35%. A few highlights note for Solta, Thermage organic revenue grew by 32% compared to the prior year quarter. Turning now to Slide number 21, we have listed the key growth drivers for our business in 2021 and beyond. First our SiHy daily lenses, with expected ramp up of additional approvals global revenue of Bausch and Lomb SiHy daily is expected to exceed $250 million in sales. Many of you have asked about our performance in Japan, the first country we now estimate our share – the Japanese SiHy daily market is already approximately 7% and in the U.S., we have data that shows in the spherical lenses we’re at about 13% market share. Next, we anticipate tailwind for 2021 and beyond from the backlog of cataract surgeries that were delayed due to COVID in 2020. We’re expanding the salesforce for Thermage franchise into Europe and finally given the momentum which we headed into year, we expect to see strong performance and recovery of our leading brands. Both Bausch and Lomb and Bausch Pharma have a number of near-term catalysts and upcoming milestones in the R&D pipeline, which are outlined in Slides 22 and 23. Let’s start with XIFAXAN – sorry, let’s start with Bausch and Lomb. Last month, we received readout of Phase 3 results for NOV03 an investigational treatment for dry eye disease, where the 16 million adults in the United States have some form of dry eye disease with meibomian gland dysfunction as a known cause for a majority of these cases. The GOBI trial met both of its co-primary end points and also met all the secondary end points showing statistically significant improvements in both the signs and symptoms of dry eye disease in as early as 15 days. NOV03 is a potential first-in-class treatment option for millions of patients. The second Phase 3 trial is ongoing, and if the results are positive, we expect to file with the FDA in 2022, also we expect to complete enrollment for the Eyenovia Phase 3 trial in the second half of 2022 and to start a Phase 3 trial for an investigational treatment to help reverse vision loss due to dry AMD. Moving now to Slide 23 in Bausch Pharma, a few weeks ago we announced a statistically significant top line results from the second Phase 3 trial evaluated the IDP-126 gel, which is a combination retinoid anti-bacterial and antibiotic topical for acne. If approved IDP-126 would be a first-in-class with this triple combination. The data also demonstrated a benefit for patients as early as two weeks and a greater than a 70% reduction in lesion counts, following the results of the comparative bridging study we hope to submit a new drug application for IDP-126 in the second half of 2022. On Slide 24, we have charted the four novel rifaximin formulations we are working on, so we can see where we are in each of the development timeline. We are excited about these novel rifaximin formulations and their commercial opportunities. Moving now to our third area of strategic focus of accelerating strategic alternatives to drive shareholder value, if you turn to Slide number 27, we’re dedicated to expediting alternatives that we believe will unlock value for shareholders and create two great companies. We have completed the new financial segmentation and are on track for all internal objectives necessary for the spin of B&L to be achieved by the end of the third quarter of 2021. We are actively pursuing all opportunities to expedite leverage improvement and deliver shareholder value, including by increasing EBITDA and improving working capital efficiency. Also regarding the question of debt leverage, we formerly articulated the 5.5 times leverage target for Bausch Health and the roughly four times for Bausch and Lomb that was one path of many. We anticipate Bausch Pharma to be a very strong cash generator as we expect it to enjoy an attractive tax rate and has modest annual capital expenditure requirements, as such it will convert a great deal of its earnings to cash and carry a fair degree of leverage. With a commitment to prioritize the use of free cash flow to reduce debts and show rapid improvement in leverage, we are confident that Bausch Health will be able to handle 6.5 to 6.7 times net leverage. On the B&L side of the equation, we want B&L to start with leverage more consistent with its most relevant comparable peer companies as this will enable the market to value being now without the need to consider significant differences in capital structure. On Slide 28 we show the actions we have taken since August 2020 to expedite the spin-off such as continued debt paid down over the last two quarters and the sale of Amoun that we announced in March and expect to close in the second quarter. In addition, as Paul mentioned earlier, we have provided expected tax rates for Bausch and Lomb and Bausch Pharma. Both companies will remain domiciled in Canada and we will continue to have corporate offices in Bridgewater, New Jersey. We tend to apply to list Bausch and Lomb on the Toronto and New York Stock Exchanges as BHC is currently listed. As promised on Slide 29, we are pleased to announce an initial Bausch and Lomb spin leadership decisions. I’m pleased to announce that Sam Eldessouky will serve as the Bausch and Lomb’s CFO and I will take the role as CEO of Bausch and Lomb upon separation. Tim and I will be focused on building out a SpinCo B&L leadership team over the next several months. We remain committed to unlocking value across our two attractive businesses as soon as possible. And today’s announcement represents a step forward in that process. Looking ahead, our process remains on execution, growth and positioning these two strong budget-similar businesses for attractive growth and opportunities in the markets they serve. With that, operator, let’s open up the line for questions.

[Operator Instructions] The first question comes from Ken Cacciatore with Cowen and Company. Please go ahead.

Hey, good morning, guys. Just had a question about the potential of a dual process here of analyzing different divisions for possible sale. Just wondering if you can give some commentary about how that’s going levels of interest, say, your desire to maybe affect sales. And then also in terms of timing, if there were to be a plural sales of different divisions, is that something that you’d want to do simultaneous, or is it something that you would announce separately? And then second question, we’re often asked about comparing your eye care business to the other eye care businesses that are out there. Can you just talk about some of the similarities and differences and maybe rationale why you should be ascribed similar value to those franchises? Thanks so much.

Okay. Let’s start with the potential sales and timing just to maybe recap a little bit of what we’ve done. Since Paul and I have joined the company, we have divested up until the announcement of Amoun, $3.8 billion of assets. And now with the Amoun, it’s now over $4.5 billion of asset proceeds we’ve received. They are at about 11 times EBITDA multiple what we’ve realized. So we’ve absolutely been willing to explore all the opportunities to divest assets to help increase shareholder value. Well, I can’t comment specifically, as you can understand about any specific asset that’s under consideration today, what I will want to reassure you and all of our investors that we take this process very serious, and we’re going to consider all the alternatives to help us increase shareholder value and create value across all of our businesses. So currently we are – I hope you understand, we are going to look at all the things that would be opportunities to create that shareholder value in the near-term and long-term. And that’s how we’ve been approaching this from really from day one since the fall when I got here. But that is what we’re going to do, we’ll continue to do and make sure that we check all the different possibilities for thinking about shareholder value creation. On the second part of your question, the B&L comparison to peers, we look across all the different opportunities. As I said in my earnings comments, accepting that I’m biased, we have a belief that Bausch and Lomb is the most integrated eye health company. And by that, I mean that we have the businesses on the surgical side, we have the prescription, we have the vision correction, we have the consumer. By having that integrated platform, we think that’s an important part of what will help Bausch and Lomb to be very successful versus the pure company. We always look at, and you probably do more than we do, the EV, enterprise value divided by the EBITDA. We think we compare very favorably in terms of the opportunity to create economic value relative to where is Alcon today. Alcon in 2021 is somewhere in the 24 times or thereabout Cooper in the 22 plus, Zeiss over 30. So we think those are opportunities as the market gets a good indication of comparing us for economic value versus other company multiples. We can compare very favorably and obviously the market will make that decision. I can’t comment on that. On the question – final area, though. One of the areas that we were thinking through is we did want to look at a relative leverage of ourselves versus other companies. And that was part of the decision that we put in place a debt leverage for B&L of less than 2.5 times as we contemplate the future for the business. So we’ve been doing a lot of thinking about it and our view is that we can create a very valuable asset in Bausch and Lomb. And one that importantly we’ll take care of patients by having integrated approach to eye health. I think I got all your questions, Ken.

Yes. Thanks, Joe, and congratulations, Paul, on your tenure here.

Thanks again. Our next question?

The next question comes from Gary Nachman with BMO Capital Markets. Please go ahead.

Thanks. Good morning. If Solta is one of the businesses you can ultimately divest, would you be committed to the medical derm business for the long haul, given some of the challenges there and how you said that you’ll be restructuring it? And then on the consumer side, just talk about how you’ve been spending more on DTC for those types of products to take advantage of the recovery coming out of it. And how you think that’ll sort of play out for the rest of the year in terms of spending? Thanks.

Sure. Once again, on the Solta question, I’m not going to comment on individual assets for divestment. I will simply say that we are very, very pleased with the performance of the Solta aesthetic business. We all think – look at the aesthetic business and see that growth. And we think a large part of that growth is driven by what we refer to nowadays as the Zoom culture of people looking at themselves in high definition screens and saying they want to make sure they can improve the aesthetics of their face. And also in many parts of the world where they have not been able to travel, they’re investing more than theirselves. So clearly we think there’s a real trend on the continuation and growth of our Solta business. On the question of, I’m not going to comment about the divestment side, but we do view that the medical derm is a business that because of what we’ve been able to do and what Scott Hirsch has been able to do for us and looking at the profitable growth dynamics, we can look at investing in the med derm business, especially when we come up with compounds that we think can offer advantages for patients. The IDP-126 data is very, very favorable, its ability to reduce the overall number of lesions for patients with acne and importantly that quickness or speed in which it provides that relief. So it is something we’ll continue to look at that to divest in and certainly something we will look for what I referred to med derm as profitable growth for the future. On the – Paul, do you want to…

Sorry. Gary, it’s Paul. I want to weigh in on this as well. I think that the med derm business, I called it out in my prepared remarks, we are repositioning that business in a different way than that we were thinking about it, say, 24, even 12 months ago. I think there was terrific opportunity there. You can see even what I talked about in terms of substantially reducing the OpEx intensity, what we have is a terrific position, number one. Number two, we have a very solid R&D capability that we’re in the process of, I should say, refocusing or pivoting that activity to different sorts of products. We think we have a great opportunity in med derm, but to be clear, it’s quite different than what the way we were thinking about it, even 12 or 18 months ago. So we’re excited about the long-term prospects there, but it’s different.

The numbers you’ve quoted on the consumer business are amazing. We’ve been able to grow that consumer business very dramatically. Obviously, the entire e-commerce business continues to grow. We are continuing to look at the direct-to-consumer activities. But we feel that our products are – patients are responding to our products very well. LUMIFY is a great example, I mentioned in call, its growth versus last year is very surprising and continues to show great growth. If you look at the trends in the data that we put forth in the charts, you can see the LUMIFY data and how it’s performed as well as the overall consumer business on Page 16 of our chart. You can see the U.S. Bausch and Lomb consumption change year-over-year, dramatic increase in consumer increase versus what we saw a year ago and those trends continue. We also see what was happening with LUMIFY, clearly recovery and progress. So we’re going to continue to spend behind that business. We expect to see continued strong consumer demand and we’ll continue to move forward with that. From a long-term recovery point of view, we believe that’s going to be one of the important growth factors that helps the B&L business, truly have what we believe is going to be an integrated eye health business. Operator, take the next question, please.

Thank you.

Thank you. The next question comes from David Amsellem with Piper Sandler. Please go ahead.

Thanks. So I understand the thought process of surrounding the aspirational leverage ratios for each business, but I wanted to drill down on your thinking about the sustainability of that 6.5 times for the pharma business. And I guess where I’m going from this is – where I’m going with this is, do you see that business as a growth business given how things have transpired with derm, for instance, and other, and also what looks like the maturation of XIFAXAN? I guess the question here is, is this a situation where over time those leverage ratios could conceivably deteriorate? At one point you had something called the significant seven that didn’t really materialize. So how do you think about that longer term? And how should we be thinking about the cap structure of that business over time? Thanks.

Sure. So we’ve done a lot of thinking on this. And I want to step back and then I’ll make a couple of comments, and Paul may want to add to it. But I remind you that the Bausch Pharma business, as we’re thinking about it has very high margin business. If you look at the pages that we put together for derm is a 50% margin, Salix was over 67%, diversified 70%. They’re very high margin businesses, first comment. Second comment is that we do expect the Bausch Pharma business to have an advantageous tax rates, mid-single-digit growth, very diversified and low CapEx. So from that point of view, they will generate high amount of cash. And as we stated in the call, majority of that cash will be used for debt pay down. So I do think that as we contemplate this, we do believe there is an opportunity for that business to be one of two great businesses and Bausch and Lomb being the other. So we are looking at it from the point of view of what each business can appropriately carry for leverage. Paul, anything you wanted to add to that comment?

Yes. I think the key is, and Joe hit on it is, we believe that the portfolio that is representative of Bausch Pharma has the prospect to grow mid-single digits over the near-term. And that business will delever pretty quickly, and let me rephrase that, call it at a good pace. So that in a relatively short period of time, I think you get more flexibility to be able to invest back in your business. And of course, implicit in that is you’re investing in R&D and invested in productive R&D. You will have the ability to demonstrate long-term growth prospects as well. I think I’ve been quite clear the cash flow characteristics of Bausch Pharma, it can handle 6.5 to 6.7 times net leverage. I used to say way back in one of my prior lives, not all adjusted EBITDA is created equal. When you have an excellent tax rate, and when you also have a relatively modest CapEx, you convert an awful lot of your earnings to cash. And if you prioritize that cash to improve your leverage that certainly is a big helper. If you have the ability to grow that certainly is a big helper to getting that leverage statistic down in relatively short order.

Operator, next question, please.

Thank you. The next question comes from Gregg Gilbert with Truist. Please go ahead.

Good morning. First, what are your thoughts on the management team for the pharma, the RemainCo business? And what variables will factor into that decision and timeline? Secondly, you’ve been very clear that you’re open to any action that will enhance shareholder value to your credit. Is the sale of B&L a realistic possibility versus the spin that you announced? And lastly, Joe, if you end up leading a pure play eye care company, once the market has a chance to value it, what changes would you make to reinvestment rates, M&A strategy and urgency, cost structure, et cetera, it appears that successful spins have tended to be more about sort of specific changes over time and not just multiple arbitrage. Thanks.

Sure. Let me start with the leadership question that you asked first. Just step back a bit, the Board made a decision going back last year to create two great companies, a pure play eye health company and a diversified pharma business. As we’ve gone through this, the Board has thought through the process, and as with other SpinCos, the Board evaluated how can we build that leadership team of this SpinCo organization while at the same time ensuring that the Bausch healthcare team, which has already existed, continues to do very well and continues to move the business forward. The first big issue that we have with the spin is that we’ve got to build those new teams. So the Board has asked myself and Sam to build out the B&L SpinCo team and get it ready for an IPO or separation sometime after that October 2021 timeframe. So that’s what we’re going to do. My expectations on the Bausch Pharma or the remaining Bausch healthcare team is that there is a process underway just like there was with B&L with internal and external candidates, and the decisions will be made that in due course, sometime in the next several months. But I remind you that the remaining Bausch healthcare team is in place. We’ll obviously have to make some additional decisions there though with the total team. But the feeling was that we needed to make that spin decision, start building that spin team very soon realizing that we want it to be ready for a IPO separation sometime after that October 2021 date. On the question of the B&L versus sell versus spin, I guess the way I phrase it is that obviously I’m not going to be able to comment specifically on any sell process. I’ve seen the obvious rumors as you have seen them. Our view is we’re going to take all the steps required to set up Bausch and Lomb as a company that can be an IPO – opportunity to do an IPO or to separate at sometime after that October 2021 timeframe, we have a value in our mind for that business. But if there are others that want to pay a price that is equivalent to that value, we always going to do what we believe is the right thing to do for our shareholders and evaluate that those types of offers. But to me, what I’ll simply say is that we’ve got a pathway to take this business to spin-off Bausch and Lomb. We’re going to continue to make progress on that pathway. And as a Board and a leadership team, we’re always going to be open to other alternatives or pathways that can help create value for our shareholders. Paul, do you want to add anything to that?

No, you keep going, but I want to come back after.

On the question of what changes would we make to B&L in regard to investment in M&A, I think the first comment is, first and foremost, we think we’ve got a great business with Bausch and Lomb, 165-year legacy business so we think it’s a great business and one that we can continue to build on, number one. Number two, we think by having the integrated eye health business, by having the opportunity to have the surgical, the prescription, the vision correction, the consumer, that’s going to put us in a very important position as we think about what are the mega trends driving the eye health business, which we know are going to drive a significant need for myopia or eye vision correction. We know that people over the age of 65 use 8 times more eye health than people under the age of 65, that’s going to continue to be important. We know that more and more practices, especially in the United States are being consolidated. So having a place where we can offer integrated approach, those practices is going to be important, so we think we’ll be able to be an important supplier for those group practices that are being formed. So all of those I think are important, but what else is to me. Clearly one of the things that has limited our ability with Bausch and Lomb has been the leverage that it’s been part of the overall Bausch Health Company, as that leverage comes down, we would look to the opportunity to grow organically, to invest in the R&D and importantly, look at bolting on assets that can help us with the overall organic growth rate. So I think those are all some of the changes we’re thinking about, some of exciting things that we see in the future of Bausch and Lomb. Paul anything you want?

Yeah. I want to jump on that last point about once you spin the eye health business out, it is like, well is it better and the answer is, yes. It’ll start life as very well capitalized company with access to capital. It will have the ability to allocate capital to areas that will strengthen that entity’s competitive position, and it will do so without competing for capital with its brothers and sisters on the pharma side. I think that Joe, myself, Sam, the rest of the team here, we’ve done a pretty good job of allocating capitalize between different types of businesses. And I think that over the last several years, what you’ve seen is, we rotated a little bit and we did what we needed to do in order to be able to, for example improve the quality of that Ophtho Rx pipeline over the last call it 24 months. If you go further back, we took the steps that were necessary to ensure that we filled out the Vision Care portfolio with a Daily SiHy lens. Those were hard decisions. Back in the day, when you’re looking to say, I can invest here or I can invest there, having the eye health business B&L set up, again starting life as a well-capitalized entity it will have the ability to take the best decisions to improve the competitive position for that entity and to ensure that entity has the prospect to be able to deliver a really solid and sustainable growth.

Thank you, gentlemen.

Operator, next question, please.

Thank you. The next question comes from Balaji Prasad with Barclays. Please go ahead.

Hi, good morning and thanks for the questions. Joe, just want to focus on the recent top line of NOV03 and get some sense of your expectations around this opportunity. So we did an expert call where our expert highlighted the population is three times that of what Restasis or Xiidra is trading currently, which is already a $3 billion market. So some color on the market potential will be helpful. And secondly, say any other large market opportunities around eye care, similar to meibomian gland dysfunction? On the same topic, so the product has been launched in Europe, but from what we see, it seems to be not tracking well commercially any thoughts around that? Thanks.

Sure. Well, first and foremost we are very, very excited about the NOV03 data and the market potential. And once again if others may not have had a chance to see the data, but the Phase 3 endpoint data, both in corneal staining and ocular dryness is statistically very significant and the time point we did both the 57-day and then also a 15-day look, and we had statistically significant results in both 15-days and 57-days. We think that timing is a real important thing for patients who have dry eye. Number two, as you said, it’s a big market. We know in the United States alone 16 million, 17 million Americans who have this problem of dry eye disease by having a product that could potentially, if we get a second Phase 3 trial that confirms this data show that the product works with that kind of speed and has that kind of level of effectiveness and the side effect profile, very similar to the placebo. We think that’s a really exciting opportunity. Our view on what we did in the United States was to take it through the prescription pathway, so that we can make sure that we had the appropriate data and be able to share that data versus the alternative products out there. We think it’s really exciting. And most importantly, the data that shows the quick speed of action for this product relative to other products out there in the marketplace. So we’re excited. We’ll see what happens with that second Phase 3 trial, but we think it’s very positive happening. We think the additional claims we will have though to be clear on the Rx side is going to help differentiate it from the product that’s currently being utilized in Europe, because we have some very significant comparative, certainly timing claims. I’ll say it that way timing claims. On the other questions that I didn’t mention it, on the previous question, but I will say in addition to having the NOV03 data, we also are working with a partner that just filed or re-filed XIPERE yesterday for – we think that’s another good opportunity for us in macular edema associated with uveitis. Uveitis causes I think up to about 30,000 new cases of blindness in the U.S., so we think that’s another good opportunity. And importantly we’re also looking at a product for dry AMD. So that’s another opportunity for us. And the final one of course is what we’re looking at with Eyenovia for myopia and those we think give the overall Bausch & Lomb prescription business a really good number of short term goal for the future.

Thanks, Joe.

Operator, let’s take the next question, please.

The next question – just one moment, the next question comes from Umer Raffat with Evercore. Please go ahead.

Hi, thanks so much for taking my question. I have three quick ones, if I may. Perhaps, first Paul and Joe, if you could give us a sense for what the leadership team looks like or where your head is at for the remain co, I think that’ll be very helpful? Secondly, on your S1P1, which is perhaps one of the more important programs on the Salix side, I saw your new trials in mild-to-moderate patients and many of your S1P1 competitors from Celgene, Bristol to Arena, et cetera, all the companies don’t necessarily think of mild as an opportunity for S1P1, but I also realize you’ve been in that market with the presales. I was just very curious what feedback you heard from Salix folks on the possibility of sort of a pre-sell for S1P1 co-formulation or something along those lines. And then finally just a quick follow-up on the last question on NOV03, do you agree it’s an artificial tear or are you thinking of it more as a RESTASIS or Xiidra? And could you remind us what’s the largest artificial tears Rx product in the marketplace in the U.S. right now?

Let me try to comment and take them in the order you gave them to me, Bausch Pharma leadership. What are we thinking about, well, with as I said the board’s view on this is that we want to create two great companies that pure play eye health business as well as the diversified pharma business of being called Bausch Pharma until we rebrand. What our view is that we’re looking at internal and external candidates for that leadership position of the Bausch Pharma. Our expectation is that process is going to take another couple of months and we’ll have some additional announcements in due course. But our view is that’s something that will build on the existing Bausch Healthcare team. In other words, already have Bausch Healthcare team in place, we’ll build on that and as we’re trying to select the two different business leadership, both in the Bausch and Lomb side as well as in the Bausch Pharma side. On that second question you have relative to the S1P, you’re correct. We did look at mild-to-moderate and how we targeting this population. The team has looked at these patients and the needs in this patients and how they work, where is this market going to be in the next five-years, 10-years and that is the reason we went after the mild-to-moderate population, I 100% understand where the market is today. But we believe that this market is going to be targeted differently in five years and 10 years. And we put together a new team of individuals that look at this from a portfolio point of view of what the future will hold, where we want to go with this opportunity. Our view is that based on the discussions, we’ve had a number of key opinion leaders is that we should go after this mild-to-moderate opportunity. We think it is going to be an important, if we can show the clinical trial results, it will be an important additive to what’s currently available in the armamentarium for docs, as they think about this population. On the NOV03, we think much bigger than I think you’ve referred to it as artificial tears. We think much bigger than that. We think this area of meibomian gland dysfunction is a major contributor to dry eye disease. And as such we have what we believe will be a first-in-class treatment for pharmaceutical treatment of meibomian gland dysfunction, as I mentioned that’s a major cause of much of the dry eye disease. So we do think it’s a very significant patient population. I will tell you that the data you’ve seen the data, I’m sure if you look at both the ability to help these patients having statistically significant results of both signs and symptoms, and having that result in as quick as 15-days statistically significant, we think offers a significant opportunity for patients. So obviously we’ve got to confirm it with the second clinical trial but if indeed, that trial turns out anything close to this first one we do believe this is a very significant opportunity for patients who have dry eye disease for the future. So we’ll stay tuned to see what the rest of the trial results are, but clearly we think a significant opportunity versus the great products like Restasis and Xiidra. Operator, take the next question, please. I think we have time for our last question please.

Thank you, sir. And that will come from David Steinberg with Jefferies. Please go ahead.

Thanks. I have two questions. First, just the third question is aligned on NOV03 just because the data was so intriguing. Joe you’ve highlighted a number of times the onset. So I assume you’re contrasting it with Allergan’s Restasis, which despite slow onset and stinging still. I think peak sales were about $1.5 billion. And so my question is, given that this area has been a graveyard and so many companies have tried to develop dry disease products and so many has failed, and there are only two on the market. And with the first study seemingly showing comparative onset versus the market leader, and then the market leader going generic likely in the coming months or years, how big a product do you see this being a peak when you include the U.S. and Europe? And do you view it mostly as monotherapy or would you see it being used in conjunction with some of the other leading products like Xiidra? And then my second question is on TRULANCE, and you noted that since you acquired the product, the market shares doubled and it’s growing much faster than the market. But I was just curious, in the first quarter 21% growth is good, but last year in the first half of the year growth was over 50% and then the second half of the year growth was 43%, 44%. So I’m just curious is the 21% first quarter growth, sort of a one-time drop-off. And if so, what might’ve caused that and do you see growth accelerating throughout the year, getting closer to growth rates you showed on a quarterly basis last year. Thanks.

Great questions. I’m going to try to make sure I get all the NOV03 comments that you asked. First and foremost I’m not going to comment specifically about this bigger product it could be, but I do think it compares very favorably to other drugs that are out there currently being used for treating dry eye disease. I think relative to both the – we’ll share more about the side effect profile, but it’s a very clean profile. We shared the timing advantages that we at least see in this. And we showed at least initially the first Phase 3 trial, the ability to show both the signs and symptoms of dry eye disease specific to patients who have meibomian gland dysfunction. We think that combination is a very winning combination and will help us to compare very favorably to any type of drug in the category, which as you stated are certainly Restasis over $1 billion, I think Xiidra is up to that $500 million plus range already. So these are big drugs, big opportunities. And unfortunately it’s a real problem for 16 million Americans and more in Kansas. So we look forward to getting that second trial and having the data to share with you in terms of the results for these patients. On the question of monotherapy or with other products, I think the answer is probably going to be, it could be used for both, especially because it works so quickly. Some of these other drugs that increase tear production take a longer time. And if we can work quickly, have a relatively limited adverse event profile or similar to a placebo, we think that’s going to be an opportunity to add to patients who may be on therapy, but not getting sufficient relief from existing products. So large product opportunity, many Americans who have this problem we hope to be able to help if we get the same confirming clinical trial results. On the question of TRULANCE, we’re very pleased, as I said we’ve already doubled, almost doubled the market share just two years from what we have, had it when we grow with somewhere around 11% market share, it’s outgrowing the market to be clear and picking up share each and every quarter. And then importantly, one of the comments I made you might’ve missed, but I’ll just repeat it is that, based on the great work of Jeff Hartness and our team on the market access, we’ve been able to pick up incremental lives that we expect to add access to another 32 million commercial lives on top of what we already have. So I think if you look at our Slide number, I think it’s 18 it shows a great trajectory for TRULANCE. If you look at that slide, it really – I think is very powerful in terms of what we’re seeing and where we think TRULANCE is going. On balanced, we’re really excited about it, and we think that we will continue to grow. And I think that’s another one of the questions people asked about the future of our Bausch Pharma business TRULANCE is going to be a great contributor there as we think about the future of this overall business. So thank you David, for the question.

Operator, that concludes our call today, I want to thank everyone for joining us and have a great day everyone.

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