Bausch Health Companies Inc. (BHC) Q2 2022 Earnings Report, Transcript and Summary

Good morning and welcome to the Bausch Health Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Christina Cheng, Senior Vice President, Investor Relations. Please go ahead.

Thanks, Andrew. Good morning and welcome to our second quarter 2022 earnings conference call. Participating in today’s call are Thomas J. Appio, Chief Executive Officer of Bausch Health and Tom Vadaketh, Chief Financial Officer of Bausch Health. Before we begin, I’d like to remind you that our presentation today contains forward-looking information. We would like to ask you to take a moment to read the forward-looking statements at the beginning of the slides that accompany this presentation. They contain important information. Our actual results may vary materially from these expressed or implied in our forward-looking statements and you should not place undue reliance on any forward-looking statements. Please refer to our SEC filings and filings with the Canadian securities administrators for a list of some of the factors that could cause our actual results to differ materially from our expectations. We use non-GAAP financial measures to help investors understand our ongoing business performance. Non-GAAP financial measures may not be comparable to similarly titled measures used by other companies and should be considered along with, but not as an alternative to, operating performance measures calculated in accordance to GAAP. You will find reconciliations to our non-GAAP measures in the appendix of the slides that accompany this presentation available in Bausch Health’s Investor Relations website. Finally, the financial guidance in this presentation is effective as of today only. We do not undertake any obligation to update guidance. Our discussion today will focus on Bausch Pharma and Solta. However, we will briefly comment on B&L’s results. Beginning this quarter, when discussing consolidated Bausch Health Companies Inc. results, we will include a discussion of results attributable to Bausch Health Companies, Inc., which excludes a portion of Bausch & Lomb’s results attributable to the approximately 11.3% ownership interest in Bausch & Lomb, not owned by Bausch Health. Please refer to Bausch & Lomb separate 10-Q and earnings release last week for more details on Bausch & Lomb’s results. With that, it is my pleasure to turn the call over to our CEO, Thomas J. Appio. Tom?

Thank you, Christina and welcome to those of you joining the call today. We had a number of significant developments during the quarter that we would like to cover. Let’s start by giving you three things that I hope you will take away from this call, as you can see on Slide 6. First, we will vigorously defend our intellectual property in the XIFAXAN patent litigation. Second, we are committed to creating value, improving our balance sheet and advancing our strategic alternatives as we work through patent litigation. Third, while we are rebasing our expectations for the year, our new leadership team is focused on driving performance and has taken a series of actions to improve results. Before I get started, it is my pleasure to welcome John Paulson as the Chairman of the Board of Bausch Health. I want to thank Joe Papa for his contributions during his many years as the Chairman and CEO of Bausch Health. Let me start with the patent litigation. The U.S. District Court of Delaware indicated that they would find certain U.S. patents protecting the use of XIFAXAN 550 milligram tablets for the reduction in risk of HE reoccurrence to be valid and infringed. The court also indicated that they would find U.S. patents protecting the composition and use of XIFAXAN for treating IBS-D invalid. Let me take a few minutes to lay out the state of play. One, we strongly disagree with the court’s anticipated decision and intend to vigorously appeal the outcome. We expect the appeal process to take 12 to 18 months. Two, Norwich doesn’t have a tentative full FDA approval for generic rifaximin. Three, Norwich’s pending Abbreviated New Drug Application, or ANDA, applies to both indications, IBS-D and HE. The court’s decision prevents existing ANDA approval until our HE patent expired in 2029 and therefore, a generic version cannot be launched. While they could attempt to carve out the HE indication from their existing ANDA and seek modification of the injunction, they cannot launch a generic rifaximin product until they secure full FDA approval. Four, the FDA has stated its plans to update product-specific guidance for rifaximin to include in vivo bioequivalent requirements in humans. Differences in the composition between the generic equivalent and XIFAXAN could raise serious risk to HE patients, including hepatocoma or death. The required clinical studies to require safety and efficacy could take a number of years. Five, we have the only approved product for HE and there are many patients depending on this drug. XIFAXAN’s unique properties cut the risk of OHE reoccurrence and HE related rehospitalization by half. It reduces the risk of another OHE episode by 58% compared to placebo. Six, we will aggressively defend our intellectual property related to HE until the patent expires in 2029. As you can see, there are a number of hurdles protecting our market exclusivity. Our teams will continue to be focused on providing this important drug for patients and their families. Moving on to the next topic. We remain committed to creating value by advancing the strategic alternative process and improving our balance sheet. First, earlier in the second quarter, we suspended our plans to IPO Solta Medical due to the challenging market conditions and other factors. Solta is a leading player in the fast growing medical aesthetics market and is an important franchise for Bausch Health. We are very excited about its significant market and geographic potential. As Solta enters its next phase of growth, it will continue to leverage the scale and the capabilities of our Global Bausch Health team. Second, we continue to believe that spinning off Bausch & Lomb makes strategic sense and remain committed to doing so as soon as we are able to satisfy all applicable conditions as previously disclosed. We are evaluating all relevant factors and considerations regarding the distribution as we assess the potential impacts of the Norwich XIFAXAN patent litigation. Third, we are committed to improving our balance sheet. This quarter, we executed an open market repurchase of our long-term paper, which retired $481 million at a significant discount. In addition, earlier in the second quarter, we extended our maturity profile, which significantly reduced the debt maturities through 2025. Finally, since taking over on May 10, our leadership team has taken a series of actions to accelerate performance. We created a flatter and more focused organization that is closer to our core businesses. We reevaluated our operational strategy and began implementing new initiatives focused on driving near-term returns with a greater sense of urgency, ownership and accountability. With that, I will turn the call over to Tom Vadaketh who will provide further details on our second quarter performance and our outlook for the remainder of the year. Tom?

Hello, everyone and thanks for joining us. My remarks today will largely focus on Bausch Pharma and Solta’s business results. As you can see on Slide 8, second quarter revenues for Bausch Pharma and Solta were $1 billion, down 5% on an organic basis versus the second quarter of last year. On Slide 10, Salix revenues of $501 million improved sequentially versus Q1 2022, but were down 3% versus the second quarter last year. The year-over-year decline was largely driven by unfavorable changes in volume, including the effect of changes in primarily retail channel inventory of approximately $21 million. XIFAXAN revenue was up 1%, with retail TRxs remaining essentially flat in the second quarter and the first half of the year. We continue to observe a softer demand for HE in the long-term care channel as the industry continues to face post-COVID staffing constraints and occupancy rates remain approximately 9% below 2019 levels. International delivered second quarter revenues of $233 million and organic revenue growth of 2% versus the second quarter of last year driven by solid performance, particularly in Canada and Latin America. This was offset by a provision for expected future product returns of $11 million in the Middle East, mainly hand sanitizer product. Excluding the impact of this return provision, organic revenue growth for the second quarter was 7%. Diversified Products revenue was $235 million, down 11% on an organic basis compared to the second quarter of last year, primarily due to declines in neurology and dermatology. Our neurology business was down 15%, primarily due to lower demand for Wellbutrin and COVID-related demand for certain products in the prior year. JUBLIA revenues were up 13% and year-to-date TRx demand is up 25% as the brand continues to benefit from our marketing investments. Our legacy products and loss of exclusivity drove the decline in dermatology. Solta Medical’s revenue was $57 million, down 22%, largely due to the continued COVID lockdowns in China, which accounted for about a third of Solta’s business in 2021. The Asia business, excluding China, posted double-digit volume growth, while demand was stable in the U.S. Lastly, on Slide 11, Bausch & Lomb reported revenues were $941 million, up 6% organically compared to the second quarter of 2021. Organic growth in Vision Care and Surgical were partially offset by lower sales in ophthalmic pharmaceuticals. Turning to the consolidated P&L for the quarter, I am going to focus my comments on non-GAAP results that you can see on Slide 14. Second quarter consolidated adjusted gross margin was 70.7%, 20 basis points lower compared to the second quarter last year, driven by inflation and shipping costs and partially offset by lower inventory write-offs in the B&L segment. Bausch Pharma plus Solta’s adjusted gross margin was approximately 81%, up approximately 170 basis points versus the prior year. Consolidated adjusted operating expenses for the second quarter were $752 million, an increase of 1% with higher R&D and marketing offset by lower selling and G&A expenses. R&D was up 10% and represented 6.5% of net sales compared to 5.5% in the second quarter last year, partly driven by a normalization of spending levels following the pandemic. Consolidated adjusted EBITDA attributable to Bausch Health was $701 million for the second quarter, a decrease of 15% versus the second quarter last year due to lower revenues, the divestment of Amoun and investments in sales, marketing and R&D. Adjusted EBITDA attributable to Bausch Health includes a reduction of $14 million to reflect the portion of B&L’s adjusted EBITDA that is attributable to minority shareholders. On a consolidated basis, adjusted EBITDA margin was 35.6%, down 370 basis points compared to last year’s 39.3%. As a reminder, adjusted EBITDA margin for combined Bausch Pharma and Solta approximates 50% and for Bausch & Lomb approximates 20%. For the segments that comprise Bausch Pharma and Solta, segment profit was approximately $581 million, a decrease of approximately $93 million versus last year due to revenue decline, the Amoun divestiture and foreign exchange impacts. Excluding legacy legal settlements, separation costs and cash provided by Amoun, adjusted cash flow from operations was $179 million versus $425 million last year due to operating activities and working capital. Now, let me discuss our balance sheet on Slide 15. We ended the quarter with consolidated net debt of $21.4 billion, down from $22.1 billion of net debt as of March 31, as repayments of debt using cash on hand and the B&L IPO proceeds were partially offset by a revolver draw of $425 million. Moving on to Slide 16. Excluding Bausch & Lomb, gross debt for the remaining company was $19.6 billion and net debt was $19.3 billion. We accelerated deleveraging by executing an open market repurchase program this quarter, retiring $481 million of our 2028 to 2031 bonds at a significant discount using $300 million of cash. Approximately 75% of our consolidated debt is fixed today, 85% excluding Bausch & Lomb debt and we have no maturities until 2025, as you can see on Slide 16. We will continue to evaluate available options to reduce debt and extend our debt maturities. I will now discuss our outlook for the remainder of 2022, which you can find on Slides 18 and 19. Given the uncertainties in the overall operating environment and our detailed assessment by business, we are rebasing our 2022 expectations. Our outlook assumes a sequential improvement in the back half of the year driven by sales and marketing investments and seasonal restocking. We expect consolidated full year revenues in the range of $8.05 billion to $8.22 billion and organic growth of flat to up 2%. Organic revenues are expected to be flat to down 3% over the last year at Bausch Pharma and Solta and up 4% to 5% at Bausch & Lomb. On a consolidated basis, we expect to generate consolidated adjusted EBITDA of $3.02 billion to $3.12 billion for the full year. As it pertains to Bausch Pharma and Solta, this outlook assumes adjusted gross margin of 80% and R&D expense of $225 million. You will find our assumptions on Slide 19. We expect $1.4 billion of interest expense and will generate approximately $600 million in adjusted cash flow from operations this year. I will now hand the call back to Tom Appio for concluding remarks.

Thank you, Tom. The second quarter was a transitional quarter for Bausch Health with disruptions and distractions from leadership changes, the IPO of B&L and the suspension of the Solta IPO. Having become the CEO mid-quarter, I and our new executive management team are excited with the opportunities ahead and urgently want to return the company to growth. Turning to Slide 21. We have four priorities: one, sales and EBITDA growth; two, focus and operating rigor; three, developing a high-performance culture; and four, creating value through strategic alternatives. I want to focus on the first objective today. Let me discuss several immediate actions we have taken to drive our revenue and EBITDA for each of our business segments in the near-term. Despite the headwinds we are facing, we are adapting to the current environment and moving with great urgency. First, let me start with Salix on Slide 22. I met with our national sales team. They are dedicated and energized and fully committed to our patients. Over the last 90 days, we, as a management team, have analyzed the market and believe there is significant unmet patient need in both IBS-D and HE. We believe we have white space to grow. We are activating patients and caregivers who targeted omni-channel strategies that will establish XIFAXAN as the treatment of choice. We are increasing patient access and adherence with specific interventions along the GI patient journey. I want to emphasize that we will continue to make XIFAXAN available and affordable for the doctors and the patients who depend on it. Second, International. We have a strong team in our International business, and they truly understand how commercial execution drives growth. We will continue to expand our branded generic product line into new geographies. We continue to focus on key markets such as Poland, Mexico, Canada. Mexico is benefiting from the growth of our core franchises of Bedoyecta and Codril and our digital channel strategies. Furthermore, our expansion in Latin America is driving growth throughout the region. We expect our engagement strategy will further enable us to win more customers in key markets. We are launching 66 products across 16 countries in the next 3 years as we enter new markets and increase investment in high-growth countries. Third, Solta Medical. We believe Solta Medical is a high-growth business with a significant runway for international expansion. We continue to make the necessary investments to drive growth, and we are seeing signs of pent-up demand in developed markets such as the U.S. and South Korea. We are excited that our strong Solta team is part of the Bausch Health organization, and we will continue to support them with our scale and global capabilities. Lastly, diversified products. I want to highlight two products. JUBLIA, an asset in our dermatology portfolio with 9 years of exclusivity, had revenue increase of 13% this quarter compared to the second quarter last year. We launched a new brand campaign in major U.S. cities in July during the height of the summer season and early results are promising. We also continue to invest in growing scripts and market share of Arestin for periodontal disease, our leading product in dentistry under a strong new business leader. Going forward, we will continue to balance our growth opportunities with ways to maximize the cash contribution of our more mature businesses in the diversified product set. In conclusion, we will vigorously defend our intellectual property and address patient needs with XIFAXAN. Let me state again, Norwich does not have either tentative or full FDA approval for a generic rifaximin product. We are focused on creating value through driving growth, profitability and improving our balance sheet. We are a resilient team, highly motivated working with a sense of urgency and ownership and we have already taken a series of actions to improve our performance. With that, we will now take any questions you have. Andrew, please open the line for Q&A.

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

Thanks, team. My question is around this patent situation. So I’m just trying to understand some technical parts of this. If Norwich wins on appeal, given there are multiple patents that were settled upon by all the other settlements, does this have any bearing on other settlements? Meaning, on appeal, if Norwich is successful, is there any trigger of exclusivity or does Norwich have to secure its own approval to trigger exclusivity? Obviously, you understand all those settlements, and we don’t. And we’re trying to understand if Norwich could reach an agreement. There is a tentative approval out there that they could apply this win to that other tentative or is there something in the settlements that would preclude such an agreement? So anything that you can help us with about this situation in terms of triggering exclusivity or implications on the other settlements in absence of Norwich approval, again, if Norwich triggers, we have to wait for Norwich approval? And then also just a little bit more conversation on cash yield, how you’re trying to maximize it. I know there was a lot of prepared remarks, but would like to hear contextually how are we going to be driving actual cash here to get at this debt? Thanks so much.

Okay. Ken, you had a lot of – there is a lot in there of questions, but let me just try to cover off on the questions regarding Norwich. So the court’s findings, if reiterated in the final order remember this, we have not got the final order yet, will not accelerate other settled parties until the FDA approval of Norwich’s ANDA and a launch of XIFAXAN generic by Norwich. Teva appears to be the first to file, but we can’t speak to whether Teva has maintained or forfeited or is likely to forfeit their first-to-file status. What I would say is also is Norwich does not have FDA approval, so they cannot launch. So the FDA has stated that they plan to make a major revision, as I stated in my prepared remarks, to the rifaximin product-specific guidance to add in an in vivo bioequivalency study. So that, as I said in my prepared remarks, could take time. If Norwich secures FDA approval before an appeal decision, they can potentially launch subject to Teva’s exclusivity rights as a first filer. However, that would involve launching at risk. And if we win on appeal, they would be liable for significant monetary damages. And then lastly, what I would say is, again, it’s a very complicated, multi-factorial situation, but absent Norwich’s removal of the HE indication and the data from their ANDA, the court’s judgment enjoins Norwich’s pending ANDA until the expiration of the HE patent. So that is a very important point. And clearly, a lot of the safety data that is in there, it was part of HE. So being able to do that and carve it out is a difficult task. So we intend, again, to what I said in my prepared remarks, is to vigorously oppose any attempt by Norwich to remove the HE safety data as HE was the first indication that we know, one of the first indications we got approval for. Not the first, but ahead of IBS-D. And so therefore, the HE safety data from the ANDA will be very, very difficult. So I’ll just now turn it over to Tom because on your question regarding the cash yield.

Thanks, Tom. Ken, yes, you asked about cash yield, and I’ll just go back to a portion of my prepared remarks, I talked about our expectation now that we will generate about $600 million cash flow from operations for the year. We have always thought about the business capable of generating, say, $800 million to $900 million. The delta between that and the $600 million is essentially the lowering of our expectations in the P&L. So our EBITDA versus what we thought going into the year, we’ve taken down with our new rebased guidance, and so that’s flowing through to cash. So that’s the explanation of why it’s only $600 million versus what we’ve said before. Now in terms of just the business and what are the levers we have, my first – I’ve been here 6 months and the CFO for a few weeks since May. The business continues to be highly cash generative. When I look at it on the receivables front, we really have no issues in the pharma business. On payables, we have – we do see lumpiness. That’s no different from any other company. And in the first half, we probably had more than a fair share of outflows from payables. But we think that will even out as we look at the full year. And the team and I, it’s my team in finance that really holds the string to a lot of the cash flow yield, and we are focused and will continue to be focused through the year. To your point, it is very, very critical for us that we maximize cash yield for the obvious reasons to continue to de-lever.

Andrew, next question.

The next question comes from Annabel Samimy with Stifel. Please go ahead.

Hi, thanks for taking my question. I actually have a number here. So first on Salix, where you’re making an effort to really drive revenue and EBITDA growth. I mean, with XIFAXAN, that has always been a strategic goal for a while. There is always been white space. And I guess I’m not understanding what you’re doing different with that program that you expect is going to drive significantly more revenues. And then with Solta, you obviously postponed a spin-off, and it looks like it’s a good part of the business that could be a significant revenue generator for Bausch Health. So is there any plan to not just postponed but cancel it all together and keep it as part of Bausch Health and really take advantage of that, I guess, revenue contribution that has pretty meaningful longevity? Would you be able to consummate the B&L spend without considering larger divestments and a reduction of that debt? So those are my two questions.

Okay. Annabel. Let me address the Salix question first, okay? So since May, we were really taking a hard look at this to see and we believe there are large opportunities in both IBS-D and HE indications for XIFAXAN. If you take a look at it, the incidence of IBS-D is increasing, not only from a demographic perspective but also due to the direct and indirect impacts of COVID, which the health authorities believe has not really become epidemic in nature. So I think that if you look at the research, okay, and if you look at XIFAXAN specifically, it just offers significant relief from abdominal pain and diarrhea and has an excellent safety profile. And then when we take a look at HE clearly, if you look at how many patients that are out there that are having HE episodes, there is still a lot there that we could do and grow if you look at the size of that pool. What – and the other thing is when we specifically look at HE, as you know, the majority of our sales are in HE. Clearly, when you look at what happened with COVID and long-term care, there is things that we can do to make sure that those patients who maybe are not going into long-term care but are going home, that the caregiver really understands what to look for. What I would say also is that, you asked about some of the things that we’ve done specifically in terms of the tactics that we took in the early days since taking over, is really using data to identify patients and PCP points of contact. Reinvesting in DTC marketing after a period of low investment, as you know, we did have many years ago investments in DTC and bringing that back. And then when you look at working closely with doctors to reinforce the adherence and support staff with training in terms of prior authorizations. One of the things that we’ve seen, clearly, when you look at the turnover in doctors’ offices, and what they will need to do to make sure that the drug is filled in terms of getting the prior authorization. So there is been a lot of turnover in the doctor’s offices. Along with COVID, we’ve had some turnover within our field force. And over the last year at 6 months, we have filled 100 sales rep positions. So with all those tactics to address the strategy of where we believe we can grow, we think we’ve put those in place, but there is still a lot more work to do. We’re identifying over the next – in the next quarter other things that we believe will help drive the growth of IBS-D and HE. Let me just talk to Solta. Solta is a business I know very well. I used to run the Solta business as part of – when it was part of International, actually Solta reported to me even for the U.S. given years ago as things were – as the company was changing, I took over that entire Solta business. I think it’s an excellent business. I think there is, again, a lot of white space to grow this business. Clearly, it has been impacted by COVID, specifically in China, and the growth opportunities that we had in Europe and in Latin America, but we can reaccelerate those. And when – if you take a look at China, we’re starting to see a recovery as we work it through. I think it’s a business that can generate a lot of growth for us. And we think it still has lots of opportunities to grow. There is a lot of work going on in our R&D team on innovation there, and we believe significant potential exists to create value for shareholders. And right now, the priority is to grow it and to keep our options open. Andrew, next question.

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

Hi, good morning. You mentioned the expected timing on the appeal process of the XIFAXAN decision is 12 to 18 months. With that uncertainty, how is it possible to move forward with the full B&L spin? How could that actually work? I’m curious if there are any restrictions or limitations on that front. And is there a certain timeframe by which the B&L then has to be distributed to Bausch shareholders? And are you still sticking with the target leverage ratio for RemainCo? I saw the 6.5x to 6.7x still highlighted on Slide 21. I don’t know if you’ve changed your thoughts on that.

Okay, Gary. Let me just start from the bottom and work up. So, what I would say is, yes, we are sticking to our – the targets that we had of 6.7x to 6.5x, and I’ll work it back. No, there is no required timeline. And then let me just get to the first point of your question is, again, which I stated in my prepared remarks, we continue to believe that spinning off Bausch & Lomb makes strategic sense and remain committed to doing so as we are able to satisfy all applicable conditions as previously disclosed. We are – as I have said before, we are evaluating all relevant factors and considerations regarding the distribution as we assess the potential impacts of the Norwich XIFAXAN patent litigation. We don’t – one of the things I would like to point out here is we don’t have a Norwich ruling yet or a reason for this decision. We were hoping we were going to see that in the early part of the month, but we did not. And so now we expect to receive it probably in mid-August. And once we were able to see the ruling and the decisions, we will be able to continue to look and assess the potential impacts, okay. So, that’s – that would be where I would say where we are. Alright.

Can I get a follow-up? Yes. So, how active have you been looking at divestitures, whether it’s Solta or other assets, to try and get to that 6.5x to 6.7x leverage target? And are you being more aggressive now given the facts and uncertainty? Thanks.

What I would say is we are always open to looking at divestitures, but they have to be at really good prices and really show the value of the businesses that we have. So, we are always openly looking, but it’s got to be a price that really reflects the value of that business, of what it may be. And I would say we are, but it would have to be at a really good valuation.

Okay. Thank you for taking my questions.

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

Hey guys. This is Isaac on for David. Thanks so much for taking my questions. Just a few from us. So, if we assume the worst-case scenario here, which is generic market formation for XIFAXAN earlier than 2028, I mean what’s next for Bausch? And more so, what I am wondering is how does a potential LOE for XIFAXAN shape your thinking for the road ahead? Would you divest some of your established brands, international brands to your peers? And then I have got a few follow-ups.

Yes. So let me, Dave, let me just take it this way. I mean again, what I said in the prepared remarks, we are going to vigorously defend our patent on XIFAXAN. So, that’s the priority right now. As I already had laid out, there is multiple, multiple steps that need to be taken and actions in terms of what it’s going – where this is all going to land. What I would say is, is that if you look at our businesses today, if you look at our international business, growing strong. I mentioned we are going to launch 66 new products. We are continuing to fuel that pipeline. If you take a look at what I talked about on Solta, I think there is great opportunity to build that business. If you look at that, along with where aesthetics is going, clearly, that will be a growth driver. We did not touch it in this call, but it is in my prepared remarks of what I talked about operating vigor and what we have in our pipeline in terms of what we are looking at in RED-C and the new novel the formulations for XIFAXAN. We really believe in those programs, and there is some very interesting things there that we are doing. Of course, we are recruiting patients into those studies. So, really, when I – when we look at it, we are looking at, again, defending our patent, okay. So, we are not looking – we are preparing various strategies for that. But clearly, as we move forward, and then we could do like a bolt-on acquisitions that make sense for our business. So, what I would say is – and then lastly, the point where you talked about to deliver in the near and long-term R&D in late stage. Clearly, this is a priority for us is to continue to build our innovation pipeline. I think that one of the things that clearly now with the IPO of B&L, the focused effort that we can have from an R&D perspective and innovation, whether that be in RED-C or sickle cell or other things that we are working on with XIFAXAN along with the innovation that we will be able to have from an aesthetic standpoint, there are some other things there that look quite interesting. Okay. Andrew, next question.

The next question comes from Greg Fraser with Truist Securities. Please go ahead.

Great. Thanks for taking the questions. On the revised bioequivalence guidance that is expected to come out, how much insight do you have into what the new guidance will require? Has FDA provided any specifics on its thinking beyond the inclusion of an in vivo study? And just my second question is on the Granite Trust situation. Do you have any visibility into when you might receive formal communication from the IRS? And is there anything that you can do to kind of move that process along towards resolution? Thanks so much.

Okay, Greg. Greg, I will take the first point, and then I will hand it off to Tom to talk about Granite Trust. The U.S. FDA has indicated in a public statement last year that they will add an in vivo bioequivalent study requirement for rifaximin into the product-specific guidance. The rifaximin product-specific guidance previously permitted generics to avoid an in vivo bioequivalent study. The new requirement, once published, would create an additional test that generic must perform to get bioequivalence and safety of the generic product. Right now, we don’t know when we would be speculating on what the FDA is going to require in terms of – in that what would bioequivalence would mean in vivo. Clearly, there could be multiple things there of what the outcomes would need to be. But I can’t speculate. But clearly, we do – our team has thoughts of what would be. But what I would say is, we don’t speculate on that, in terms of what the requirement would be. We are waiting to see what the published guidelines will be. With that, I will hand over to Tom to talk about Granite Trust.

Yes, Greg, on the Granite Trust, in terms of visibility, we actually – nothing much has changed since the last time we had this update. We continue to remain confident in our position and we are waiting for the process with the IRS to run through its course. We have contact, obviously, with the local IRS office, the one that has been doing the audit and that raised this issue, and ready if the process would speed up. But we really rely and have to depend on the IRS. And they approach us basically, there is not much we can do from the outside to rush it along.

Andrew, next question.

The next question comes from Jason Gerberry with Bank of America. Please go ahead.

Hi. Good morning. This is Chad on for Jason. Thanks for taking our questions. I want to follow-up on consideration for doing the distribution sort of what are the gating factors or sensitivity. On the leverage ratio, how much leeway do you have between the 6.5x, 6.7x target leverage ratio and the 7.6x that you need to restrict P&L? I am just curious, I know you can’t give guidance right now, but is this a scenario you could actually do the distribution as high as 7.6x or in any sort of intermediate ratio between 6.7x and the 7.6x. From a timing perspective, is 2022 truly off the table? And how comfortable are you with the planned timeline in 2023? And I guess you have already provided a lot of comments on Solta, understood all of your recent updates. But curious if you have any updated thoughts on any strategic options you could do with Solta to help facilitate the distribution. Thank you.

Well, let me take a stab at that. It’s Tom Vadaketh here, Jason. So, in terms of the ratios and our commitments, so the 7.6 that you referred to is something that’s defined in our covenants and we will have to achieve that. But as you know, the company has committed and we have recommitted it today that we will not spend until we achieve the 6.5x to 6.7x. That’s what we feel is leverage needed for the remaining company to continue to operate and perform efficiently and in the way that we want. And so we remain committed to that. In terms of a 2023 timing, I know that was communicated by B&L. As Tom said, we are working towards achieving those ratios and all the conditions that we need to meet in order to do that in addition to those ratios. And obviously, the Norwich XIFAXAN litigation matter will have an impact, and we will continue to evaluate the distribution as we work that matter. Strategic options for Solta, I think Tom referred to it. Our focus, we have suspended the IPO. We are focused on operating that business. We think it’s a very exciting business, has lots of potential and lots of potential for growth. And so that’s what we are focused on. And also, as Tom said, with every business, there was a question earlier about we are looking at other divestitures. We are a public company, and as the company said before, in a sense, everything is up for sale at the right valuation. And so we would consider it. But I think at the moment, we believe that the best place for Solta is in the family and for us to run it.

Yes. Chad, I would like to add to that, as I said, talking about Solta. The priority right now and the focus is get that business return to growth and accelerate the growth. And clearly, with the expansion that we can do in Europe, there is a lot there that we can do to continue to create value. I think also as part of Bausch Health Companies, as Tom put it in the Bausch Health family, they will benefit from our global structure. We have a global structure to support this business. And clearly, if you look at the structure, especially when it comes to an R&D effort, we have an ability to create innovation there and continue to focus on building great products and bring them to market. Andrew, next question. Andrew.

Excuse me. The last question will be from Umer Raffat from Evercore. Please go ahead.

Hi guys. Thanks for taking my question. I have three here, if I may. Perhaps, first, Tom, I think many of your shareholders have asked if there were ever a point in time where going forward with the spin is no longer in the best interest of shareholders – of your shareholders. How would you approach that decision, again, being the CEO of the RemainCo and not of the entirety? The second one is, when do you guys plan on designating Bausch & Lomb as unrestricted subsidiary? And more importantly, can you also speak to the mechanics of how an unrestricted subsidiary could be restricted again? And then finally, on the Salix business, I saw the year-over-year sales were down $16 million, and the segment profit for Salix was down $15 million. Should I think of that as the incremental margin on any future sales reduction? Thank you.

Yes. Umer, thanks for the question. Let’s just hit the first one at the beginning. Again, we continue to believe that the spin-off of Bausch & Lomb makes strategic sense and we remain committed to doing so. We are evaluating all the relative factors and considerations regarding the distribution. And again, we will have to – as I have said before, we are going to continue to assess the potential impacts of Norwich once we get the written decision. Again, I have – when I look at it, I just have to make sure I have the responsibility to continue to make sure the distribution makes sense in light of the litigation issues that we have, and we will continue to evaluate it as we move through this process. What I would say is – I am going to pass it over to Tom regarding unrestricting of B&L and he can address that issue for you.

Yes. Umer, hi, it’s Tom Vadaketh. The criteria for unrestricting, as you know is meeting the 7.6x leverage as well as the 2 to 1 fixed cost coverage ratio. So, at that point, we would unrestrict B&L. From my perspective, ostensibly, there is really no difference really. I mean they already have – you would have heard on their call, they have the freedom to operate right now. They can make investments, acquisitions. There is really no restriction at the moment. So, for me at least, going from restricted to unrestricted is a little bit academic. From a spin perspective, what the company’s target leverage ratio is the 6.5x to 6.7x. And so that’s the criteria that we are following. In terms of your third question, can an unrestricted sub be restricted again. We haven’t really considered that. So, I don’t want to speak to that. I am not myself. We are totally clear on what the technical side of that is, but we have no plans to do that at the moment. And then finally, I think your last question was on Salix and Salix flow through. It’s a very profitable business, as you know. And gross margins are pretty high. I am not sure we have disclosed them before, but they are pretty high and so you don’t quite get a one-for-one flow-through, but it’s closed basically when there is a very significant revenue reduction.

Okay, operator – Andrew, I think we can take one last question. We have just a few more minutes.

Yes, sir. We have Sahil Dhingra from RBC. Please go ahead.

Hi. This is Sahil for Doug Miehm. Thank you for taking our questions. My first question is on the stipulation agreement. In case Norwich decides to go with the skinny label, that is the – exclude the HE patent, what happens to the stipulation agreement? Are the remaining 19 patents, which were not addressed at the March bench trial, do they come into play? Can those be litigated again? And my second question is, there is one tentative approval out there. Are you aware if that company has done in vivo bioequivalent study or will they be required to do so once FDA publishes the final guidelines? Thank you.

Okay. So let me try to just go from the first one in terms of the impact on the stipulation agreement with the skinny label. So, I think that we believe and we don’t know, again, what the ruling is with Norwich and we expect to receive that in August. So, we will have to see what that’s going to be, first. But what I would say is that when we look at it, the case has been heard on the seven patents for XIFAXAN in this case. The stipulation agreement, okay, would not apply if Norwich modifies its ANDA to exclude the HE indication. So, if Norwich chooses, okay, to modify its ANDA to exclude the HE indication or HE safety data, we would, of course, weigh all options for asserting the remaining XIFAXAN patent. So, it’s – again, still multiple things moving there as we look at it. And again, waiting the final court decision so we can take a look at it and really seeing where we are going to be. But there is still a lot to learn from when we get the written opinion. And the last – with your last question was a tentative approval. Could you just repeat that of what you were saying?

Yes. So, there is one tentative approval out there for rifaximin. I was – I wanted to know if you are aware that the company which got the tentative approval has done an in vivo bioequivalent study, or will they be supposed to do that once FDA publishes the final guidelines?

Yes. We don’t know and you really can’t speculate on that.

Okay. Thank you.

Okay, Andrew that will conclude the Q&A.

Thank you. This concludes our question-and-answer session and today’s Bausch Health second quarter 2022 earnings conference call. Thank you for attending today’s presentation. You may now disconnect.