Good morning, ladies and gentlemen and welcome to the Bausch Health Third Quarter 2022 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Christina Cheng, Senior Vice President, Investor Relations and Communications at Bausch Health. Ma’am, the floor is yours.

Thanks, Matt. Good morning and welcome to our third 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. Before we begin, I’d like to remind you that our presentation today contains forward-looking information. We ask you to take a moment to read the forward-looking statements at the beginning of this presentation. 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 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, measures calculated in accordance with GAAP. You will find reconciliations to our non-GAAP measures in the appendix of this presentation, which is available on 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 Bausch + Lomb’s results announced yesterday. We will refer to year-over-year comparisons with the same period last year unless otherwise noted. With that, it is my pleasure to turn the call over to our CEO, Thomas Appio.

Thank you, Christina and welcome to those of you joining the call today. Let me start with the four points on Slide 6 that I want you to take away from this quarter. First, we are encouraged with the sequential sales improvement for Bausch Pharma and Solta this quarter. Second, we created value during difficult market conditions with a very successful exchange offer that reduced debt principal by $2.5 billion. Third, we continue to evaluate potential options to maximize value, including improving our balance sheet and evaluating all factors related to the future distribution of Bausch + Lomb. Fourth, we continue to vigorously defend our intellectual property in XIFAXAN patent litigation. Let me now take you through some specifics. First, on Slide 7, I am pleased to report that we are making progress on our key priorities in each of our business segments. In Salix, we are activating patient and caregivers through targeted commercial strategies, which are starting to drive results, with a XIFAXAN script growth running positive during the last 8 weeks of the quarter. Other key promoter brands also saw increased scripts, led by double-digit growth for RELISTOR and PLENVU and mid-single-digit growth for TRULANCE. Salix had a 3% organic revenue increase in Q3, improving from the minus 2% during the first 6 months of the year. We continue to intensify our focus on near-term initiatives to improve the diagnosis and treatment of GI and HE disease. In international, we continue to grow key markets such as Poland, Mexico and Canada with existing brands and new products. The international business posted a 10% organic growth, following a healthy 5% increase during the first half of the year. In Solta Medical, sales grew organically 4%, with strong gains in our international business following a slow first half given the…

Thanks, Tom. Hello, everyone and thanks for joining us. My comments today will refer to organic growth and adjusted results. Let’s start with Slide 9. We are encouraged with the progress we made this quarter, with consolidated third quarter revenues of $2 billion, up 2% on an organic basis over the same quarter last year. This represents an important inflection from the first half of the year, which was flat on an organic basis. At Bausch Pharma and Solta, third quarter revenues were $1.1 billion, improving from the 4% decline through the first half of the year to a minus 1% on an organic basis this quarter. This quarter, three out of four businesses posted organic growth, notably Salix, International and Solta. Let me discuss each segment in greater detail as shown on Slides 10 and 11. Salix revenues were $544 million, an increase of 3% versus the third quarter last year, an improvement from the 2% decline in the first half of this year. XIFAXAN revenue was up 4% from the third quarter of last year. TRx growth was flat, but ended the quarter with a positive trend. Increased demand was partially offset by an estimated $13 million reduction of inventory at the retail level. We are also pleased with the performance of TRULANCE, RELISTOR and PLENVU, with double-digit increases in sales and TRx growth of 6%, 22% and 23%, respectively. International revenues were $250 million, an increase of 10% on an organic basis compared with the third quarter of last year, driven by strong performance in Canada and Europe and double-digit growth in a number of key brands. Solta Medical revenues of $72 million increased 4% on an organic basis this quarter driven by strong results in the Asia-Pacific region as China recovers from the COVID lockdowns. Diversified…

Thank you, Tom. As I said since becoming the CEO, we have four priorities: one, driving sales and EBITDA growth; two, focusing on operating rigor behind R&D and business development; three, developing a high-performance results-oriented culture; and four, creating value through strategic alternatives. We have made solid progress this quarter. Our strategy is starting to produce results for Bausch Pharma and Solta, with three out of our four segments posting organic growth, and a very successful debt exchange offer that has created additional flexibility to invest and innovate. We have also made good progress in research and development, which I’d like to touch on briefly today. We continue to invest strategically in R&D to advance our clinical and regulatory programs in GI, hepatology and other key areas. One of our new formulation of rifaximin gained regulatory alignment with various global health authorities on two pivotal Phase 3 trials. Our Red Sea program could bring a much needed treatment to patients living with liver cirrhosis to prevent their first episode of overt hepatic encephalopathy, OHE. This is a much larger patient population than patients being treated with the current formulation of rifaximin for OHE. This would be – this product would be a global franchise for Solta – for Salix. Findings published in our second liver trends report this past quarter highlighted the urgent needs in this area. Our research finds that 81% of the respondents believe preventing the reoccurrence of liver disease symptoms is extremely important, and yet 51% of primary care physician survey were uncomfortable treating OHE. We will continue to increase our efforts to educate medical practitioners and improve both the diagnosis of HE and patient adherence. We expect the recent approval of the new ICD-10 code for HE will support the continued reimbursement for, and access to treatment of this life-threatening condition. In conclusion, we will continue to drive growth, profitability and improve our balance sheet. We will continue to vigorously defend our intellectual property and address patient needs with XIFAXAN. We will continue to evaluate potential options to maximize value for all our stakeholders. I’d like to thank the Bausch Health team for all their hard work, focus and dedication in driving performance and building a results-oriented culture. As I have stated before, we are a resilient team, motivated, working with a sense of urgency and ownership, and we will remain focused as we execute with excellence to drive performance. With that, we will now take any questions you will have. Operator, please open the line for Q&A.

[Operator Instructions] Your first question is coming from Gary Nachman from BMO Capital Markets. Your line is live.

Great, thanks. Good morning. So first, maybe you could talk at a high level, what are the different options you might have related to the distribution of B&L? Is it all related to achieving apply the appropriate leverage targets? Have those targets changed at all? How are you thinking about them? And without visibility on the XIFAXAN appeal at this point, can you actually still do the distribution? Can you affect that? And then secondly, just a follow-up, just, Tom, maybe you could talk also at a high level just the status of potential divestitures? Are you close to anything? Do you feel like discussions have progressed and maybe what the time frame is for us to hear about something on that front? Thanks.

Okay. Gary, thanks. What I’ll do is I’ll let Tom Vadaketh take the first part, and then I’ll answer the second part. Tom?

Yes. Hi, Gary. Good morning. Thanks for your question. Look, in terms of options, we continue to consider all options, as you mentioned, criteria being what’s going to create value for all our stakeholders. And so we’re focused on that. And then also what would position the company for long-term success. I think you’ve seen already this year that we’ve been quite thoughtful in the steps we have taken, and we’re going to continue to be thoughtful with each action and each step that we’re going to take. And so we’re not going to comment on this call on individual actions. But we are considering everything and taking each step pretty thoughtfully. So I would – that’s all we can say about next steps vis-à-vis distribution or unrestricting or anything else on that front.

Yes, Gary, on the question on divestitures. I continue and the team continues to look at the assets that we have globally, and seeing what we have, what we can do. So it’s something that we’re viewing constantly. And then, of course, we have a lot of valuable assets, and if there was a divestiture, that would have to be at a premium price. But that’s something that we continue to look at because if we were able to divest some assets, we do have some things that we’re very interested in from an investment standpoint or paying down debt. Next question?

Your next question is coming from Georgi Yordanov from Cowen. Your line is live.

Thank you so much for taking our questions. So we have one, and I guess, a follow-up – just on a follow-up on the previous question. Can you confirm that at this point, you’ve satisfied all the debt covenant requirements to allow for the spin? And what is your updated thinking on the previously-guided optimum leverage ratios? And then just as a follow-up, do you have – do you have any updates on the citizens petition? And if you can talk about what those bioequivalence guidance might look like? Are there any examples that the FDA has required from other generic products in a specific – in a similar product-specific guidance?

Okay. So, Georgi, I’ll let Tom take the first part, and I’ll take the second part.

George, thanks. The – in terms of criteria for spin, as we’ve said before, there are certain leverage targets that the company – we’ve set for ourselves as well as various regulatory and other approvals and steps that we’ve got to take. So we are considering all of those and not just leverage targets. Obviously, the debt exchange has made a – is nice progress. As Tom said and I’ve said in our prepared remarks. But at this point, we have no further comments on whether or not we’re closer to a spin.

Yes. Regarding the second part of the question regarding the citizens petition, right now, the FDA granted Bausch’s petition in part and intends to revise the XIFAXAN product-specific guidance. But as of right now, have not issued the actual guidance yet. Next question?

Thank you. Your next question is coming from David Amsellem from Piper Sandler. Your line is live.

Hi, guys. This is Isaac on for David. Thanks so much for taking our questions. Two for me. So on XIFAXAN, we saw a tentative approval for allogen generic of the 200-milligram strength a month or 2 ago. And it looks like the agency went ahead with their decision without updating the draft guidance. So how does that dynamic alter your thinking about a potential label carve-out for the HE indication? And then as a follow-up, this one on XIFAXAN commercially, what is your ability to invest more given the state of the capital structure? Or should we, at this point, think XIFAXAN as a largely mature asset that you’re going to just manage and maximize the cash flows out of? Thanks so much.

Okay. I’ll take those two questions. Firstly, on the 200-milligram, I can’t speculate on this time regarding that question. What I would say is, let’s just talk about XIFAXAN and what I believe and the team believes we have. We have a great asset here in two very important indications. If you take a look at the incidence of these diseases clearly, we have a lot of area for growth. And if I take – just take a look from an IBS-D perspective, 2.5 million patients are diagnosed with IBS-D, but only 140,000 are treated with second-line medication like XIFAXAN. So there is a lot of area there to grow. We are investing in this year and next year. Our plan is to continue and to put more investment behind this franchise. When we take a look at HE, our analytics indicates that there is about 193,000 patients potentially have HE and only 50,000 are treated with XIFAXAN, which is a standard of care and the only approved medication in this indication. So, I believe there is a lot of space there to continue to grow this franchise, and we put extra investment in the XIFAXAN franchise for 2022, and we are expecting to increase that investment in 2023. So, I think there is – as we look at it, this is a really core franchise for us that we can continue to grow. Next question.

Thank you. Your next question is coming from Umer Raffat from Evercore. Your line is live.

Hi guys. Sorry. Thanks for taking my questions. A couple of quick ones, if I may. Number one, you mentioned you are evaluating numerous options to maximizing shareholder value. Could Solta be on the table? And then also if you could remind us if a shareholder approval is needed for spin to go through on BLCO? Thank you.

Hey Omar. Thanks for the question. Okay. So, of course, the Solta franchise, I believe is, again, another great asset that we have. As now – again, with a part of the Bausch Health family of assets gives us a global footprint around the world. I think this is an asset that we can continue to grow, continue to invest in, but keep all options open. But again, as I stated previously, any type of actions that we would take with our assets would have to be especially an asset like Solta at a premium price. So, again, we always – we are open to looking at different things, but we believe this asset can really grow for us and really be part of the Bausch Health family. So, Tom, do you want to take the second part of the question regarding shareholder approval?

Yes. Hi Omar. Yes, indeed, shareholder approval is required for the spin – for B&L spin.

Next question.

Certainly. Your next question is coming from Annabel Samimy from Stifel. Your line is live.

This is Jack calling in for Annabel. Thanks for taking our question. So, you touched on HE briefly, but would you be able to provide any additional color on any update for some of the other rifaximin programs? And which of the several you are going might have the potential to offer a future offset to XIFAXAN revenues?

So Jack, as I said in my prepared remarks, when I look at the Red Sea program, I think that this is an area where this is a much larger patient population. And so this indication and the work that’s going on here will be in a much larger pool. So, we believe that this program can really be a really growth driver for us in the future. Of course, we have to wait and see on the data, but the Red Sea program is a high priority for us, and we really believe in it. Next question?

Certainly. Your next question is coming from Greg Fraser from Truist Securities. Your line is live.

Good morning folks. Thank you for taking the questions. On the P&L spin, are the IRS dispute in the remaining legacy legal cases package that could influence the process? I guess do you need visibility on those in order to move forward? And then on working capital, can you just comment further on the quarter? You mentioned the changes in working capital impacted cash flow from ops. Any additional color there would be helpful. Thank you.

Hi Greg. Tom Vadaketh here. I will take both. So, on the working capital, it’s nothing unusual really that goes beyond what occurs at most companies. It’s hard to predict and have an even cash flow pattern throughout the year. And we have just had just working capital movements, moving cash in and out of the quarter. And so Q2 and Q3 have been particularly low, as you know. And so this year, we are going to end up with the sort of barbell a year where we had pretty nice cash flow in Q1, and then we expect Q4 to be pretty strong as well. And then on the legacy, I think you meant the IRS litigation, correct, Greg?

Lawsuits that still remain.

Yes. Look, like I said at the beginning, and Tom has also said, we are evaluating all the factors and then evaluating all the options and trying to very carefully step forward and take actions and steps that are in the best interest and beneficial for the company as well as our stakeholders. So, all of these factors kind of play into that decision-making process as they have been really, frankly, for the last few years.

Next question?

Certainly. Your next question is coming from Douglas Miehm from RBC Capital Markets. Your line is live.

Thank you and good morning. Two questions. Number one, can you talk about turnover at the company and how things are looking from that perspective? And then secondly, for Tom, when we think about the debt covenant construct and where the holdco sits, which is outside of that, leverage ratios would appear to be below or at the 6.5% to 6.7%. Could you elaborate on how you are viewing the $1 billion that’s held within the holdco? Thank you.

Hey Douglas. I will take the first part and then Tom will take the second part. If we take a look at since the IPO of B&L, there has been a lot of, of course, changes in the company. And then as we went through the year, with the normal course that we see on turnover in the sales force is pretty much what has been tracking for the previous years. Again, there can be spikes from – at times, but we are taking as we look at it, but we haven’t seen turnover above what was in prior years. When we look at what our policies are in terms of returning to work post-COVID, we have been really putting some things in place there that give our employees optionality of how they want to work. So, that has helped. Also, we have restacked our global headquarters. So, we now are separated between Bausch Pharma and Solta and of course, then B&L. So, we are seeing stabilization. And of course, as you know, with what has taken place globally from a workforce perspective, there are some movements around. But right now, we are seeing it pretty stable in that regard other than some spikes here and there. Tom, do you want to take the second part?

Yes. Hi Dough. Good morning. Let me just take your – the second part of your question in pieces. So, I think first, just around the covenant and our credit agreements. The debt, the $1 billion that is at that holdco level, that is an unrestricted subsidiary. And so I don’t want to – I will get into trouble with my legal team if I try and interpret our agreements. But I can tell you briefly that, that debt is not part of our – would not count in the covenants basically and any leverage ratios that we are calculating in accordance with the covenants. On the 6.5 to 6.7, I will remind you that, that was a company target and a leverage ratio that we had set out for ourselves to ensure that the remaining company is financially strong. And so we have never said – we have not said how that’s going to be calculated. And I don’t want to speculate on whether we are at that level or not. The debt, the $1 billion is a debt of the consolidated company, and I will just leave it at that.

Next question.

Thank you. Your next question is coming from Rishi Parekh from JPMorgan. Your line is live.

How are you doing? Thanks for taking my questions. So, I have two. One, you have noted in the past that you would consider all options as it relates to the spin. Do any of these options include just not moving forward with the spin, or are you at the point where the spin is happening and it’s just about market timing and meeting covenant requirements? And my follow-up, as it relates to the requirements, you are below the leverage target. I believe you are at or near your interest coverage target. And then as it relates to that 50% equity that you own, what’s holding you back from unrestricting that? Is it the litigation? Does that have to do with the Canadian approval process? Anything with the solvency opinions? Can you just walk us through just what’s remaining and what’s holding you back? And then in constructing that 50% spin-off, will it move to the unrestricted sub that you created back in August? Thank you.

Okay, Rishi. I will take the first part. Tom will take the second part. So, the first part of your question, so what I said in my prepared remarks, we continue to evaluate all relevant factors and considerations regarding the Bausch + Lomb distribution. This includes looking at, of course, the XIFAXAN patent situation. And we are focused on doing everything that we can to continue improving the company’s balance sheet and liquidity. So, we – again, we have identified potential options and paths that we believe could reach the objectives. We still think the spin-off makes strategic sense, but we were considering everything given the situation that we have today. Tom, do you want to take the second part?

Yes. Hi Rishi. I think Tom sort of addressed the second part of your question as well. The unrestricting is just a step. It’s – I don’t view it as some end in itself. It’s a step towards our overall strategic path here towards the separation of the company. And so in doing that and deciding to unrestrict or not, we are, as Tom said, looking at all the options. We are trying to be very thoughtful about each step we are taking, and we haven’t unrestricted B&L yet, and I will leave it at that.

Next question.

Thank you. Our last question is coming from Jason Gerberry from Bank of America Securities. Your line is live.

Hi. This is Chi on for Jason. Thanks for taking the questions. So, maybe on XIFAXAN, I am wondering if you can elaborate on the price and volume dynamic this quarter. I think coming out of COVID IBS-D was a little slower to pick up. So, I am wondering if you can talk about the underlying growth dynamics between the IBS-D and HE indications? And I guess on Salta, can you talk a little – elaborate a bit more on the growth dynamics, your 4% organic growth? Do you think this segment has returned to more normalized growth? And if not, when might you expect this segment to return to more normalized growth? And I hate to squeeze that last one in, but I know you can’t talk a lot more about what you have done – what you already have with the distribution. But I am curious, previously talked about potential timing for a spin. And I am wondering, do you guys have an internal estimate of what that timeline might be? Thank you.

So, let’s – we will break this question down. So, I will take the one on Solta first. When we look at the growth, when we look at Asia-Pac, which is a big part of our business, as Asia-Pac returns to normal post-COVID, with the lockdowns in China somewhat coming back to normalized levels, again, this growth dynamic, I think this business can get back on the trajectory of good growth. We have a lot of areas where we can continue to invest in driving the performance. Clearly, we do have, in China, regulatory hurdles that we have to overcome, which is ongoing work. But as we look at what this business – what it can do around the world globally, we see really good things ahead. We look at our European business. Clearly, COVID impacted our investments there and our build-out of Solta. So, that has – there is a really great opportunity to accelerate that build-out that we had planned for, but was delayed due to COVID. So, from a Solta perspective, I think this is a really great asset. We have great products, and we have some really good work going on, on the R&D front as we continue to innovate in this area. What I will do is I will pass the next – your second part of the question to Tom regarding the distribution timing and the XIFAXAN underlying performance.

Yes. I will start with distribution timing. I – as we have said several times on this call, we are not really going to comment on our next steps. And so I will leave it at that. On XIFAXAN and on Salix, in particular, just a reminder, our growth – organic growth for the quarter was 3%, and that was predominantly price that’s coming through. So, we took pricing actions at the beginning of the year, and we are seeing most of that stick, which is great. On the volume side, as I mentioned, we have seen an uptick in prescription growth in the back half of the quarter. TRx growth for the full quarter was basically flat, but we are excited by the growth that we saw in the last part of the quarter that was coming across both indications. And – but that growth then was offset by a drop in – or at least we are seeing, we think a drop in retail inventory of about $13 million, which I mentioned in my comments. And so volume growth was negative during the quarter. End of Q&A:

Okay. So, we don’t have any more questions. So, we will end the conference call here. What I would like to say thank you very much to everybody who joined today. Really appreciate the time that you took to spend with us and look forward to continuing the dialogue as we move forward with building and growing this company. Thank you.

Thank you, ladies and gentlemen. This concludes today’s event. You may disconnect at this time and have a wonderful day.