Bausch Health Companies Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unless indicated otherwise, amounts are U.S. dollars in millions. The company develops and sells pharmaceuticals, OTC products and medical devices, with a strategic focus on eye health, gastroenterology and dermatology.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $2,152 | $2,128 | $4,168 | $4,123 |
| Operating income (loss) | $257 | $(245) | $544 | $(2,526) |
| Net loss attributable to Bausch Health | $(171) | $(873) | $(223) | $(3,454) |
| Loss per share | $(0.49) | $(2.49) | $(0.63) | $(9.84) |
| Cash from operating activities | — | $752 | $660 |
- Revenue rose 1% in both comparisons. Organic revenue growth, a non-GAAP measure, was 3% for Q2 and 4% for the first half.
- Calculated product gross margin, using product sales less cost of goods sold excluding intangible amortization and impairments, was approximately 72.7% in Q2 and 73.1% for the first half. Operating margin was approximately 11.9% and 13.1%, respectively.
- First-half operating cash flow was $752; purchases of property, plant and equipment were $109, implying $643 of operating cash flow less those purchases. Investing cash outflow was $261, including the $180 Synergy acquisition. Financing cash outflow was $338.
- At June 30, cash and cash equivalents were $878. Current assets of $4,467 exceeded current liabilities of $3,705; the current ratio was approximately 1.21.
- Debt principal was $24,369 ($24,079 net of premiums, discounts and issuance costs); cash-adjusted principal debt was approximately $23,491. The weighted average stated interest rate was 6.44%, up from 6.23% at year-end 2018. Interest expense was $409 in Q2 and $815 in the first half.
- The $1,225 revolving facility had $150 drawn, $169 of letters of credit and $906 of remaining availability. The company reported compliance with its financial maintenance covenant and expected to remain compliant and meet debt service over the next 12 months.
Changes versus prior comparable periods
- Reported operating results improved substantially, but comparisons are distorted by 2018 impairment charges: first-half 2018 included $2,213 of goodwill impairments and $345 of asset impairments, versus none and $16, respectively, in first-half 2019. Lower intangible amortization also supported reported earnings.
- Q2 Salix revenue increased 15% to $509 and segment profit rose 14% to $332; six-month revenue increased 11% to $954 and segment profit rose 10% to $620. Growth reflected Xifaxan pricing and Trulance sales.
- Q2 Bausch + Lomb/International revenue was essentially flat at $1,208; Ortho Dermatologics fell 13% to $122, and Diversified Products fell 7% to $313. For the first half, Ortho Dermatologics declined 7% and Diversified Products 6%.
- Research and development expense increased 24% in Q2 to $117 and 26% for the first half to $234. SG&A was broadly flat year over year.
- Cash from operations increased $92 year over year for the first half, while working-capital movements reduced cash by $123, including a $121 inventory build.
Outlook, management commentary and notable matters
- No specific full-year revenue or earnings guidance is provided. Management said existing cash and operating cash generation should cover liquidity needs and debt service in 2019–2020; it also forecast approximately $864 of principal and interest payments for the remainder of 2019.
- Management cited continued investment in core businesses and a pipeline of more than 225 R&D projects. Its seven highlighted products generated more than $150 of revenue in 2018; management expects significant potential but notes launch, uptake and competitive uncertainties.
- Management reaffirmed a commitment to limit average annual price increases for branded prescription products to no greater than single digits. The Dermatology.com cash-pay program and amended Walgreens fulfillment arrangement are intended to improve patient access; their effect on sales and realized prices remains uncertain.
- Generic competition remains a material risk. Uceris Tablet revenue was approximately $13 in the first half, versus $70 a year earlier. The filing identifies additional products facing actual or potential loss of exclusivity.
- The company issued new notes in March and May to refinance debt, extending approximately $3,000 of maturities from 2021–2023 into 2027–2029. It reported approximately $410 of scheduled principal repayments through 2021 as of the filing date. On August 1, 2019, it repaid a further $100 of term debt.
- Material unresolved legal and regulatory matters include U.S. and Canadian securities litigation, RICO claims, SEC and U.S. Attorney investigations, an AMF investigation, generic-pricing antitrust litigation and product-related claims. Accrued current loss contingencies were $12; the company said it generally could not predict outcomes or estimate losses for other proceedings.
- Among unusual items, the company recorded an $83 first-half income tax benefit, including $52 of net discrete tax benefits. Extending the estimated useful life of Xifaxan-related intangible assets reduced first-half net loss by $235. Adoption of lease accounting added a $302 right-of-use asset and lease liability at January 1, 2019, without material reported earnings or cash-flow impact.
Investor verification priorities
- Assess whether Salix growth and new-product launches can offset generic erosion and declines in Ortho Dermatologics and Diversified Products.
- Review debt maturities, interest costs, refinancing terms, covenant headroom and cash available after debt service and planned capital spending.
- Test the sustainability of cash conversion, particularly given the inventory build and the company’s expected remainder-of-year cash requirements.
- Track outcomes and potential financial exposure from ongoing investigations, securities and antitrust litigation, and product-liability matters.
- Evaluate assumptions behind intangible-asset useful lives and impairment tests, tax benefits and valuation allowances, and management’s non-GAAP organic growth measure.