Bausch Health Companies Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars unless noted.
Business context and reporting period
Bausch Health develops, manufactures and markets pharmaceuticals, OTC products and medical devices, with a strategic focus on eye health, gastrointestinal (GI) and dermatology. Its four reportable segments are Bausch + Lomb/International, Salix, Ortho Dermatologics and Diversified Products. The company reported approximately 1,400 products and more than 225 R&D projects.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $8.601 billion | $8.380 billion |
| Operating income (loss) | $(203) million | $(2.384) billion |
| Net income (loss) attributable to Bausch Health | $(1.788) billion | $(4.148) billion |
| Diluted loss per share | $(5.08) | $(11.81) |
| Cash from operating activities | $1.501 billion | $1.501 billion |
| Interest expense | $1.612 billion | $1.685 billion |
FY 2019 product sales were $8.489 billion. Cost of goods sold, excluding intangible amortization and impairments, was 27.1% of product sales, down from 27.9%. Total segment profit was $3.835 billion, or 45% of revenue, versus $3.748 billion, also 45%, in 2018. R&D expense rose 14% to $471 million.
Fourth quarter: Revenue was $2.224 billion versus $2.121 billion in Q4 2018. Operating loss was $1.076 billion, net loss attributable to the company was $1.516 billion, diluted loss per share was $4.30, and operating cash flow was $234 million. The quarter included the large legacy securities-litigation charge described below.
At year-end, cash and cash equivalents were $3.243 billion, working capital was $721 million, total assets were $33.863 billion, and total liabilities were $32.727 billion. Long-term debt, net of discounts and financing costs, was $25.895 billion; contractual principal was $26.188 billion. The weighted average stated interest rate was 6.21%. The company had $1.055 billion available under its revolving credit facility and reported compliance with its financial maintenance covenant.
Material changes versus the prior comparable period
- Revenue increased 3%; organic revenue growth, a non-GAAP measure, was 4%. Growth reflected higher prices and volumes and $55 million of Trulance sales following the Synergy asset acquisition, partly offset by $112 million of unfavorable foreign exchange, divestitures and discontinuations, and higher sales deductions.
- Salix revenue increased 16% to $2.022 billion, led by Xifaxan and including Trulance. Bausch + Lomb/International revenue rose 2% to $4.739 billion. Ortho Dermatologics revenue fell 8% to $565 million, and Diversified Products revenue fell 6% to $1.275 billion, chiefly reflecting generic competition and lower demand.
- Net loss narrowed year over year, but remained substantial. Operating results benefited from lower goodwill impairment, amortization and asset impairment charges than in 2018. This was partly offset by $1.401 billion in litigation and other matters, principally the proposed U.S. securities class-action settlement.
- Operating cash flow was unchanged at $1.501 billion. Cash provided before working-capital changes improved, but inventory build and the timing of other payments offset that improvement.
- Debt refinancings extended maturities; the company issued $2.5 billion of notes in December 2019 to finance the settlement and refinance debt. Cash increased substantially, while reported net debt also rose versus year-end 2018.
Outlook, management commentary, risks and unusual items
- Management said it expects existing cash and operating cash generation to support liquidity and debt service over the next 12 months and to service debt obligations in 2020–2022. It expected to remain covenant-compliant, while noting that forecasts could fail and remedial actions might not be effective.
- As of the filing date, scheduled principal repayments through 2021 were $103 million after the January 2020 redemption of $1.240 billion of notes. Management anticipated approximately $300 million of 2020 capital expenditures, $80 million of net IT infrastructure spending and $64 million of contingent-consideration and development milestone payments.
- The company reaffirmed its commitment to limit average annual price increases for branded prescription products to no greater than single digits. It withdrew its prior specific outlook that Ortho Dermatologics revenue could double within five years and its revenue outlook for the “Significant Seven” products.
- The $1.210 billion U.S. securities class-action settlement was subject to final court approval. The company recorded the charge in 2019, denied wrongdoing, and reported that $200 million was paid into escrow in January 2020. The balance was expected to be paid under the settlement terms.
- Goodwill impairment was zero in 2019, following $2.322 billion in 2018. Finite- and indefinite-lived intangible asset impairments were $75 million in 2019. The company cautioned that further impairments could result from weaker forecasts, generic competition or execution challenges.
- Principal risks include substantial indebtedness and restrictive covenants; ongoing government investigations and litigation concerning historical pricing, distribution, marketing and accounting practices; pricing and reimbursement pressure; generic competition; dependence on key products and intellectual property; and single-source suppliers. The filing also noted uncertainty about the potential impact of the coronavirus outbreak on 2020 international and consolidated results.
- Other relevant exposures include a $1.397 billion accrued current legal liability at year-end, $355 million of unrecognized tax benefits for which payment timing could not be reliably estimated, and product-liability self-insurance for substantially all claims arising after March 31, 2014.
Most important facts for investors to verify
- Final court approval, payment schedule and any related opt-out litigation associated with the $1.210 billion U.S. securities settlement.
- Cash available for operations after settlement payments, debt redemptions, interest and planned 2020 spending; reconcile year-end cash with the financing raised for specified uses.
- Debt maturity profile, covenant headroom, refinancing costs and the company’s ability to sustain cash generation and reduce leverage.
- Xifaxan revenue durability and the outcomes and timing of patent litigation involving Sandoz and Norwich; assess potential generic entry and the related impairment risk.
- Whether Salix growth and new launches can offset declines in Ortho Dermatologics and Diversified Products, including the impact of generic competition and pricing.
- Key estimates in product rebates and returns: the auditor identified these as critical audit matters; management estimated that a 1% change in return rates or Medicaid rebate rates would affect pretax earnings by approximately $84 million or $83 million, respectively.
- Potential effects of the coronavirus outbreak, foreign exchange, regulatory changes and product-supply constraints on 2020 results.