Bausch Health Companies Inc. quarterly report, Q3 FY2018

Bausch Health Companies Inc. — Q3 2018 Form 10-Q

Reporting period: Three and nine months ended September 30, 2018. All amounts are U.S. dollars; financial figures are in millions unless otherwise noted. The company, formerly Valeant Pharmaceuticals International, develops and sells pharmaceuticals, medical devices and OTC products. It reorganized reporting into Bausch + Lomb/International, Salix, Ortho Dermatologics and Diversified Products.

Financial performance and position

Metric	Q3 2018	Q3 2017	Nine months 2018	Nine months 2017
Revenue	$2,136	$2,219	$6,259	$6,561
Operating income (loss)	$117	$38	$(2,409)	$424
Net income (loss) attributable to Bausch Health	$(350)	$1,301	$(3,804)	$1,891
Diluted earnings (loss) per share	$(1.00)	$3.69	$(10.83)	$5.38
Cash from operating activities	Not presented for quarter	Not presented for quarter	$1,182	$1,712

Revenue and margins: Q3 revenue fell 4%; nine-month revenue fell 5%. Product sales were $2,108 million in Q3 and $6,173 million for nine months. Cost of goods sold, excluding intangible amortization and impairments, was 27% of product sales in Q3 versus 30% a year earlier, and 28% versus 29% for nine months. This is a product-sales cost ratio, not a fully burdened operating margin.
Cash flow: Nine-month operating cash flow declined $530 million year over year to $1,182 million. Investing used $134 million; financing used $851 million. Cash and cash equivalents at quarter-end were $973 million, up from $720 million at December 31, 2017; restricted cash was zero.
Liquidity and debt: Current assets were $4,742 million and current liabilities $4,162 million, a $580 million working-capital surplus. Long-term debt and other totaled $24,731 million net of discounts and issuance costs ($25,055 million principal), compared with $25,444 million net at year-end. Weighted average stated interest was 6.32%. The company had $980 million of availability on its $1,225 million revolving facility after $75 million drawn and $170 million of letters of credit.
Balance sheet: Total assets were $33,777 million, liabilities $30,540 million and equity $3,237 million at September 30. Goodwill was $13,290 million and net intangible assets $12,655 million.

Material changes versus comparable periods

Q3 revenue declined $83 million, primarily from 2017 divestitures and discontinuations, lower volumes and unfavorable foreign exchange; higher realized pricing partly offset the decline. Nine-month revenue declined $302 million, with $509 million attributed to divestitures/discontinuations and lower volumes, partly offset by $225 million of higher pricing and $59 million favorable currency effects.
On an organic, constant-currency basis excluding divestitures and discontinuations, revenue grew 3% in Q3 and 2% for nine months (non-GAAP measures).
Salix was a relative strength: nine-month revenue rose 16% to $1,323 million and segment profit rose 28% to $868 million, led by Xifaxan pricing and volume. Ortho Dermatologics revenue fell 17% to $460 million and segment profit fell 27% to $193 million. Diversified Products revenue fell 20% to $1,017 million; Bausch + Lomb/International revenue fell 4% to $3,459 million.
Nine-month operating loss included $2,213 million of goodwill impairment, primarily associated with Salix ($1,970 million) and Ortho Dermatologics ($243 million), following early adoption of revised goodwill impairment guidance. The 2018 loss also included $434 million in asset impairments, including Uceris Tablet and other products. By contrast, 2017 included substantial divestiture gains and a large tax benefit from internal restructuring.
Q3 operating income improved to $117 million from $38 million, in part because 2017 had $312 million of goodwill and $406 million of asset impairments. The Q3 2017 net profit also included a $1,700 million tax benefit; Q3 2018 had a $51 million tax provision.
Interest expense declined to $1,271 million for nine months from $1,392 million, despite refinancing at higher rates, reflecting lower debt balances and lower deferred financing-cost amortization/write-offs. The weighted-average stated debt rate rose from 6.07% at year-end 2017 to 6.32% at September 2018.

Outlook, management commentary and key risks

Management said cash on hand and expected operating cash generation should meet liquidity needs and debt service over the next 12 months; it expected covenant compliance over that period. The company was in compliance with its financial maintenance covenant at September 30. These are forward-looking statements, not guarantees.
Management planned to reduce U.S. channel inventory in Q4 2018 and expected that action to reduce revenue and gross profit. It anticipated full-year 2018 R&D expense above 4% of revenue. No specific consolidated revenue or earnings guidance is provided in the filing text.
Strategy centers on eye health, GI and dermatology. Management cited more than 275 R&D projects and expects the “Significant Seven” products to have substantial potential over five years; their revenue was under $100 million in 2017. These prospects depend on product approvals, successful launches, demand and investment.
Product and competitive risks include generic entry and loss of exclusivity. A generic Uceris Tablet competitor launched in July 2018; the company recorded related impairments. A patent challenge to Jublia was decided adversely by the review board, and the company appealed. The Actavis Xifaxan patent settlement permits market entry from January 1, 2028, or earlier in specified circumstances; patents were stated to expire in late 2029.
Debt remains substantial, with significant scheduled maturities, covenant restrictions and exposure to floating rates. Management estimated that a 100-basis-point increase in rates would raise annualized pretax expense by about $45 million on current variable-rate borrowings. The company also faces potential refinancing, rating and covenant risks.
Material contingencies include ongoing U.S. and Canadian securities litigation, government investigations, pricing-related inquiries, RICO and antitrust matters, product liability claims and tax audits. The company said it could not reasonably estimate losses for most matters; accrued current loss contingencies were $11 million. The Salix SEC settlement was subject to court approval and carried no monetary penalty; it resulted in a favorable $40 million liability reversal.
Pricing and reimbursement are risks: branded-drug price increases were capped by company policy at no greater than single digits on average annually, and the company announced no U.S. branded prescription drug price increases for the rest of 2018. Regulatory approvals and launch timing also remain uncertain; Duobrii had a February 15, 2019 FDA action date after resubmission.

Important facts for investors to verify

Whether operating cash flow and planned channel-inventory reductions support debt service, working capital needs and covenant compliance.
Debt maturities, refinancing costs, interest-rate exposure and remaining availability under the revolving credit facility.
Sales and margins of Xifaxan and other Salix products, and the realized effects of Uceris and other generic competition.
Whether Ortho Dermatologics can stabilize revenue and convert pipeline products into approved, commercially successful launches.
Potential outcomes and cash costs of litigation, investigations, tax audits and other contingencies, including the final approval/status of the Salix SEC settlement.
Assumptions underlying goodwill and intangible-asset valuations, especially for reporting units with limited valuation headroom.
Effects of pricing, rebates, returns and channel inventory on reported net sales; variable-consideration reserves totaled $2,500 million at quarter-end.