Bausch Health Companies Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts are in U.S. dollars; financial statement figures are in millions except per-share data. The filing was signed August 3, 2021.
Business context
Bausch Health develops and markets branded, generic and OTC pharmaceuticals and medical devices, primarily in eye health, gastroenterology and dermatology, across approximately 100 countries. Its five reportable segments are Bausch + Lomb, Salix, International Rx, Ortho Dermatologics and Diversified Products. The segment structure was realigned in 2021 in anticipation of separating the eye-health business.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $2,100 | $1,664 | $4,127 | $3,676 |
| Operating income (loss) | $(270) | $(27) | $(491) | $221 |
| Net loss attributable to Bausch Health | $(595) | $(326) | $(1,205) | $(478) |
| Loss per share, basic and diluted | $(1.66) | $(0.92) | $(3.37) | $(1.35) |
| Operating cash flow | Not separately provided | Not separately provided | $838 | $461 |
| Cash used in investing activities | Not separately provided | Not separately provided | $(99) | $(107) |
| Cash used in financing activities | Not separately provided | Not separately provided | $(631) | $(1,674) |
Q2 revenue increased 26%; first-half revenue increased 12%. Management attributed growth mainly to recovering volumes as COVID-19 restrictions eased and favorable foreign exchange, partly offset by lower realized pricing, divestitures and product discontinuations. First-half organic revenue growth, a non-GAAP measure, was 10%.
First-half results included $469 million of goodwill impairment, primarily for Ortho Dermatologics, and $195 million of asset impairments, including $88 million of additional loss related to the Amoun sale. Other expense, net was $512 million for the first half, including $532 million of litigation and other matters, partly offset by a $23 million gain on asset sales. Interest expense was $732 million for the first half, down from $781 million; the weighted-average stated debt rate was 5.85% at June 30, 2021.
At June 30, cash and cash equivalents were $642 million, restricted cash was $1,214 million, and current assets and current liabilities were $5,450 million and $5,517 million, respectively. Most restricted cash—$1,210 million—was in escrow for the U.S. securities litigation settlement and should not be treated as ordinary available liquidity. Long-term debt, net of discounts and issuance costs, was $23,439 million; principal debt obligations were $23,685 million. The $1,225 million revolving facility had no borrowings and $1,172 million of availability. The company reported compliance with its financial maintenance covenant and expected to remain compliant for the next 12 months.
First-half segment revenue and segment profit were: Bausch + Lomb $1,815 million and $452 million; Salix $988 million and $697 million; International Rx $619 million and $212 million; Ortho Dermatologics $278 million and $131 million; and Diversified Products $427 million and $311 million. Segment profit is a management measure that excludes certain costs and is not equivalent to operating income. Q2 revenue grew across all segments except Diversified Products; its revenue fell 8%, while Bausch + Lomb grew 38% and Salix 28%.
Material changes versus the prior comparable period
- Revenue growth reflected recovery from the unusually weak Q2 2020 pandemic comparison; management cautioned that year-over-year growth for the rest of 2021 would likely be slower.
- Operating results deteriorated despite higher revenue: first-half operating income of $221 million in 2020 became a $491 million loss in 2021, driven notably by the Ortho Dermatologics goodwill impairment and higher litigation-related expense.
- First-half SG&A rose $132 million to $1,291 million, including $55 million of Bausch + Lomb separation-related costs and the return of selling and promotional spending reduced during 2020.
- Debt principal declined by $500 million from year-end 2020 to June 30, alongside refinancing that replaced $1.6 billion of 7.00% secured notes due 2024 with 4.875% secured notes due 2028. The refinancing contributed to a $50 million first-half loss on extinguishment of debt.
- Amoun was classified as held for sale and sold on July 26, 2021 for approximately $740 million gross consideration, subject to adjustments. After quarter-end, the company used proceeds and cash on hand for $600 million of term-loan repayments and redeemed $150 million of 2025 notes; it also announced a further $350 million redemption.
Outlook, risks and unusual items
- Management expected revenue to likely return to pre-pandemic levels during 2021, assuming continued vaccine availability and no material adverse resurgence of COVID-19 or variants. It expected slower year-over-year growth for the remainder of 2021 and operating expenses above 2020 levels as commercial investment resumed.
- The company intended to separate Bausch + Lomb into an independent public company and announced on August 3, 2021 its intention to pursue an IPO of Solta Medical. Management said proceeds would be used, to the extent possible, to reduce debt and support appropriate capitalization of the resulting businesses. The transactions remained subject to approvals, market conditions and other conditions; completion and timing were not assured. The filing anticipated the Solta IPO in Q4 2021 or the first half of 2022, while no definitive timetable for the separation or final capital structures was provided.
- Legal exposure remains significant. Accrued current loss contingencies were $2,076 million at June 30, including $1,738 million expected to be payable during the remainder of 2021. The $1.21 billion U.S. securities settlement had received court approval but remained subject to two appeals; the settlement funds were held in escrow. The company also reported an agreement in principle, reached after quarter-end, to settle Glumetza antitrust class claims for $300 million, subject to final documentation and court approval; additional non-class settlement consideration was not clearly quantified.
- On July 20, 2021, the company agreed to insurance settlements expected to provide $213 million in aggregate; certain insurance claims remained pending. These events occurred after the reporting date.
- A third-party sterilization supplier data issue led to containment or recall of limited lots of certain consumer products and $7 million of manufacturing variances and $6 million of returns in Q2. The company said the issue did not affect product safety or performance, but its evaluation continued and further charges were possible. It also cited inflationary pressures on labor, materials, shipping and utilities.
- Other key risks include substantial debt and refinancing needs, negative credit outlooks from S&P and Fitch, generic competition and loss of exclusivity, pricing and reimbursement pressure, litigation and regulatory matters, execution and costs of the proposed transactions, and COVID-related supply, demand and clinical-development disruption. The company noted that a proposed global minimum tax could materially affect it, but the impact was not yet clear.
Important facts for investors to verify
- Whether revenue recovery and segment profitability persist after the favorable pandemic comparison, and whether pricing, rebates and generic competition pressure margins.
- The cash timing and final amounts of litigation settlements, including resolution of appeals, the Glumetza class and non-class claims, and realization of the announced insurance proceeds.
- Debt repayment progress, interest costs, covenant headroom and liquidity available after separating restricted escrow cash from usable cash.
- The timing, structure, costs, approvals and capitalization of the Bausch + Lomb separation and Solta IPO, including any effect on the remaining pharmaceutical business.
- Whether Ortho Dermatologics forecasts stabilize and whether further goodwill or intangible-asset impairments are required.
- Any further costs or sales effects from the supplier quality issue, inflation, COVID-19 developments, or product-specific regulatory and patent outcomes.