Bausch Health Companies Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated financial statements are presented in U.S. dollars. The company develops, manufactures and markets pharmaceuticals, OTC products and medical devices, principally in eye health, gastroenterology and dermatology.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $2,209 million | $2,136 million | $6,377 million | $6,259 million |
| Operating income (loss) | $329 million | $117 million | $873 million | $(2,409) million |
| Net loss attributable to Bausch Health | $(49) million | $(350) million | $(272) million | $(3,804) million |
| Loss per share, diluted | $(0.14) | $(1.00) | $(0.77) | $(10.83) |
| Interest expense | $406 million | $420 million | $1,221 million | $1,271 million |
- Revenue increased 3% in Q3 and 2% year to date. Management cited higher selling prices, lower sales deductions and Trulance sales; foreign exchange and divestitures/discontinuations partly offset growth.
- Gross margin before intangible amortization and impairment, calculated as product sales less cost of goods sold, was approximately 73.8% in Q3 versus 72.8%; for the nine months, approximately 73.4% versus 72.2%.
- Operating income improved year over year, but the comparison reflects lower intangible amortization and, for the nine-month comparison, the absence of $2.213 billion of goodwill impairments recorded in 2018. The company remained loss-making after interest and taxes.
- For the nine months, cash from operations was $1.267 billion (2018: $1.182 billion); investing used $334 million and financing used $812 million. Operating cash flow included a $205 million inventory build, partly offset by $110 million of collections from trade receivables.
- At September 30, cash and equivalents were $825 million; current assets were $4.305 billion and current liabilities $3.735 billion. Long-term debt and other, net of discounts and issuance costs, was $23.566 billion; contractual principal debt was $23.841 billion. The weighted-average stated interest rate was 6.39%.
Material changes and segments
- Q3 revenue rose $73 million, led by Salix, up 20% to $551 million; Bausch + Lomb/International increased 2% to $1.175 billion. Ortho Dermatologics declined 16% to $147 million and Diversified Products declined 5% to $336 million.
- For the nine months, Salix revenue rose 14% to $1.505 billion, while Ortho Dermatologics fell 11% to $407 million and Diversified Products fell 5% to $964 million. Bausch + Lomb/International rose 1% to $3.501 billion.
- Salix benefited from Xifaxan pricing and demand and the March 2019 acquisition of Synergy assets, including Trulance; Trulance contributed $37 million in revenue from acquisition through September. Dermatology and diversified products faced generic competition and lower demand in certain products.
- Sales-return provisions improved by $159 million year to date versus 2018; approximately $75 million of that improvement related to prior sales. Total sales deductions were 38.0% of gross product sales versus 42.0% a year earlier, supporting reported net sales.
Liquidity, outlook and risks
- The company reported compliance with its debt financial maintenance covenant and expected to remain compliant and meet debt service over the following 12 months, based on its forecast. Revolver availability was $1.055 billion at quarter-end, with no borrowings and $170 million of letters of credit; in October it drew net $200 million and repaid $100 million of notes.
- 2019 refinancing transactions extended $3.0 billion of maturities into 2027–2029. Management reported approximately $203 million of scheduled principal repayments through 2021 as of the filing date, while total debt remained substantial. About 80% of debt was fixed-rate; management estimated a 100-basis-point increase in rates would add about $52 million to annual pre-tax expense on variable-rate debt.
- No specific revenue or earnings guidance is provided in the supplied filing text. Management emphasized investment in core businesses and product launches, including the “Significant Seven,” and stated a commitment to keep average annual price increases for branded prescription drugs to single digits. It also described plans to promote growth in dermatology and continue debt reduction and refinancing efforts.
- Key uncertainties include extensive litigation and government investigations concerning legacy pricing, distribution, disclosure and accounting practices; generic competition and patent challenges, including Sandoz’s Xifaxan 550 mg ANDA and related patent suit; reimbursement and pricing pressure; product-launch execution; foreign exchange; and the ability to sustain covenant compliance and service debt.
- Unusual or nonrecurring items include 2018 goodwill impairments that heavily affect the comparison, 2019 debt-extinguishment losses of $40 million year to date, and an $8 million impairment on a business classified as held for sale. A Polish tax ruling and other discrete items contributed to the $101 million year-to-date income tax benefit.
Important facts for investors to verify
- Whether revenue gains and improved operating results persist without relying on lower sales-return provisions, prior-period adjustments, or the absence of 2018 impairment charges.
- Debt repayment capacity, refinancing costs and covenant headroom, especially given $23.841 billion of contractual principal debt and significant maturities after 2022.
- Commercial performance of Xifaxan, Trulance and new dermatology products, alongside generic-entry and patent-litigation outcomes.
- Potential financial exposure, costs and timing of pending investigations, class actions and other legal proceedings; the filing says many outcomes cannot be predicted or losses estimated.
- Whether the inventory build, working-capital movements and expected cash requirements affect future operating cash flow and liquidity.