Bausch Health Companies Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 20, 2019. The filing is an annual report with unaudited fourth-quarter supplemental data, not a standalone quarterly filing. The company changed its name from Valeant Pharmaceuticals International, Inc. to Bausch Health Companies Inc. on July 13, 2018. Amounts are U.S. dollars unless stated otherwise.
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 three core businesses contributed approximately 71% of 2018 revenue, up from 67% in 2017. Management continued its turnaround strategy, including divestitures of non-core businesses, investment in core products and efforts to reduce debt.
Key financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $8.380 billion | $8.724 billion |
| Operating income (loss) | $(2.384) billion | $102 million |
| Net income (loss) attributable to Bausch Health | $(4.148) billion | $2.404 billion |
| Diluted earnings (loss) per share | $(11.81) | $6.83 |
| Net cash provided by operating activities | $1.501 billion | $2.290 billion |
| Cash and cash equivalents at year-end | $721 million | $720 million |
| Working capital at year-end | $375 million | $478 million |
| Long-term debt, net of discounts and issuance costs | $24.305 billion | $25.444 billion |
- Revenue and margins: Revenue fell 4% year over year. Product sales were $8.271 billion. Cost of goods sold, excluding amortization and impairments, was 28% of revenue versus 29% in 2017; on this basis, product gross margin was approximately 72% versus 71%. GAAP operating margin was approximately negative 28%, reflecting large impairment charges.
- Revenue mix: Reported revenue declined partly because of 2017 divestitures and discontinuations ($541 million impact) and lower volumes; higher gross selling prices, lower sales deductions and favorable currency partially offset the decline. Organic revenue, a company-defined non-GAAP measure, grew 2%.
- Cash flow: Operating cash flow declined 34%. Investing activities used $196 million; capital expenditures were $157 million. Financing activities used $1.353 billion, principally reflecting debt repayments and refinancing. Cash and restricted cash ended the year at $723 million.
- Interest and debt: Interest expense was $1.685 billion, down from $1.840 billion; the weighted-average stated debt rate increased to 6.23% from 6.07%. Contractual debt principal was $24.632 billion. Scheduled principal maturities include $228 million in 2019, $303 million in 2020, $1.003 billion in 2021, $1.553 billion in 2022 and $6.348 billion in 2023. The company reported $981 million of availability on its $1.225 billion revolving facility, with $75 million borrowed and $169 million of letters of credit outstanding.
- Segment performance: Bausch + Lomb/International revenue was $4.664 billion, down 3%; Salix was $1.749 billion, up 12%; Ortho Dermatologics was $625 million, down 14%; and Diversified Products was $1.342 billion, down 18%. Segment profit totaled $3.748 billion, a management measure that excludes specified corporate and other costs; it is not GAAP operating income.
Fourth-quarter results
Q4 2018 revenue was $2.121 billion, versus $2.163 billion in Q4 2017. Operating income was $25 million, compared with an operating loss of $322 million. Net loss attributable to Bausch Health was $344 million, or $0.98 per diluted share, versus net income of $513 million in the prior-year quarter. Operating cash flow was $319 million versus $578 million. The large year-over-year change in quarterly net income should be considered alongside the unusual tax benefits recorded in 2017.
Material changes versus the prior comparable period
- Revenue decreased 4% year over year, while organic revenue increased 2%; divestitures, discontinued products and generic competition weighed on reported sales.
- Operating results shifted from $102 million of income to a $2.384 billion loss. The company recorded $2.322 billion of goodwill impairments and $568 million of asset impairments in 2018.
- Net results moved from $2.404 billion of income to a $4.148 billion loss. The 2017 comparison included a $4.145 billion income-tax benefit, largely from internal restructuring and U.S. tax reform; the 2018 tax benefit was $10 million.
- Operating cash flow fell $789 million, partly because 2017 benefited from more than $800 million of working-capital cash generation that did not recur and 2018 included legal settlement payments.
- Debt principal declined by approximately $1.120 billion. Refinancing extended about $8.3 billion of maturities into 2025–2027 and extended the revolving facility to June 2023, but included new debt with high stated interest rates, including 9.25% notes due 2026 and 8.50% notes due 2027.
- Salix revenue and segment profit grew 12% and 23%, respectively, supported by Xifaxan and Relistor. Ortho Dermatologics and Diversified Products revenue declined 14% and 18%, respectively.
Outlook, management commentary, risks and unusual items
- Liquidity and outlook: Management said existing cash and expected operating cash generation should be sufficient for liquidity needs over the next 12 months and for debt service in 2019–2020, and forecast continued compliance with its financial maintenance covenant. The company was compliant at December 31, 2018. It did not provide a numerical revenue or earnings forecast in the provided filing text.
- 2019 cash needs: Expected capital expenditures were approximately $275 million; contingent consideration and milestone payments, $44 million; and restructuring payments, $19 million. Contractual obligations totaled $34.866 billion, including $33.757 billion of debt obligations including interest. These amounts are not all due in 2019.
- Products and investment: Management reported more than 250 R&D projects and expected to submit approximately 120 for regulatory approval in 2019–2020. Revenue from the “Significant Seven” products exceeded $150 million in 2018, versus approximately $75 million in 2017. Duobrii’s FDA review missed its February 15, 2019 action date; management expected a decision in the near future. Success and timing of approvals and launches remain uncertain.
- Acquisition proposal: Bausch Health was pursuing certain Synergy Pharmaceuticals assets, including Trulance, for approximately $200 million plus assumed liabilities through a bankruptcy auction process. Completion was subject to competing bids, court approval and other conditions.
- Impairments and estimates: The $2.322 billion goodwill impairment included a $1.970 billion Salix charge associated with early adoption of new goodwill accounting guidance, a $243 million Ortho Dermatologics charge and a $109 million Dentistry charge. The company also impaired Uceris-related and other intangible assets. Further impairments are possible if forecasts or market conditions weaken.
- Pricing and competition: The Patient Access and Pricing Committee reaffirmed a commitment to average annual branded prescription price increases no greater than single digits. Management cautioned that pricing limits, rebates, reimbursement decisions and generic entry can pressure realized prices and sales. A generic Uceris Tablet competitor launched in 2018; the company also disclosed patent challenges and an adverse patent-board decision concerning one Jublia patent, which it appealed.
- Legal and regulatory matters: Ongoing investigations and litigation relate to historical pricing, marketing, distribution, disclosure and accounting practices, including the former Philidor relationship. The filing says outcomes and potential losses are generally not predictable; $11 million of current loss contingencies were accrued for matters considered probable and reasonably estimable. The company reported resolving or obtaining positive outcomes in approximately 70 matters during 2018. FDA inspection of the Tampa facility resulted in an Official Action Indicated status; a January 2019 re-inspection closed without observations, and the company expected a status change.
- Other risks: Substantial debt, covenant restrictions, floating-rate exposure, generic competition, customer concentration, foreign exchange, reimbursement and pricing pressure, single-source suppliers, product liability and regulatory approvals remain material risks. A 100-basis-point increase in rates was estimated to increase annual pretax expense by approximately $60 million on current variable-rate debt. The company self-insures substantially all product liability risk for claims arising after March 2014.
- Controls and audit: Management and the auditor concluded internal control over financial reporting was effective at year-end 2018; the auditor issued an unqualified opinion on the financial statements and controls. The filing also disclosed a non-material correction to the first-quarter 2018 tax provision in the second quarter.
Important facts for investors to verify
- Whether operating cash flow can sustain debt service, required investment and further principal reduction, particularly with the 2023 maturity concentration and high interest burden.
- Whether core revenue growth—especially Xifaxan, Relistor and Bausch + Lomb products—can offset generic erosion, divestitures and declines in dermatology and diversified products.
- Progress and commercial contribution of the Significant Seven, including Duobrii’s regulatory outcome and the timing and economics of the proposed Trulance acquisition.
- Developments in Uceris and Jublia patent matters, pricing and reimbursement pressures, and the remaining government investigations and shareholder, antitrust and product-liability litigation.
- Assumptions behind goodwill and intangible-asset valuations, deferred-tax-asset recoverability, product-sales deductions and the company’s covenant and liquidity forecasts.