Bausch Health Companies Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited U.S. GAAP financial statements. Amounts are in U.S. dollars unless otherwise noted.
Business context and reporting period
Bausch Health is a multinational specialty pharmaceutical and medical-device company focused primarily on eye health, gastroenterology and dermatology. It reports four segments: Bausch + Lomb/International, Salix, Ortho Dermatologics and Diversified Products. The quarter captures the initial effects of COVID-19, with management noting that the more pronounced revenue effects began in March and were expected to intensify in Q2.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $2,012 million | $2,016 million |
| Operating income | $248 million | $287 million |
| Operating margin | 12.3% | 14.2% |
| Net loss attributable to Bausch Health | $152 million | $52 million |
| Loss per share, basic and diluted | $0.43 | $0.15 |
| Cash from operating activities | $261 million | $413 million |
| Cash used in investing activities | $40 million | $203 million |
| Cash used in financing activities | $1,521 million | $150 million |
At March 31, 2020, cash and cash equivalents were $912 million and restricted cash was $1,011 million, including approximately $1,010 million placed in escrow for the proposed U.S. securities-litigation settlement. Total debt principal was $24,701 million; debt net of premiums, discounts and issuance costs was $24,428 million. The company had $1,057 million of availability under its $1,225 million revolving facility, with no borrowings outstanding, and reported compliance with its financial maintenance covenant.
Product-sales cost of goods sold was 25.4% of product sales, versus 26.3% a year earlier. Net sales deductions rose to 40.2% of gross product sales from 38.8%. Interest expense was $396 million, compared with $406 million; the weighted average stated debt rate was 6.01% at quarter-end. Current assets were $5,504 million and current liabilities were $4,886 million, though restricted cash is not freely available for ordinary liquidity needs.
Material changes versus the prior comparable period
- Revenue was nearly flat, down $4 million. Higher gross selling prices, volume and Trulance sales largely offset increased sales deductions, unfavorable foreign exchange, divestitures and discontinuations.
- Operating income fell $39 million. SG&A increased $46 million, impairments rose $11 million and other expense increased $26 million; lower amortization and restructuring costs partly offset these items.
- Net loss attributable to the company widened by $100 million, reflecting weaker operating results, a smaller income-tax benefit ($26 million versus $74 million) and higher debt-extinguishment and foreign-exchange losses.
- Operating cash flow declined $152 million, mainly due to less favorable working-capital movements and lower cash provided before working-capital changes. Financing cash outflow included $1,459 million of debt repayments, including redemption of notes previously refinanced.
- By segment, Salix revenue grew 7% to $477 million and segment profit rose 11% to $319 million. Diversified Products revenue fell 9% to $288 million and segment profit fell 14% to $202 million. Ortho Dermatologics revenue declined 4% and segment profit declined 16%; Bausch + Lomb/International revenue was essentially flat.
Outlook, management commentary, risks and unusual items
- COVID-19: Management expected the greatest revenue impact in Q2, with declines affecting vision care, surgical and ophthalmology products, medical aesthetics, and some Salix, dermatology and dentistry products. It anticipated stabilization during Q2 and into Q3, with a possible return to pre-pandemic revenue levels in late 2020 or, otherwise, in 2021. This outlook depends on containment, no significant second wave or renewed restrictions, continued supply operations and an orderly economic recovery; actual results could differ materially.
- The company said supply and manufacturing had experienced limited disruption as of the filing, and reported more than five months of Xifaxan finished-product supply plus API to manufacture another five months. Some clinical-trial enrollment and R&D work was paused, potentially delaying development and launches.
- Management believed cash and other funding sources would meet liquidity needs for at least 12 months after issuance and expected covenant compliance and debt-service capacity over that period. It expected approximately $1,164 million of principal and interest payments for the remainder of 2020. A proposed refinancing and $3,250 million secured-debt issuance were abandoned in March because of market conditions.
- Long-term debt remains substantial. Scheduled principal maturities are concentrated in 2025, when $10,632 million is due. Management said it may consider asset sales, refinancing, or equity and equity-linked issuance to reduce debt or support covenant compliance.
- The proposed $1,210 million U.S. securities-litigation settlement was preliminarily approved by the court, but final approval remained pending at the filing date. The company had funded $1,010 million into escrow. It recorded $1,416 million of accrued current loss contingencies across matters considered probable and reasonably estimable.
- The SEC issued a Wells Notice in March 2020 indicating a preliminary intent to recommend charges related to legacy disclosures, accounting matters and Philidor. The company was responding and discussing settlement; it warned the matter could result in material payments or sanctions.
- Goodwill impairment testing found no impairment for Ortho Dermatologics, but its valuation headroom had decreased. Management cautioned that worsening conditions, including COVID-19 impacts, pricing pressure and product-launch delays, could lead to future material impairments.
- Other risks include generic competition and patent challenges, pricing and reimbursement pressures, regulatory scrutiny, litigation and investigations, foreign exchange and interest-rate exposure, and dependence on major wholesalers. The three largest customers accounted for 48% of Q1 revenue.
Important facts for investors to verify
- Whether the securities-settlement received final court approval, how the remaining settlement amount was funded, and whether additional legal accruals or payments arise.
- Actual Q2 and subsequent revenue trends versus management’s COVID-19 assumptions, particularly elective-procedure-related businesses and the expected recovery timeline.
- Unrestricted liquidity, revolving-facility availability, covenant headroom and the company’s capacity to service debt as maturities approach, especially in 2025.
- Progress and outcomes in the SEC investigation, remaining securities opt-out actions, other litigation and the Xifaxan patent challenges.
- Whether reduced Ortho Dermatologics goodwill headroom, product sales forecasts or pandemic-related developments lead to impairment charges.
- Changes in sales deductions, generic competition and customer concentration, and the resulting effects on realized revenue and margins.