Business context and reporting period
Bausch Health Companies Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2019. The company develops and sells pharmaceuticals, OTC products and medical devices, principally in eye health, gastroenterology and dermatology. Its four reportable segments are Bausch + Lomb/International, Salix, Ortho Dermatologics and Diversified Products. Figures are in U.S. dollars unless noted.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $2.016 billion | $1.995 billion |
| Operating income (loss) | $287 million | $(2.281) billion |
| Net loss attributable to Bausch Health | $(52) million | $(2.581) billion |
| Basic and diluted loss per share | $(0.15) | $(7.36) |
| Cash from operating activities | $413 million | $438 million |
| Cash and cash equivalents at period end | $782 million | $721 million at Dec. 31, 2018 |
| Long-term debt, net of discounts and issuance costs | $24.181 billion | $24.305 billion at Dec. 31, 2018 |
Product sales were $1.989 billion. Cost of goods sold, excluding amortization and impairments, was 26.3% of product sales, compared with 28.5% a year earlier. Interest expense was $406 million. Total current assets were $4.275 billion and current liabilities were $3.941 billion at March 31. The company reported $1.055 billion available under its revolving credit facility at quarter-end, after $170 million of letters of credit; it subsequently drew net borrowings of $175 million in April and May.
Segment revenue and profit: Bausch + Lomb/International $1.118 billion and $319 million; Salix $445 million and $288 million; Ortho Dermatologics $138 million and $57 million; Diversified Products $315 million and $236 million. Segment profit is a company-defined measure and excludes specified corporate and other costs.
Material changes versus the prior comparable period
- Revenue rose 1% as higher selling prices, higher net volumes, lower sales deductions and $6 million of Trulance sales more than offset $59 million of unfavorable foreign-exchange effects and divestitures and discontinuations.
- Organic revenue growth was 5% overall, excluding foreign exchange and acquisition, divestiture and discontinuation effects. Bausch + Lomb/International grew 8% organically and Salix 5%; Ortho Dermatologics declined 1% and Diversified Products declined 4%.
- Operating results improved sharply from the prior-year loss, chiefly because Q1 2018 included $2.213 billion of goodwill impairments. Q1 2019 also benefited from $254 million less intangible amortization, partly reflecting an extension of the estimated useful life of Xifaxan-related assets. The current-quarter loss includes $489 million of amortization; the improvement should not be read as equivalent to a comparable increase in underlying earnings.
- Operating cash flow decreased $25 million to $413 million. The company cited inventory growth of $68 million and ordinary-course payment timing, partly offset by $89 million of receivables collections.
- Revenue by segment reflected growth in Salix (+5%) and Bausch + Lomb/International (+1%), offset by declines in Ortho Dermatologics (−1%) and Diversified Products (−5%). Generic competition contributed to weakness in the latter segments.
Outlook, management commentary, risks and unusual items
- Management gave no specific consolidated revenue or earnings guidance in the provided filing text. It said existing cash and expected operating cash generation should cover liquidity needs and debt service over the next 12 months, and that it expected covenant compliance and debt-service capacity over that period.
- For the remainder of 2019, management estimated approximately $1.439 billion of principal and interest payments, $225 million of capital expenditures, $32 million of contingent-consideration and milestone payments, $17 million of restructuring payments and $11 million of pension and postretirement payments.
- The company reported $24.474 billion of contractual debt principal at March 31 and a weighted-average stated interest rate of 6.38%. It was in compliance with its financial maintenance covenant. Management noted that covenant failure could trigger default, acceleration or cross-default risks. A 100-basis-point increase in rates was estimated to increase annual pretax expense and cash outflow by about $56 million on current variable-rate debt.
- Q1 refinancing issued $1.5 billion of notes and repurchased or refinanced debt; the company said it extended maturities. The stated weighted-average debt rate increased from 6.23% at year-end 2018 to 6.38% at March 31, 2019. April–May borrowing and redemption activity occurred after quarter-end.
- Management emphasized investment in core eye-health, GI and dermatology businesses, product development and launches. It reported more than $150 million in 2018 revenue for its “Significant Seven” products and anticipated continued marketing investment, but did not provide a specific revenue forecast. Duobrii was FDA-approved in April 2019, with launch expected in June; the Ortho Dermatologics cash-pay prescription program launched in February 2019.
- Principal risks include substantial debt and refinancing needs; generic competition and loss of exclusivity; pricing and reimbursement pressure; foreign exchange and interest-rate exposure; and extensive litigation, regulatory inquiries and investigations concerning historic pricing, distribution, disclosure and accounting practices, including matters related to Philidor. The filing says outcomes and potential losses for many proceedings cannot be reasonably predicted or estimated. Accrued current loss contingencies were $12 million.
- Unusual items include the March 2019 acquisition of Synergy assets, including Trulance, for approximately $180 million; a $21 million gain from acquisition-related contingent-consideration remeasurement; a $10 million gain on asset sales; and $20 million of restructuring and integration costs. The 2018 comparison was revised for a $112 million income-tax benefit error and a foreign-currency translation adjustment; the company said the revisions were not material and did not affect 2019 amounts.
- The company adopted lease accounting guidance on January 1, 2019, recognizing an operating-lease right-of-use asset and lease liability; it said adoption did not materially affect reported operations or cash flows. Management reported disclosure controls were effective at March 31, 2019.
Important facts for investors to verify
- Whether operating performance and cash generation can support debt service, planned capital spending and ongoing investment, given the debt balance and interest burden.
- Progress in reducing leverage and maintaining covenant compliance, including the effect of post-quarter-end revolver borrowing and debt transactions.
- Sales trends, pricing, deductions and generic erosion in key products and segments, including Xifaxan, Uceris, Jublia and products facing expected loss of exclusivity.
- Whether the Significant Seven, Trulance and the dermatology cash-pay program deliver the growth management anticipates.
- Developments in major legal and regulatory matters, potential settlements or penalties, and whether reported accruals adequately reflect exposures that remain difficult to estimate.
- Assumptions behind intangible-asset useful lives and goodwill valuations, including the impact of future competition, pricing pressure or weaker forecasts.