Bausch Health Companies Inc. annual report, FY2020

Bausch Health Companies Inc. — FY 2020 Form 10-K

Reporting period: Fiscal year ended December 31, 2020. The filing was signed February 24, 2021. Amounts are in U.S. dollars unless noted. This is an annual report; the Q4 figures below are unaudited quarterly data included in the filing.

Business context and reporting period

Bausch Health develops, manufactures and markets pharmaceuticals, OTC products and medical devices in approximately 100 countries, with core businesses in eye health, gastrointestinal products and dermatology. Its four reported segments were Bausch + Lomb/International, Salix, Ortho Dermatologics and Diversified Products. In August 2020, the Company announced a planned separation of its eye-health business; the transaction remained subject to approvals and other conditions, with no assurance it would be completed.

Financial results and liquidity

Metric	FY 2020	FY 2019
Revenue	$8.027 billion	$8.601 billion
Operating income (loss)	$676 million	$(203) million
Net loss attributable to Bausch Health	$(560) million	$(1.788) billion
Loss per share, basic and diluted	$(1.58)	$(5.08)
Cash from operations	$1.111 billion	$1.501 billion
Capital expenditures	$302 million	$270 million

Revenue declined 7%. The Company attributed the decrease mainly to lower volumes amid COVID-19 restrictions and product exclusivity losses, unfavorable foreign exchange, and divestitures and discontinuations. Organic revenue declined 6%.
Operating income improved by $879 million, while the Company remained loss-making after $1.534 billion of interest expense, $454 million of other expense (net), and other non-operating items. The 2020 income tax benefit was $375 million.
Cost of goods sold was 27.8% of product sales, versus 27.1% in 2019; management cited product mix and COVID-related manufacturing variances. Segment profit was $3.578 billion, or 45% of revenue, compared with $3.835 billion, also 45%, in 2019. Segment profit excludes certain corporate, amortization, impairment, restructuring and other items.
Cash and cash equivalents were $605 million; restricted cash was $1.211 billion, including the $1.210 billion securities-litigation settlement escrow. Total current assets were $5.342 billion and current liabilities $4.913 billion.
Long-term debt, net of discounts and financing costs, was $23.925 billion, down from $25.895 billion. Contractual principal was $24.185 billion. The weighted-average stated interest rate was 6.02%. There were no debt maturities or mandatory amortization payments due in 2021–2023; scheduled principal repayments begin in 2024.
The $1.225 billion revolving facility had no borrowings, $104 million of letters of credit and $1.121 billion of remaining availability at year-end. The Company reported compliance with its financial maintenance covenant at December 31, 2020.

Material changes versus the prior comparable period

Full-year revenue fell $574 million. COVID-19 effects were most pronounced in Q2: revenue was down 23% year over year that quarter, versus down 3% in Q3 and less than 1% in Q4. Q4 revenue was $2.213 billion, compared with $2.224 billion a year earlier.
FY 2020 segment revenue declined across all four segments: Bausch + Lomb/International 7%, Salix 6%, Ortho Dermatologics 2% and Diversified Products 9%. Ortho Dermatologics segment profit rose 5%; the other segments’ profit declined.
The improvement in operating results chiefly reflected lower amortization and other expense, including lower litigation-related charges than in 2019, as well as reduced SG&A. Cost savings and reduced selling activity helped margins, while lower sales and manufacturing variances weighed on results.
Operating cash flow decreased $390 million to $1.111 billion. Financing activities used $2.294 billion, largely reflecting debt repayments; cash and restricted cash together fell to $1.816 billion from $3.244 billion.
In 2020, the Company refinanced debt to extend $3.5 billion of payments due in 2022–2023 into 2029–2031, replaced $1.5 billion of secured debt with unsecured debt, and repaid €1.5 billion of euro-denominated debt.

Outlook, management commentary, risks and unusual items

Outlook: Management anticipated gradual global recovery and said affected businesses could return to pre-pandemic levels during 2021, conditional on vaccine effectiveness, economic recovery and no material resurgence or renewed restrictions. The filing does not provide a numerical revenue or earnings forecast. If recovery continued, management expected 2021 operating expenses to exceed 2020 as selling, promotional and development investment increased.
Liquidity and 2021 cash needs: Management said available liquidity was expected to meet needs for at least 12 months from filing. It forecast approximately $1.425 billion of 2021 interest payments, $275 million of capital expenditures, $60 million of IT infrastructure spending, $164 million of contingent consideration and development or sales milestones, and $14 million of pension and postretirement payments.
COVID-19: Restrictions reduced demand for elective procedures, physician visits and some contact lens and other products, and delayed some clinical enrollment. Milan and China facilities temporarily closed in 2020, but the Company reported limited lasting supply disruption and said inventory had returned to pre-pandemic levels by year-end. Further disruption could affect sales, supply, trials, liquidity and asset values.
Separation: The proposed eye-health separation was in the planning phase. Management expected organizational design work substantially completed by late 2021, but timing, structure, capitalization, approvals and completion remained uncertain. The Company recorded $11 million of direct separation costs and $21 million of separation-related costs in 2020; future costs were not yet estimable and could be material.
Litigation and contingencies: Accrued current legal loss contingencies were $1.672 billion. The $1.210 billion U.S. securities class-action settlement received court approval in January 2021, but an objector appealed; funds remained in escrow at year-end. The Company also reported pending securities opt-out and RICO matters, generic-pricing and Glumetza antitrust cases, and other litigation. The SEC investigation was resolved under a settlement involving a $45 million penalty without admission or denial; the AMF closed its investigation. Management stated that outcomes and potential losses for many remaining matters could not be predicted or estimated clearly.
Other unusual items: The Company recorded $114 million of asset impairments, including a $96 million charge on a business classified as held for sale. It reported no goodwill impairment in 2020; the Ortho Dermatologics reporting unit’s tested fair value exceeded carrying value by approximately 10%. The business’s outlook and assumptions remain relevant to future impairment risk.
Key risks: Substantial debt and interest burden, restrictive covenants, generic competition and patent challenges, drug-pricing and reimbursement pressure, ongoing legal exposure, reliance on some single-source suppliers, foreign exchange and interest-rate movements, and COVID-related demand or operational setbacks. The Company also self-insures substantially all product-liability risk for claims arising after March 31, 2014.

Important facts for investors to verify

Track revenue recovery by segment and geography, and whether 2021 results support management’s conditional pre-pandemic recovery expectations.
Review the debt schedule, interest expense, covenant headroom and refinancing needs; confirm that unrestricted cash and revolving-credit availability remain adequate.
Monitor settlement escrow status, remaining litigation and the legal-contingency accrual, including potential changes in estimated losses.
Assess the eye-health separation’s approvals, structure, capital allocation, costs and timetable; completion was not assured.
Check whether generic entry, pricing or reimbursement changes, supply constraints, or revised forecasts affect major products and the carrying values of goodwill and intangible assets.