Bausch Health Companies Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited interim financial statements are presented in U.S. dollars. Bausch Health is a diversified specialty pharmaceutical and medical device company and owned approximately 89% of Bausch + Lomb at quarter-end.
Financial performance
| Metric (USD millions, except per-share amounts) | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $2,167 | $1,967 | $4,111 | $3,885 |
| Operating income | $412 | $161 | $587 | $446 |
| Net income (loss) attributable to Bausch Health | $26 | $(145) | $(175) | $(214) |
| Diluted earnings (loss) per share | $0.07 | $(0.40) | $(0.48) | $(0.59) |
| Interest expense | $319 | $410 | $626 | $772 |
Q2 operating margin was approximately 19.0%, compared with 8.2% a year earlier. Revenue increased 10% in Q2 and 6% in the first half. Management attributed growth primarily to higher volumes and net pricing in Bausch + Lomb, Salix, Solta Medical and International, partly offset by weakness in Diversified, foreign exchange and divestitures or discontinuations. First-half cost of goods sold was 29.8% of product sales, up from 28.8%.
Q2 operating income benefited from lower amortization and the absence of the prior-year $83 million goodwill impairment, as well as $83 million of favorable other income, primarily insurance recoveries and contingent-consideration estimate changes. It included a $37 million Uceris Foam intangible impairment. First-half results also included $50 million of asset impairments and a $125 million income tax provision; discrete tax items included audit-related accruals and changes in uncertain tax positions.
Segment trends: Q2 revenue rose 10% at Bausch + Lomb, 11% at Salix and International, and 54% at Solta Medical; Diversified declined 3%. For the first half, Diversified revenue fell 12% and segment profit fell 18%; International segment profit fell 8%. Xifaxan represented approximately 80% of Salix revenue.
Cash flow, debt and liquidity
- First-half operating cash flow was $360 million, versus $60 million in 2022. Operating cash flow before changes in operating assets and liabilities was $624 million; working-capital changes reduced cash by $264 million, including a $160 million inventory increase.
- First-half investing cash outflow was $108 million, including $75 million of capital expenditures. Financing cash outflow was $262 million.
- June 30 cash and cash equivalents were $579 million, with $9 million restricted. Total current assets were $4.461 billion and current liabilities $3.967 billion. The filing notes that $392 million of cash, cash equivalents and restricted cash was held by Bausch + Lomb entities and generally was not available to fund other Bausch Health entities.
- Long-term debt carrying value was $20.552 billion; contractual principal was $19.010 billion. The weighted-average stated interest rate was 7.91%. Reported interest expense understates contractual interest costs on certain exchange-offer notes because part of their cash interest reduces a recorded debt premium.
- The company reported compliance with its financial maintenance covenant and expected to meet debt service obligations for at least the next 12 months. Management said existing liquidity sources were expected to meet needs over that period. As of August 3, 2023, Bausch Health had drawn $350 million under its new receivables facility; it also reported no borrowings on its 2027 revolving facility after repayment in July. Bausch + Lomb’s revolving facility had $250 million drawn and $225 million available as of that date.
Material developments, outlook and risks
- Bausch + Lomb separation: Management continued to view separation as strategically beneficial, but completion remains conditional on targeted leverage ratios and required approvals. The filing gives no firm completion date or assurance it will occur. The Norwich Xifaxan litigation may affect the process.
- Xiidra acquisition: Bausch + Lomb agreed to acquire XIIDRA and related ophthalmology assets for $1.75 billion upfront, with up to $750 million of potential milestone payments. Closing was expected by year-end 2023, subject to regulatory and other conditions; Bausch + Lomb intended to fund the upfront payment with new debt. The filing identifies execution, financing, approval and integration risks.
- Other transactions: Bausch + Lomb completed its $107 million Blink product-line acquisition in July 2023 and acquired AcuFocus in January for an upfront $35 million, with possible additional milestone payments.
- Intellectual property and competition: The Norwich decision invalidated certain Xifaxan patents for IBS-D, while the court barred final FDA approval of Norwich’s ANDA until October 2029; appeals were consolidated and ongoing. Xifaxan is important to Salix, and an earlier successful generic launch could materially affect revenue, cash flows and intangible-asset values. The company also reported new generic competition for Uceris Foam and recognized the related impairment.
- Other operating risks and unusual items: A voluntary Emerade auto-injector recall in EMEA and Canada produced approximately $12 million of provisions and other costs; further charges are possible. Generic competition, pricing and reimbursement pressure, inflation, foreign exchange, interest rates and potential future impairments remain risks. The company had $326 million of accrued current legal loss contingencies; outcomes and payment timing for other proceedings may be uncertain.
- Tax and legal exposures: A Luxembourg tax assessment of €272 million remains disputed and unreserved. The company disclosed a worst-case estimate of up to $2.1 billion, excluding penalties and interest, if its 2017 U.S. capital-loss position were ultimately disallowed; it recorded an estimate following a tentative IRS settlement that remained subject to review and approval.
- Forward outlook: Management described continued investment in core products and research, including Salix programs, and reported approximately 100 pipeline projects. It did not provide quantified company-wide revenue or earnings guidance in the supplied filing text. It expected substantial remaining-2023 cash requirements, including approximately $836 million for debt amortization and interest and approximately $200 million for capital expenditures.
Important facts for investors to verify
- Progress and conditions for the Bausch + Lomb separation, including leverage targets, approvals and the effect of Xifaxan litigation.
- Financing, regulatory clearance, closing terms and integration risks for the XIIDRA acquisition and its potential additional milestone obligations.
- Debt maturities, cash interest requirements, revolving-facility availability and covenant compliance; distinguish contractual interest from GAAP interest expense.
- Developments in the Norwich appeals and potential generic entry for Xifaxan, alongside the performance of the Diversified segment and products facing generic competition.
- Resolution of the IRS and Luxembourg tax matters, legal proceedings and any additional costs related to the Emerade recall.