Bausch Health Companies Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited consolidated results, in U.S. dollars. The company develops and sells eye-health, gastrointestinal, dermatology and other pharmaceutical, OTC and medical-device products in approximately 100 countries.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $2.138B | $2.209B | $5.814B | $6.377B |
| Operating income | $460M | $329M | $681M | $873M |
| Net income (loss) attributable to Bausch Health | $71M | ($49M) | ($407M) | ($272M) |
| Diluted EPS | $0.20 | ($0.14) | ($1.15) | ($0.77) |
| Operating cash flow | Not presented separately | Not presented separately | $717M | $1.267B |
- Q3 operating margin was approximately 21.5%, versus 14.9% a year earlier. The improvement reflected lower SG&A, R&D, amortization and impairment charges, despite lower revenue and contribution.
- Q3 interest expense was $374M, down from $406M. For the first nine months, interest expense was $1.155B; the company reported a $51M debt-extinguishment loss.
- At September 30, cash and cash equivalents were $977M and restricted cash was $1.011B. Restricted cash primarily comprised funds escrowed for the U.S. securities settlement and was not ordinary operating cash.
- Long-term debt, net of discounts and issuance costs, was $24.343B; contractual principal was $24.601B. The company had $655M of total equity and $30.907B of total liabilities.
- The $1.225B revolving facility had no borrowings, $107M of letters of credit and $1.118B available. The company reported covenant compliance at quarter-end and expected to remain compliant and meet debt service for at least 12 months after filing.
Changes versus prior-year periods
- Q3 revenue fell 3%; nine-month revenue fell 9%. Management attributed the declines to COVID-related volume pressure, product losses of exclusivity, pricing and sales deductions, foreign exchange, and divestitures or discontinuations.
- Q3 operating income rose $131M, while nine-month operating income declined $192M. For the nine months, lower contribution and a $131M increase in other expense—largely litigation-related—more than offset cost reductions and lower amortization.
- Nine-month operating cash flow declined $550M to $717M, reflecting weaker operating results, higher legal-settlement payments and less favorable working-capital movements, including inventory growth.
- Revenue declined in each reportable segment for the first nine months: Bausch + Lomb/International 10%, Salix 9%, Ortho Dermatologics 3% and Diversified Products 9%. Salix Q3 revenue was down 10%, including lower realized pricing and volume; its sales remained concentrated in Xifaxan.
Outlook, management commentary and material risks
- COVID-19: Management described operations and supply as largely maintained, while medical-office closures, postponed procedures and reduced consumer activity had weighed on revenue. It expected further year-over-year declines in some businesses in Q4 2020, with a gradual, uneven recovery and affected businesses potentially returning to pre-pandemic levels in late 2020 or 2021 if restrictions did not materially return. These are conditional expectations, not formal revenue guidance.
- Management expected operating expenses to increase in Q4 from Q3 as selling, promotional and product-development activity resumed. Clinical-trial enrollment had improved during Q3, but renewed restrictions could delay trials, approvals and launches.
- Eye-health separation: Announced in August 2020, the proposed transaction would create a standalone Bausch + Lomb entity and a diversified pharmaceutical company. The company was evaluating structure and capitalization; completion remained subject to approvals and other conditions, with no assurance it would occur. Management targeted readiness before the end of 2021 and expected to begin reporting realigned segments in 2021. Future separation costs could be material and were not yet estimable.
- Debt and liquidity: Debt remained substantial, with significant principal payments scheduled from 2023 onward, including $10.632B in 2025. Management cited refinancing and debt repayment efforts, but covenant compliance, refinancing access, interest rates and cash generation remain important risks.
- Legal matters: A $1.210B U.S. securities-class-action settlement remained subject to final court approval. $1.010B was in escrow at quarter-end, with another $100M paid in October. Accrued current legal contingencies totaled $1.462B. The company also reported ongoing opt-out securities cases, antitrust and other litigation, and investigations. It reached a $45M SEC settlement without admitting or denying the allegations; the AMF closed its investigation.
- Other notable items: The company paid $10M for an option related to Allegro ophthalmology assets, including investigational risuteganib; exercising the option would require additional payments. Generic competition and patent challenges, pricing and reimbursement pressures, and potential product or goodwill impairments remain risks. No goodwill impairment was recorded in the period; management planned its annual test for October 2020.
Most important facts for investors to verify
- Whether the U.S. securities settlement receives final court approval, and the timing and funding of remaining settlement payments.
- Whether operating cash flow recovers from the nine-month decline and how much of reported cash is unrestricted and available for operations.
- Debt repayment, refinancing and covenant headroom as maturities approach, particularly the large 2025 principal requirement.
- Actual Q4 and subsequent revenue trends against management’s conditional COVID-19 recovery expectations, including segment-level pricing, volume and expense changes.
- Progress, costs, approvals and proposed capitalization of the eye-health separation, and whether it is completed on the anticipated timeline.
- Developments in key litigation and investigations, generic-entry and patent outcomes for major products such as Xifaxan, and any resulting effects on sales, liabilities or impairment assessments.