Bausch Health Companies Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited consolidated results are in U.S. dollars; financial amounts below are in millions unless noted.
Business context and financial performance
Bausch Health develops and sells pharmaceuticals, OTC products and medical devices, with businesses focused on eye health, gastroenterology and dermatology. Its reportable segments are Bausch + Lomb/International, Salix, Ortho Dermatologics and Diversified Products.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $1,664 | $2,152 | $3,676 | $4,168 |
| Operating income (loss) | $(27) | $257 | $221 | $544 |
| Net loss attributable to Bausch Health | $(326) | $(171) | $(478) | $(223) |
| Loss per share | $(0.92) | $(0.49) | $(1.35) | $(0.63) |
| Operating cash flow | Not separately stated for the quarter | $461 | $752 |
Q2 product sales were $1,637 million; cost of goods sold, excluding amortization and impairments, was $482 million. The resulting gross margin was approximately 70.6%, versus 72.7% a year earlier. For the six months, the comparable gross margin was approximately 72.8%, versus 73.1%. These percentages are calculated from reported figures.
Q2 total segment profit was $680 million (41% of revenue), down from $942 million (44%). For the first half, segment profit was $1,574 million (43%), versus $1,842 million (44%). Interest expense was $385 million in Q2 and $781 million for the first half.
Liquidity, debt and balance sheet
- At June 30, cash and cash equivalents were $896 million; current restricted cash was $1,011 million, including approximately $1,010 million in escrow for the U.S. securities settlement. Total current assets were $5,278 million and current liabilities were $4,718 million.
- Long-term debt, net of discounts and issuance costs, was $24,358 million; contractual principal was $24,629 million. The weighted-average stated interest rate was 5.95%.
- The company had no revolver borrowings, $94 million in letters of credit and $1,131 million of available capacity under its $1,225 million revolving facility. It reported covenant compliance and expected to remain compliant and meet debt service for at least 12 months after filing.
- Operating cash flow of $461 million was down $291 million year over year. Investing activities used $107 million and financing activities used $1,674 million in the first half.
Material changes versus the prior comparable period
- Revenue fell 23% in Q2 and 12% for the first half. Management attributed the decline mainly to COVID-19 restrictions and lower volumes, alongside generic competition, foreign exchange, sales deductions and divestitures or discontinuations.
- Q2 declines affected all segments: Bausch + Lomb/International revenue fell 27%, Salix 21%, Diversified Products 17% and Ortho Dermatologics 5%. First-half revenue changes were respectively down 14%, 8%, 13% and 4%.
- Q2 operating results deteriorated to a loss, primarily reflecting a $387 million decrease in contribution from product sales, partly offset by lower SG&A, R&D and amortization expenses. Other expense, net rose to $107 million, including litigation-related adjustments.
- First-half debt principal declined by approximately $1.56 billion from year-end 2019. In May, the company issued $1.5 billion of 6.25% notes due 2029 and used proceeds and cash to refinance 2022 obligations, including $1.25 billion of secured notes and $303 million of term-loan amortization.
Outlook, commentary, risks and unusual items
- Management said Q2 was expected to be the most affected quarter of 2020, but anticipated further year-over-year revenue declines in Q3 and possibly later in the year. If restrictions were not reinstated, affected businesses could potentially return to pre-pandemic levels as early as late 2020 or in 2021; timing and pace depend on geography and other uncertain factors.
- COVID-19 had limited supply and manufacturing disruption as of filing, but reduced demand, deferred elective procedures, paused clinical-trial enrollment and increased inventory. Inventory was up 11% from year-end. Management reported over five months of Xifaxan finished goods and enough API for another nine months of production as of July 31.
- The company reported no goodwill impairment, but Ortho Dermatologics’ estimated fair value exceeded carrying value by only 10%–15% in its June quantitative test. Further deterioration could require material impairment charges.
- Accrued current legal contingencies were $1,505 million. The $1.21 billion U.S. securities class-action settlement remained subject to final court approval; $1.01 billion was in escrow. The company also reported an SEC settlement resolving allegations for a $45 million civil penalty, without admitting or denying the allegations. On August 4, it agreed to a CAD 94 million settlement of the Canadian Catucci action, subject to court approval.
- On August 6, the company announced its intention to spin off its eye-health business, subject to conditions and approvals; there is no assurance the transaction will be completed. Management provided no numerical revenue or earnings guidance in the supplied filing text.
- Key risks include COVID-19 effects, substantial debt and covenant compliance, generic competition and patent challenges (including Norwich’s Xifaxan filing), ongoing litigation and investigations, pricing and reimbursement pressure, and execution of the proposed spin-off.
Important facts for investors to verify
- Final court approval, funding and payment status of the U.S. securities settlement, and approval and terms of the Canadian settlement.
- Whether demand and segment profitability recover as anticipated, particularly following Q2 declines and deferred procedures.
- Debt service, refinancing needs, covenant headroom and the availability of revolver capacity; distinguish unrestricted cash from settlement escrow.
- Developments in Xifaxan patent litigation and the implications of generic entry or licensing arrangements.
- Progress, conditions, timing, tax treatment and potential costs or dis-synergies of the proposed eye-health spin-off.
- Whether Ortho Dermatologics’ goodwill valuation headroom remains adequate and whether future forecasts trigger impairment testing or charges.