5 Jul

Is Bausch Health Becoming a Successful Turnaround Story?

WRITTEN BY Margaret Patrick

Share price movements

Bausch Health (BHC) has gained 20.13% in the last month and is up by 38.93% in 2019 on a YTD basis. Investors seem impressed by the company’s commercial progress as well as a disciplined approach to debt repayment.

In the first quarter, the company reported revenues of $2.02 billion, a YoY rise of 1.05% but lower than the consensus by $12.5 million. The company’s adjusted EPS of $1.03, however, beat the consensus by $0.18. After this news, Bausch Health rose by 8.70% and closed at $25.48 on May 6. The positive investor sentiment drove the stock as high as $26.45 on May 8.

But even a slight increase in the liabilities of this debt-ridden company has a dramatic impact on its share prices. On May 9, the company announced pricing of the private offering of senior notes, retiring in 2028 and 2029. This news became one of the major factors pushing down the stock to $20.73 on May 31.

Bausch Health has recovered much of its stock price in June 2019 after it announced a slew of positive developments. On June 19, the company announced the US commercial launch of Bausch + Lomb ULTRA® Multifocal for Astigmatism Contact Lenses, a multifocal toric lens, for patients suffering from astigmatism and presbyopia. On June 25, the company announced the US commercial launch of DUOBRII, a topical lotion indicated for plaque psoriasis in adults. On the same day, the company also announced an additional $100 million repayments of senior secured term loans, thereby eliminating all mandatory amortization that would have been required by the end of the first quarter of fiscal 2020.

On Thursday, Bausch Health closed at $25.66, 1.70% higher than the previous close, 49.19% higher than the 52-week low price of $17.20, and 9.81% lower than the 52-week high price of $28.45.

Financial forecasts for Bausch Health

In the first-quarter earnings call, Bausch Health raised its fiscal 2019 revenue guidance from $8.30 billion to $8.50 billion to $8.35 billion to $8.55 billion and fiscal 2019 non-GAAP EBITDA guidance from $3.35 billion to $3.50 billion to $3.40 billion to $3.55 billion. The company maintained its guidance of non-GAAP selling, general, and administrative, research and development, and interest expenses of $2.45 billion, $455 million, and $1.60 billion, respectively.

Bausch Health has forecasted fiscal 2019 gross margin of 71% to 72%. The company, however, updated its non-GAAP effective tax rate guidance for fiscal 2019 from 10% to 8% to reflect the impact of favorable tax ruling and favorable pre-tax earnings by tax jurisdiction. The company has guided for around a 10% effective non-GAAP tax rate for fiscal 2020 and beyond.

In the first quarter earnings call, Bausch Health reaffirmed guidance for average fully diluted share count of 360 million. The company has reiterated its fiscal 2019 capital expenditures and restructuring and other expenses of $275 million and $50 million, respectively. The company, however, changed its fiscal 2019 guidance for depreciation from $185 million to $180 million, for stock-based compensation from $95 million to $100 million, and for contingent consideration/ milestones/license agreements from $50 million to $60 million. The company also expects cash flow from operations of $1.5 billion to $1.6 billion in fiscal 2019.

Revenue drivers

Bausch + Lomb International and Salix are the key revenue drivers for Bausch Health. These segments accounted for almost 77% of the company’s revenues and together reported 7% YoY organic revenue growth in the first quarter. According to the first-quarter earnings investor presentation, only 40% of Bausch Health’s revenues are exposed to branded prescription pricing pressures in the US.

Bausch + Lomb International segment

According to the first-quarter earnings call, Bausch + Lomb International reported 8% YoY organic revenue growth, which marked the highest YoY quarterly growth rate ever recorded for the segment since its acquisition by the company in 2013. To know more about the Bausch + Lomb International segment, please refer to What’s BHC’s Major Revenue Driver in Fiscal 2019?

According to the first-quarter earnings call, Global Ophtho Rx is currently the fastest growing business in the Bausch + Lomb/ International segment with YoY organic revenue growth of 16% in the first quarter. Robust demand for Vyzulta indicated for reducing intraocular pressure in open-angle glaucoma or ocular hypertension patients and rapidly increasing access for LOTEMAX SM, a gel formulation indicated for postoperative inflammation and pain, has been driving this growth.

According to the first-quarter earnings call, Global Vision Care was the second-best performing business in the Bausch + Lomb International segment based on YoY organic revenue growth of 9%. The robust uptake of BioTrue ONEday family of daily disposables and ULTRA silicone hydrogel lens in the US pushed up US vision care’s business organic revenue growth YoY by of 17%, far above the average US contact lens market growth of 7%. International Vision Care business has also benefitted from solid uptake of the company’s lenses in China and Japan.

According to the first-quarter earnings call, Ocuvite, eye vitamins, PreserVision, and the redness reliever, LUMIFY, are the key growth drivers of the company’s Global Consumer business. E-commerce is also emerging as a major channel for this business. However, the global shift to daily lenses is expected to have a negative impact on the company’s solutions business within the Global Consumer segment.

Salix segment

Despite $26 million worth revenue loss due to loss of exclusivity of Uceris, the Salix segment managed to report 5% YoY organic revenue growth in the first quarter. The robust prescription growth of Xifaxan in the IBS-D (irritable bowel syndrome with diarrhea) indication, as well as solid uptake of Relistor and Glumetza, have been key drivers of Salix’s revenues. To know more about Xifaxan, please refer to BHC’s Salix Segment: Xifaxan Drove Its Revenues in Q1.

According to the first-quarter earnings investor presentation, Bausch Health is also involved in four late-stage research programs to target opportunities in gastrointestinal indications such as small intestinal bacterial overgrowth, post-operative Crohn’s disease, acute overt hepatic encephalopathy, and prevention of complications of decompensated cirrhosis.

Beyond organic growth, Bausch Health is actively involved in bolt-on acquisitions to further bolster its Salix portfolio. The company announced the completion of the acquisition of certain assets of Synergy Pharmaceuticals in March 2019. The deal added Trulance, a drug indicated for IBS-C (irritable bowel syndrome with constipation) and CIC (chronic idiopathic constipation), as well as early-stage asset, dolcanatide, to Bausch Health’s portfolio. With Trulance and Xifaxan, Bausch Health can establish a strong presence in the growing IBS market. Trulance is expected to report $55.0 million in revenues in fiscal 2019. To know more about Trulance, please read An Overview of Trulance: Synergy Pharmaceuticals’ First Commercialized Drug.

Bausch Health is also exploring licensing deals to further bolster its gastrointestinal portfolio. The company has entered into an in-licensing agreement with the University of California for the development and commercialization of therapy for non-alcoholic fatty liver disease and non-alcoholic steatohepatitis. The company also entered into a licensing agreement with Mitsubishi Tanabe for developing and commercializing the latter’s late-stage asset targeting inflammatory bowel disease and ulcerative colitis.

Significant Seven

Bausch Health expects seven assets, called the Significant Seven, to report annualized peak total revenues of more than $1.0 billion by the end of 2022. This revenue performance will be exemplary, considering that these assets have together earned less than $100 million in revenues in 2017. Revenues from these products rose YoY by more than 125% in the first quarter.

Each of these assets has been reporting robust uptake trends in their respective approved indications. At the end of the first quarter, Relistor had managed to attain more than a 35% share of the monthly TRx (total prescription) retail dollar market in the opioid-induced constipation indication. Vyzulta reported more than 300% YoY increase in TRx weekly prescriptions, while Lumify emerged as the number one player in the redness reliever indication with a 20% market share. The company has highlighted the rapid onset of action of Siliq, which can prove to be an important consideration driving the uptake of this drug. The company has launched Aqualox lenses in Japan and plans to commercially launch the product in the US in fiscal 2020. Finally, the company expects robust demand trends for its dermatology drugs, Bryhali and Duobrii, in the future.

Challenges

Bausch Health depends heavily on the success of its Significant Seven to generate cash flows which can, in turn, be used to repay debt. At the end of the first quarter, the company carried a total debt of $25.57 billion and net debt of $24.66 billion on its balance sheet. The cash on the company’s balance sheet, however, was only $784 million.

In this backdrop, pricing pressures and increasing competition for its products can pose a significant challenge to the revenue growth prospects and subsequent loan repayment capacity of Bausch Health.

Bausch Health’s valuation

Bausch Health is currently trading at a forward PE multiple of 5.94x. Its non-GAAP EPS are expected to increase 5.13% in fiscal 2019 and by 3.54% in fiscal 2020. The stock looks slightly valued based on analysts’ estimate of its future five-year EPS growth rate to be 5.80%. The stock may seem significantly undervalued on a relative basis, but the higher price discount is attributable to the exceptional level of debt on its balance sheet.

The 17 analysts tracking Bausch Health have an average target price of $30.93 on its stock, indicating a potential upside of just 20.54% in the next 12 months.

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