Bausch Health Companies Inc.
Moat: 2/5
Understandability: 3/5
Balance Sheet Health: 2/5
Bausch Health Companies Inc. is a multinational pharmaceutical and medical device company that develops, manufactures, and markets a broad range of products primarily in the areas of eye health, gastroenterology, and dermatology.
Investor Relations Previous Earnings Calls
The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.
Bausch Health, headquartered in Canada, has a global footprint, with approximately 30,000 employees and a presence in over 100 countries. The company sells its products directly through its own sales force in the U.S., and largely though distributors in foreign countries.
Business Overview
Bausch Health operates through four reportable segments:
- Salix: Focuses on gastrointestinal products, including Xifaxan, Apriso, and Relistor.
- International: Sells a broad range of products including all business segments outside of the U.S., primarily including branded generics in international markets.
- Solta Medical: Focuses on aesthetic medical devices such as Clear + Brilliant, Fraxel, and Thermage.
- Bausch + Lomb: Specializes in eye-health products, including pharmaceuticals, contact lenses and lens solutions, and surgical devices.
The Salix segment represents 59% of Bausch’s net revenue for the nine months ended September 30, 2022. Revenue for this segment was up by 6% compared to prior year same period. The international segment accounts for 24.2% of the revenue while Solta and B+L made 7.7% and 9%, respectively.
Trends in the Industry
The pharmaceutical and medical device industries are characterized by:
- Intense competition and the need for constant innovation.
- Significant regulatory hurdles and a long product approval process.
- High marketing and sales expenses to build brand loyalty and customer recognition.
- Increasing price pressures from governments, payers, and competition.
Competitive Landscape
Bausch Health competes with other pharmaceutical and medical device companies, including both large and generic manufacturers. Key competitors include:
- Generic Pharmaceutical Companies
- Consumer Healthcare Companies
- Medical Device Companies
What Makes the Company Different?
- A diverse portfolio of pharmaceutical and medical device products across different therapeutic areas.
- Global reach with significant revenues from international markets, especially Asia.
- A well-established brand presence for some of their products, particularly in the eye care area through Bausch + Lomb.
Financials Analysis
- Revenue: The Company reported revenues of $2.12 billion in Q3 2022 which is lower than the $2.2 billion in the same quarter of 2021. However, excluding the impact of foreign exchange, revenues were up in Q3 2022 by 1%. For the nine months ended September 30, 2022, revenue was $6.3 billion which is up by 3% compared to the last year. On the other hand, revenues for 2021 and 2020 are $8.43 billion and $7.98 billion, respectively.
- Gross Profit: The gross profit margin has been approximately 70% in the past, however, gross profit margin for the first nine months of 2022 was around 67%. The management is confident that this is a temporary dip, and they can rebound to prior levels.
- Net Income: The company is struggling to make a profit, with a net loss of approximately $1.2 billion in the nine-month period ended September 30, 2022. Net income for 2021 was $-1.8 billion and $-2.4 billion for 2020.
- Liquidity and Leverage: The company is struggling with the load of its debt, it currently has $19.5 billion in long term debt, while it maintains about $400 million in cash and equivalents and roughly $1 billion in receivables. The company’s CFO mentioned that the company expects debt to be $16.5 million at the year end. As the company’s debt is higher and profitability is fluctuating, it can cause concerns regarding the company’s financial health.
- Cash Flow: For the nine-month period ended September 30, 2022, the cash used in operating activities totaled $-182 million, cash used in investing activities totaled $-640 million, and cash from financing activities was $978 million. The free cash flow was about -$500 million.
- Debt Profile: The company’s debt is highly structured and complicated, consisting of a mix of senior notes, senior secured notes, unsecured notes, term loans, and other debt instruments, across several different maturities, some of the maturities extending into the 2030s.
Recent Concerns/Controversies and Management Response
- Litigation and Regulatory Concerns: Bausch Health faces a number of ongoing investigations and litigation relating to product liability, securities, patents, and government regulations. According to the report, the company maintains that they have meritorious defenses to the claims. In 2022, the company incurred $268 million of litigation-related expenses, compared to just $126 in the full year of 2021. There is also a possibility of further financial implications from the various cases
- Financial Reporting and Internal Controls: The company has recently made changes to its financial reporting and internal controls, and had its internal control identified as a material weakness. Bausch has acknowledged that they need additional work to remediate the weaknesses in internal control over financial reporting which may affect future financial statements. In the past few months, this has led to concerns about the reliability of financial data.
- High Debt Levels: The company has been facing increased scrutiny from stakeholders and shareholders for maintaining a high amount of debt on their balance sheet. The company has been forced to restructure the business and sell parts of it to cope up with this debt. Management expects the level of debt to fall in upcoming years. This has raised concerns among investors regarding solvency and financial health. Management acknowledges that reducing the debt is a high priority and they are working to do it through a mixture of actions, which include debt repayments and divestments.
- Dependence on Single Product: A large portion of Bausch Health’s revenue is attributable to its Salix business and drugs such as Xifaxan. This means that loss of exclusivity, or other adverse developments to this drug, could cause a major fall in revenue. The company is actively developing other segments, especially Bausch + Lomb, to reduce its reliance on Xifaxan.
- Divestitures: The company has recently sold several of its business segments to generate funds to pay down its debt. However, those transactions also reduced the company’s earnings. The company intends to continue this process, and it could be concerning if the company’s management continues to prefer divestitures in exchange for debt reduction without considering growth strategies.
Moat Analysis
Based on Morningstar’s definition, moats can be categorized by:
- Intangible Assets: These could be brand, patents, or regulatory licenses that allow the company to produce unique products or services that cannot be replicated by competitors.
- Switching Costs: The costs that a customer has to incur in order to switch to a product or service from a competing company.
- Network Effect: It refers to situations where the value of the company’s service increases as the number of its users increase.
- Cost Advantages: Cost advantages refer to the company’s ability to sell its products at a cost lower than the competition.
Bausch Health scores low on most of these metrics:
- Intangible Assets: Bausch Health does have many patents and regulatory licenses on its products, but these expire in a few years, which means that competitors will likely come in soon. The company does not have an innovative culture, therefore it cannot be considered as having durable advantage. Brand strength also isn’t a very big factor for pharmaceuticals.
- Switching Costs: Although, there are some switching costs for medical devices like contact lenses, it isn’t significant. It is very easy for the competitors to launch a competing version of contact lenses. For other segments, switching costs are even lower.
- Network Effect: Network effect plays a very limited role in the business of Bausch, it is mostly a business with physical products. Therefore, this factor is not of much importance here.
- Cost Advantages: Though, Bausch has a large scale and has some scale-based advantages, it is nothing noteworthy. In the industries it operates in, it is usually possible for others to build similar manufacturing and distributions channels, especially as they are known to manufacture generics.
Therefore, a moat rating of 2/5 is assigned to Bausch Health, owing to low level of durability, scalability and defensibility of their advantages.
Understandability Rating
Assign a score between 1 and 5, where 1 is simple and 5 is complicated, for business understandability. This measure evaluates the simplicity and clarity of the business model and operations. Bausch Health’s business model has complexity due to:
- A complex product portfolio that covers a wide range of pharmaceuticals, medical devices, and other healthcare products.
- A highly regulated industry with a complex set of approval processes and regulations.
- Operating in different countries with different regulations and different business environment.
- A complicated financial structure involving several different liabilities. Thus, a rating of 3/5 is given, which means that the business is moderately complex to understand.
Balance Sheet Health Rating
Assign a score between 1 and 5, where 1 is unhealthy and 5 is very healthy, for financial health. This measure represents the company’s ability to manage its balance sheet, maintain liquidity, and reduce risks. Bausch Health’s balance sheet health is assessed as:
- Company is struggling with high debt load, which is more than its market cap.
- Operating profits are minimal.
- The risk of default is significant.
- Operating and investing cash flows are mostly negative.
- The company’s debt is highly structured and complex. Therefore, a rating of 2/5 is given, indicating poor health of the balance sheet.