2023-05-10 08:44:59 ET
Summary
- Bausch Health has been through rough times, leading to skepticism among investors.
- Its investment potential, however, has been on the upswing since 2016, when Joseph Papa took over as CEO.
- With Thomas Appio taking over and picking from where Papa left off, I am confident that the company is on the right trajectory.
- I am bullish on the stock in the long term but beware of the potential risks which could affect my thesis materially.
Introduction
Bausch Health Companies Inc. (BHC), initially known as Valeant Pharmaceuticals International, is a global pharmaceutical corporation with operations in over 100 countries . Its main business is creating, making, and selling medicines, products for eye health, and medical devices. The company has been through a rough time in its history. It started with a number of acquisitions and measures to cut costs, which caused the stock price to drop sharply. Its investment potential, however, has been on the upswing since 2016, when Joseph Papa took over as CEO. In this article, I will examine BHC to determine if it's a solid investment prospect as of 2023.
Company Overview
BHC is based in Laval, Quebec, Canada, and has more than 21,000 workers around the world. The company was started in 1959 as ICN Pharmaceuticals. Over the years, it has had a number of different names. In 2018, Bausch Health Companies became the company's official name after a one-year rebranding process.
The company has three divisions: Bausch + Lomb/International, Branded Rx Pharmaceuticals, and Salix. Compared to Branded Rx Pharmaceuticals, whose primary business is creating and distributing prescription pharmaceuticals, Bausch + Lomb/International specializes in producing and selling items for the care of the eyes. Finally, Salix is committed to developing medicines for the digestive system.
Bausch + Lomb/International generates most of Bausch Health Companies' revenue, with Branded Rx Pharmaceuticals and Salix contributing a smaller proportion. Below is its revenue contribution per business segment.
Market Performance: BHC Volatility
Its stock price has fluctuated dramatically over the past decade, mirroring the ups and downs of the company's history. The corporation's stock price remained generally stable between $20 and $40 per share from 2010 to 2015. The company started a spree of acquisitions in 2015, including Salix Pharmaceuticals and Dendreon, which increased its debt to unmanageable levels. After charges of accounting fraud and price gouging surfaced in 2016, the company found itself in a precarious position.
The news sent the company's stock price tumbling; by the end of 2017, it had fallen to a low of $8.31. However, 2016 saw the beginning of a new era for BHC with the appointment of Joseph Papa as CEO. Papa has led the company through an array of initiatives that have improved its financial standing. Some of these measures have included selling off non-essential assets, lowering debt, and spending more on R&D.
Its stock price has increased steadily since 2017 thanks to these initiatives. The company's stock price tripled between 2017 and 2021, from approximately $11 per share to about $34. Higher operational expenses due to historically high inflation and foreign exchange headwinds can explain the roughly 54% decline in its stock price over the past year. The current drop in share prices is not the product of poor management but a problem in the macroenvironment over which management has no sway.
Investment Potential: Moving On From Historical Setbacks
Since the company has a checkered record, prospective investors understandably feel uneasy about putting money into it. However, the company's recent performance and its ambitions for the future do provide some grounds for optimism about an investment in this business.
The company's commitment to research and development is one of the factors that makes it worth investing in. The corporation has recently spent a lot of money on R&D, especially for creating new medicines and medical equipment. The VYZULTA eye drops are just one example of the fruition of this emphasis on innovation.
BHC's financial performance is another factor worth considering if you're thinking about investing in the firm. Its sales and net income both fell in MRQ, primarily due to the effects of macroeconomic factors such as currency depreciation and inflationary pressure on the healthcare sector. Despite these difficulties and the lasting impacts of covid 19, the company's revenues and net income trended upward. I expect the trend to continue once these difficulties abate because they are seasonal.
The debt levels of the corporation have also been reduced in recent years. Debt levels for the corporation are down to $21B billion from 2016's reported $30.2 billion. Based on the evidence presented, investors should feel confident in the company's ability to make sound financial decisions under the new CEO, Appio , and his predecessor Papa.
Building On Papa's Progress For Future Prosperity
Thomas Appio has recently been appointed CEO and plans to take the company to new heights by expanding upon the foundation laid by his predecessor, Papa. To begin, the new CEO is emphasizing R&D spending, which is, in my opinion, vital in their industry. During the first quarter of the 2023 earnings call, the new CEO emphasized the company's resolve to increase R&D spending, but with greater discipline, to woo the most lucrative consumer base.
Thomas Appio ," Firstly, through operational excellence and focused investments in key businesses that have growth opportunities such as Salix, Solta, Dentistry and International business. Starting in the back half of 2022 and continuing this year, we are increasing our investments in sales, marketing and R&D to accelerate growth in Salix."
In addition, under the leadership of the new CEO, the company is speeding up several areas of its planned R&D effort and increasing the emphasis and operational rigor behind R&D and commercial development.
The firm's leadership is dedicated to bolstering its balance sheet. Bausch Health, excluding B+L, paid down debt by about $100 million in the first quarter of 2023. This amount includes repayments to the company's revolver.
When taken together, these activities suggest the company is heading in the right direction and that the new CEO is living up to his promise of making improvements since taking over. He is also committed to doing that.
Thomas Appio ," When I took over as CEO, I told you I wanted to create a fit-for-purpose company and we will continue on that journey, looking to simplify our business, invest wisely and grow profitably. We will also improve our capital structure and I've already made significant progresses in delevering the balance sheet."
Guided by the new CEO's commitment and ambitions, which are reflected in this section, I am optimistic about the company's future under the leadership of Appio. I dare say there is no void following the exit of Papa as CEO.
Valuation
According to relative valuation criteria, BHC is a decent investment. The firm is currently selling at a GAAP PS ratio of 0.26X and a price/cash flow ratio of 1.73X, both of which are significantly below the corresponding industry medians of 4.13X and 15.68X. This suggests investors have a cheaper entry point since the company is undervalued.
Potential Risks
Investing in BHC carries risks, just like any other investment. The company's history presents a significant threat. The failure of the business may be traced back to when the previous CEO Michael Pearson oversaw a period of aggressive mergers and cost-cutting. Its current leadership must assure shareholders that they have taken precautions to prevent a recurrence of this kind of activity.
The pharmaceutical market is extremely competitive, which poses another risk for the corporation. The company's future hinges on its capacity to create and sell cutting-edge pharmaceuticals and medical equipment. BHC risks a drop in market share and revenue if it is unable to stay up with rivals.
Finally, the company's Bausch + Lomb/International division is a major contributor to overall sales. If revenues in this area were to drop, it might seriously influence the company's bottom line.
Conclusion
In conclusion, BHC has a checkered past and a bright future. The corporation has taken action to reduce its debt, increase its spending on R&D, and sell off its non-essential assets under the direction of CEO Joseph Papa.
Investment in BHC has risks, including the company's history and the intense competition in the pharmaceutical sector. However, the company's emphasis on innovation and financial stability gives investors reason for optimism that it will be a successful long-term investment. If you're an investor willing to take on some risk, this stock may be a good addition to your portfolio as of 2023. However, if you're risk-averse, I recommend waiting until the current headwinds subside.
For further details see:
Bausch Health: Bullish On Long-Term Prospects, Awaiting Subsiding Headwinds