2023-05-09 05:24:52 ET
Summary
- Bausch Health has been struggling for years now following the Valeant implosion.
- The business has been hurt by a huge debt load and associated interest expenses.
- The spin-off of Bausch + Lomb has not changed the outcome either, as the business sees continued erosion in its results.
- Potential to deleverage is limited, as investors are likely waiting for continued stagnation and uncertainty to come.
- The situation is uncertain, but the low equity component leaves potential for a spike higher upon potential green shoots.
Last summer I called shares of Bausch Health ( BHC ) uncertain, far from healthy, but potentially a lucrative investment. The company continued to struggle after it proceeded with an ill-timed spin-off of Bausch + Lomb ( BLCO ) .
Uncertainty on the situation and a rapidly rising interest environment, being a bad thing for an overleveraged business of course, added to the uncertainty.
A Recap
Bausch Health is the successor of Valeant, whose name was too impaired to use after its implosion. Following this collapse, Valeant still was an $8.7 billion business in 2017, posting $3.6 billion in EBITDA (note that this was adjusted EBITDA), as net debt of $25 billion overshadowed the investment case of course.
Following a few years of stagnation, with largely flattish sales and margin developments, net debt has come down a bit to $20 billion in 2021. The 360 million shares of Bausch Health traded at $27 at the time, granting the business a $10 billion equity valuation, and an $30 billion enterprise valuation as investors were still quite upbeat.
The idea was that further deleveraging and the spin-off of Bausch + Lomb should provide a boost (to reduce leverage) in Bausch Health, but that went wrong. This came after the business posted flattish results in 2021, with sales reported at $8.4 billion and EBITDA coming in at $3.5 billion.
There were three issues. For starters, it was that the company guided for 2022 sales at $8.5 billion and EBITDA at $3.5 billion, but after a softer first quarter, the company cut the guidance on both fronts by $200 million. That created a real setback for the hope of stagnation, or even a bit of growth.
The second was that Bausch + Lomb, the eye business of the company, saw a soft public offering. Bausch Health sold 35 million shares at $18 per share, far below the preliminary price of $21-$24 per share. The remaining 315 million shares were valued at $5.7 billion at the offer price, although Bausch Health managed to transfer $2.2 billion in net debt to that business as well.
Third was that interest rates were rising rapidly and despite the spin-off, the company was still very much exposed to higher interest rates as well, although it would take a longer period of time to be fully factored in.
In either case, leverage at Bausch Health would remain elevated, creating some uncertainty on the equity part of the business for some time to come. Shares traded at $10 in May, as they fell to $8 per share in July as the market was nervous on its prospects. Moreover, shares of Bausch + Lomb have fallen to $15 per share, reducing the value of the stake held by Bausch Health, as speculative was my end conclusion on the investment thesis.
What Happened?
Since last summer shares fell to the $5 mark in July and ever since have traded in a $6-$10 range, now trading hands at $6 per share as investors had to endure quite some volatility. Shares of Bausch + Lomb have largely traded in around the $15 mark, and given the lower leverage profile and more stable operations, shares have gradually moved back up to the IPO mark at $18 per share.
Forwarding to February of this year, we have seen reported sales down 4% to $8.1 billion, with currency headwinds creating a three point headwind to reported sales growth. As the company still holds a majority stake in the business, the company reported a 7% fall in Bausch Health revenues to $4.4 billion, with Bausch + Lomb sales coming in flattish at $3.8 billion.
This was only part of the story as adjusted EBITDA fell further to $3.0 billion, worrisome as net debt in fact has not come down further, reported at $20.2 billion. Associated net interest expenses were quite stable at $1.5 billion, with quite some loans being financed with longer maturities.
The company only provided guidance for Bausch Health, as Bausch + Lomb is now a separate business of course, as Bausch Health sees revenues increase a bit to $4.45-$4.60 billion, with adjusted EBITDA seen between $2.3-$2.4 billion. Moreover, the company has ongoing patent litigation on XIFAXAN, at which it stands to lose quite some profitable sales of course.
Early in May, the company posted a 1% increase in first quarter sales to $1.94 billion, with constant currency sales up 3%. The Bausch Health business reported a 2% decline in sales to $1.01 billion, with Bausch + Lomb revenues up 5% to $931 million.
As Bausch + Lomb has started to provide an outlook, Bausch Health has now issued a full year guidance for sales around $8.45 billion, plus or minus a hundred million, with EBITDA stuck around $3.00-$3.15 billion. Net debt is again stuck at $20.2 billion, although it still includes about $2.6 billion in debt assumed from Bausch + Lomb.
And Now?
The 363 million shares of Bausch Health have fallen to $6 per share, granting the company a market value of just $2.2 billion, which together with net debt works down to a $22.4 billion enterprise valuation, according to my math. The 315 million shares held in Bausch + Lomb value equity of Bausch Health in the firm at $5.7 billion.
This makes that if Bausch Health can sell its shares and "divest" the debt of Bausch + Lomb at these levels, it could reduce net debt by $8.3 billion. This could lower net debt from $20.2 billion to $11.9 billion. That only solves part of the story as Bausch Health is set to generate $2.3 billion in EBITDA, but contrary to Bausch + Lomb its business is in decline. Even with $2.3 billion in EBITDA, leverage is still seen at 5.2 times EBITDA, as this might be prohibitive for such a route.
While refinancing risks are relatively limited, some maturities are coming up in the coming years while the core business sees continued erosion, all of which makes me quite cautious here, as quite frankly there are few reasons to be upbeat. That said, equity of the firm is valued at low levels, creating potential upside, but the situation remains extremely speculative, perhaps more speculative than was the case last year with debt reduction having come to a near standstill.
For further details see:
Bausch Health: There's Still Uncertainty