2023-06-07 07:00:00 ET
Summary
- Markets overreacted to Norwich suing the FDA.
- Investors must consider recently reported weak Q1 results of Bausch Health.
- Reasons BHC stock is a buy from here.
Last summer, Bausch Health ( BHC ) traded with wild 11% drops . Volatility in BHC stock fell after that as shares consolidated in the high single digits. The stock met resistance after the break-out to $10.00 this year. It fell by ~15% after posting first-quarter losses and a revenue miss.
In recent weeks, Bausch Health soared after a favorable court ruling against Norwich about the Xifaxan drug . Shares gave up half of those gains when Norwich sued for final FDA approval of Xifaxan on June 6, 2023.
How do many stock price swings in the last year in reaction to the Norwich lawsuit change the “buy the dip” thesis? Does the court's decision on the “skinny label” decision outweigh its weak Q1 earnings report?
Stock Volatility
Stocks that break out abruptly and break down are most suitable for traders. In the long run, a stock that swings in a range ends up nowhere. Investors end up breaking even in the best-case scenario.
The company is still trading well off its highs from 2021-2022. It needs sustained positive market sentiment from the legal proceedings to trend higher. In addition, BHC cannot afford to post quarterly losses.
In the quant factor grade table below, Bausch Health has a B- on valuation. Teva ( TEVA ), a generics drug giant, Organon ( OGN ), and Viatris ( VTRS ) score a B+, A-, and A, respectively. Despite their good value, investors are avoiding those stocks, too.
Momentum is the only advantage BHC stock has compared to other beat-up stocks.
Below: BHC competes with generic drug makers for under-performance.
Norwich Sues Bausch Health
On June 6, 2023, Norwich Pharma, a generic drugmaker, filed a lawsuit against the Food and Drug Administration. It requested that the court direct the FDA to immediately grant Final Approval to the Approval of its Abbreviated New Drug Application for XIFAXAN (rifaximin) 550 mg.
The FDA had granted Norwich a Tentative Approval of its ANDA for Xifaxan. It also confirmed that it cannot grant Final Approval until Oct. 2, 2029.
Bausch Health said that the lawsuit is an attempt to avoid the Final Judgement. Markets sent BHC stock down by 8.69% on the day. BHC needs to intervene in Norwich’s lawsuit against the FDA. This potentially costs the management team its time and distracts them. Investors face a greater risk of the company underperforming in the next quarter.
Market Overreaction
Markets are likely overreacting to Norwich’s lawsuit. The firm has a low chance of prevailing in court against the FDA. Bausch Health’s management may rely confidently on its legal team in the lawsuit. This enables them to focus on the company’s business performance. It already disappointed investors when it posted a loss in the last quarter. In addition, the results missed consensus estimates .
Fortunately, BHC posted a loss because of many one-time charges.
BHC Q1 2023 Results
In the first quarter, BHC posted revenue increasing by 1%, or by $26 million, to $1.94 billion . Sales increased at the Salix, International, Solta, and Bausch + Lomb segments. They decreased slightly at Bausch Health and the diversified segment.
The company needs Salix to grow above the 7% reported to offset the 1% decline at Bausch Health. Salix’s revenue of $496 million is just under half that of the latter. Last year, the company started to increase its investments in sales, marketing, and research and development to accelerate its growth in Salix. Those efforts paid off. Scripts for Xifaxan grew across all channels. Furthermore, BHC increased its marketing investments for both the approved indication of IBS-D and HE .
Marketing efforts take time to reach the intended customer. Expect BHC to raise its revenue outlook for Xifaxan in the coming quarters. Relistor and Trulance sales grew, too. However, Xifaxan has the strongest potential to grow at a faster pace.
Financial Priorities
Delevering its balance sheet is a priority. BHC reduced its debt by around $100 million in Q1. Since the Bausch + Lomb ( BLCO ) initial public offering, Bausch reduced its debt by $3.3 billion.
The company ended the quarter with $20.65 billion in long-term debt. It has $518 million in cash and cash equivalents. It has a revolving credit facility, senior secured and unsecured notes, and term loan facilities. This is ample liquidity to meet its funding needs.
Opportunity
CEO Thomas Appio said that separating Bausch + Health still makes sense. Its hurdles to executing the spin-off are primarily the potential impacts of the Norwich litigation. The firm will want to prioritize resolving all uncertainties related to the case before a spin-off.
Market conditions improved substantially in the last year. The S&P 500 ( SPY ) is 11.92%, albeit due mostly to the mega-cap corporations. Still, the bullish stock conditions may welcome a Bausch + Health IPO.
BHC’s balance sheet still needs work. It needs to drive business growth to increase cash flow. This increases business options, which include investing more in the business or accelerating its debt reduction.
In Q2, BHC may post an EBITDA rebound. Q1 is typically a weaker top-line period. For example, net price adjustments and higher investments weighed on results.
Investors should expect Bausch Health to post revenue growth in the range of 2% to 5%. EBITDA will grow by 2% Y/Y.
Your Takeaway
BHC has a relatively small market capitalization. Cautious investors unwilling to hold a beat-up company would avoid this stock. Still, Viatris is five times bigger and pays a dividend that yields 5.05%. Teva posted positive clinical results for a schizophrenia drug and is cutting its debt. That failed to win a stronger rating outlook from S&P Global Ratings .
BHC is among the under-valued, disliked drug companies to buy. As quarterly results improve, it will win more investors. This would set the stage for a renewed uptrend from here.
For further details see:
What To Do After Bausch Health Stock Plunged By Nearly 9% Again