Bausch Health Stock: Getting Healthier, Gradually (NYSE:BHC)

Bausch Health (BHC) is of course the successor of Valeant, a name which has been too toxic to use after a deal-driven and price-driven expansion adventure a couple of years ago imploded, with real (PR) repercussions for the business.

To see where Bausch is coming from we have to go back to the Valeant days, with my last take on that business dating back to November 2017, when Valeant was selling, or better said giving away, Sprout. Ever since, the company has focused on solid execution of the business, as this has gradually resulted in a decline in leverage. This makes that the risk-reward here look quite compelling, albeit there are real risks to this thesis.

Former Take – 2017

Late in 2017, Valeant sold Sprout at close to a zero price tag, just two years after the company paid a billion to acquire the business, with Valeant being in survival mode and looking to avoid the $100 million in losses posted by the company at the time.

The divestment for Sprout was the next in line as the company had already been divesting. In fact, it sold iNova a month before. Following that divestment, the pro forma numbers revealed that EBITDA would come in at around $3.5 billion, yet net debt of $25.3 billion was still very high, translating into a nosebleed 7.2 times leverage ratio. The deal with Sprout might actually boost EBITDA a bit, as the unit was reporting losses, which now went onto somebody else’s books.

Given the complicated finances, the highly leveraged business and uncertainty on the value of the business, I found that an equity valuation anywhere between $0 and $50 within the range of possibilities. Net debt of $25 billion was very high, as that remained my conclusion with shares trading around the $15 mark at the time. Depending on the pace of organic growth, situation on financing markets, and sentiment, the range of realistic outcomes for the quality was very wide.

In that sense, I am somewhat surprised to see relatively limited volatility in the share price since 2017, with shares having traded in a $15-$35 range ever since. In fact, shares hit the $35 mark early in 2021, but have now retreated a bit to $27 per share here.

What Happened?

Forward to early 2018, the company posted its 2017 results with revenues reported at $8.7 billion, EBITDA at $3.6 billion and a net debt load of $25 billion. The situation was far from easy as the 2018 guidance called for revenues to fall to $8.2 billion, in part the result of divestments, with EBITDA seen at a midpoint of $3.1 billion. During the year, the name change materialized as Bausch had a fresh name, but of course was still dealing with its legacy of the past.

The results for the year came in a bit stronger than guided for with revenues reported at nearly $8.4 billion and EBITDA at nearly $3.5 billion, as net debt has been cut to $23.9 billion. Moreover, continued stagnation was seen for 2019 with revenues seen at $8.4 billion and EBITDA around $3.4 billion.

Ahead of the pandemic it became clear that growth returned as sales rose modestly to $8.6 billion, with EBITDA nearly approaching $3.6 billion as net debt fell to less than $23 billion, still equivalent to 6.4 times EBITDA. The guidance called for flattish results to modest earnings growth in 2020.

The pandemic hit the business in a major way, but despite the leverage, it was manageable. Revenues fell back to $8.0 billion and EBITDA fell slightly to $3.3 billion, as net debt has been further reduced to $22.3 billion. Comforting was that the 2021 guidance called for revenues to bounce back to $8.7 billion, with EBITDA seen around the $3.5 billion mark.

The company aimed to further reduce debt as in March 2021 it reached an agreement to sell Amoun Pharmaceuticals to ADQ in a $740 million deal. In the summer, the company furthermore announced plans to pursue an IPO for its Solta activities, a business with $253 million in annual sales.

The sale of Amoun led to that net debt being cut to $20.7 billion by the third quarter, which together with $3.5 billion in EBITDA still translates into approximately 6 times leverage ratio. While this reduction in leverage is relatively modest, it does help the company with deleveraging as interest payments come down with the absolute reduction in the amount of debt, yet interest rates come down as well as refinancing should become cheaper at some point in time.

The IPO of Solta will ensure that net debt will come in below the $20 billion mark here, although the question is how much this IPO will really fetch.

What Now?

Truth be told, Bausch is doing what could reasonably be expected here. The company has been deleveraging since 2017 as net debt is down from $25 billion to nearly $20 billion here, while the business has stabilized. The upcoming IPO and a recent divestment make for a clear case to create to put leverage below $20 billion, as the 360 million shares outstanding value equity at nearly $10 billion at $27 per share here, for a $30 billion enterprise valuation.

This is a relative modest valuation given the EBITDA contribution of $3.5 billion, for less than a 9 times multiple, while the underlying assets of Bausch trade at a huge discount compared to other peers. There still appear to be major doubts of the market to effectively deleverage the balance sheet, as frankly I feel quite comfortable with the company’s ability to do so.

Additionally, Bausch is a diversified operation here which is comfortable as well, leaving more room for an occasional bolt-on divestments, with real earnings now allowing for an increase in the pace of deleveraging.

Weighing all of this together, I must say that I feel quite a lot more comfortable with the investment case than I did in 2017. While the share price has risen, this is explained by the reduction in debt, as the overall business is stable, leverage risks have come down, and the business is posting modest organic growth again. Right here, a small allocation seems justifiable, as the position is much more de-risked here, albeit this remains an above-average risky investment proposition.