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Bausch Health: Used To Drift, Now Wants To Be Snow White

Formerly known as Valeant — the abominable enterprise likened to a sewer by Charlie Munger right before it blew up — Bausch Health is now working hard to get its virginity back.

The entire management team has been changed as Joseph Papa — of Perrigo fame — joined in capacity of chief executive and restructuring officer. At the board level, the election of Fredric Eshelman — one of the finest healthcare entrepreneurs in North America — deserves special attention.

If value investing consists in uncovering gems amid the despised, the neglected and the ugly, at first glance Bausch Health may very well fit the bill: the company sports a $8.5bn market cap but earned — save for the tax benefit — a cash profit of about $1.6bn last year.

Added to the $3.2bn generated from divestures, management was able to reduce debt by $4.8bn in 2017. Leverage remains a blatant issue still, with $24bn in long-term debt carried on the balance sheet, or roughly 6x earnings before amortization, interest and taxes.

Interestingly, divestures were concluded at decent valuations despite maximum urgency. For instance, three skincare brands which did $200mil in revenue were sold for $1.3bn (6x revenue). The Australian-based iNova Pharmaceuticals, which did $230mil in revenue, was sold for $938mil (4x revenue).

Bausch earned a cash profit of about $900mil in the first nine months of 2018. All in all, provided that management does a good job at marketing the company’s different franchises, it may sound fair to assume $1bn in annual earning power for the years ahead — roughly in line with latest guidance, although my own product-by-product assessment is more conservative.

These earnings will undoubtedly be redirected in full towards debt repayment, for Bausch has $4.7bn in various tranches maturing till 2022 — that is, roughly $950mil per year. The problem remains with the $6.2bn due in 2023, and the $14bn due between 2024 and 2027. To put it bluntly, the party will come to an abrupt end if the company doesn’t find a way to refinance on time and in satisfactory terms.

There would be valid reasons to hope for a lucky outcome if sales were actually growing but, alas, the opposite is happening — with the noticeable exception of Salix, which portfolio encompasses a large variety of drugs and medical devices used in the treatment of gastroenterology disorders.

(Salix, by the way, was acquired in 2015 for a total consideration of $14.5bn, almost 13x its revenue at the time. Such valuation seems hard to justify now, as revenue grew by 10% per year since. Besides, save for the Xifaxan — Bausch’s star product accounting for 15% of consolidated revenue — none of the other products in Salix’s portfolio has yet to gain traction.)

It will be challenging to reverse the declining trend in profits and revenue. Expenses have supposedly been cut to the bone — this was, after all, the legacy Valeant’s modus operandi — and long gone are the days when prices could be raised to obscene levels without causing a ripple.

Nevertheless, assuming that Bausch protects its current earning power and manages to refinance its long-term debt as the various tranches come due — two highly speculative premises — there’s a clear path for value creation, as $1bn in enterprise value would get transferred to shareholders every year.

On paper, at this price of $24 per share for a $8.5bn market capitalization, this would equal to an expected return of only 12% — a prospect clearly not worth the gambit.

The alternative option would be to sell the company, provided that a pharma behemoth — large enough to digest an enterprise value of about $33bn — accepts to bear its hefty debt load and troubled history. Seen through that lens, as Bausch does roughly $8bn in sales, current valuation suggests a multiple of 4x revenue and roughly 10x EBITDA.

Of course, the +100 projects in the pipeline may hold great potential, as the company could selectively sell some parts, license some others, and develop those it deems the most promising. Among the latter, Bausch’s “Significant Seven” – Relistor, Vyzulta, SiHy, Duobrii, Siliq, Lumify and Bryahli – are expected to generate $1bn in revenue over the next five years.

Regardless, however you slice it, at $24 per share an investment in Bausch Health fails to offer any sensible margin of safety. Much better exists elsewhere.

(No position.)

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