Ahead of Bausch Health Companies (BHC) reporting quarterly earnings, the stock recently traded at 52-week highs but pulled back. When the company reports third-quarter results, it will likely continue demonstrating that revenue is picking up once again. More importantly, Bausch should re-affirm that its debt reduction strategy is on schedule.
Bausch Health will report Q3 results on November 6 before market open. If results are consistent with CEO Joe Papa’s remarks at the Cantor Global Healthcare Conference, investors will maintain their course in their investment in BHC stock. Bausch and Lomb accounted for 57% of the company’s business in the second quarter. Salix takes up 21%, up nicely from 14%. Selling volume continues to demonstrate growth. At B+L vision care, revenue rose 9% from last year. The rollout of new products should accelerate that growth. Although business grew just 5% organically from last year, the unit could surpass that pace in the coming quarter. Helped by the global launch of the new Ultra and Biotrue products, BHC’s stock could re-take the yearly high if revenue surpasses expectations.
Lumify, which BHC launched in May, and Vyzulta, in which insurance started covering in March, may also add meaningfully to the unit’s growth. Joe Papa noted the vision care business grew in the double-digit pace, compared to single-digits for the total market.
Salix, whose business grew 6% last quarter, should report higher sales again this quarter. The company invested in 200 sales staff, instead of paying down $50 million in debt. Bears could argue the 7x debt/equity prioritizes debt repayment but BHC must ultimately invest in the business first. Growing cash flow takes precedence over paring debt to the detriment of the company’s turnaround strategy.
BHC’s business plan forecasts EBITDA growth over the next three years. If revenue is 4-6% CAGR in that period, it may apply the EBITDA against its debt obligations. Rate hikes in the near-term should have minimal impact to cash flow since most of the company’s debt is not due for several years.
BHC’s dermatology unit is still a headwind to the business. Siliq, which Health Canada approved in March 2018, is still selling at a modest rate. On Oct. 2, Bausch reported favorable late-stage clinical results for its psoriasis lotion. Although this product will not add to results in the near-term, the prospects are good that Bausch will have a line of treatments for psoriasis. As doctors become acquainted with the BHC name and its drugs available, sales from the dermatology unit should start to recover.
Bausch’s lever of seven times is still an ongoing concern for conservative investors. Any miss in EBITDA would hurt its ability to pay the debt back sooner. Investors could just as easily buy Teva Pharmaceutical (TEVA) at a 7.5 times debt/equity. In return for slightly higher risk, Teva pays a dividend yielding 3.98 percent. The generic drug giant also counts Berkshire as one of its biggest investors. And high-profile drug approvals, like Teva’s migraine drug, could lead to revenue growing faster than that of Bauch’s.
Analysts, on average, have an average price target of $26, implying a modest upside of 5% (per Tipranks). Mizuho Securities’ $35 target gives a more likely value for BHC stock. The analyst cited the Alcon spinoff may encourage the market to value the B+L unit more favorably. Bausch will need a few more quarters before revenue growth picks up. For now, the stock market still fails to recognize the potential profitability growth of B+L.
The DIY marketplace service quietly added BHC stock to the top ideas list. We liked the management team’s track record on delivering on its promises of debt reduction, product launches, and EBITDA growth targets. The company is giving few if any, reasons for doubting its performance over the next few quarters. Chances are good that Bausch will trade at above my $29 price target set some months ago.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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