Bausch transformation ‘on track’ as shares jump

Former Valeant raises guidance

The turnaround at Quebec-based Bausch Health Cos. Inc. appeared to take another step forward Tuesday, after the company reported positive organic growth for the third quarter, sending shares up more than five per cent in Toronto.

Bausch, which changed its name from Valeant Pharmaceuticals Inc. in July, has been digging itself out from under a pile of debt and legal issues ever since the company was swept up in fraud allegations that sparked a spectacular share price collapse.

At its high in July 2015, the company was valued at $341.84 per share, making it for a time the most valuable company on the Toronto Stock Exchange. Less than two years later, the shares had plunged to a low of $11.20.

Tuesday’s earnings report was well-received — despite a US$350 million net loss — because the pharmaceuticals company beat expectations on both revenue and EBITDA, according to a CITI Research report. Bausch also raised its EBITDA guidance to between US$3.30 billion and US$3.45 billion from US$3.20 billion and US$3.35 billion.

“I’m pleased to say, the third-quarter results further demonstrate that the progress towards transformation is on track,” CEO Joseph Papa said in an earnings call.

Perhaps most important for investor confidence, the company reported a three per cent increase in organic growth — which it calculates by removing divestitures and currency fluctuations. Bausch, Papa said, has now seen organic growth for eight straight quarters.

In two years since he took over from Michael Pearson, Papa has focused on reducing the company’s more than Us$30-billion debt load, which had piled up in the wake of dozens of acquisitions.

In May, the company said it had reduced its debt by US$6.9 billion in two years. That trend continued in third quarter as Bausch used nearly 70 per cent of its cash flow — more than US$360 million of US$522 million — to pay down debt. There’s still a long way to go, Papa admitted. As of Tuesday, Bausch still owes about US$25 billion. Most of that is due after 2021, with more than US$6 billion of it in 2023.

Evercore ISI pharmaceutical analyst Umer Raffat said the move to push out the majority of their debt was an important one in the company’s turnaround.

“They’ve pushed out the debt maturities, along with (completing) asset divestitures, along with doing a very good job with expectations management and they have beat expectations,” said Raffat, who remains equal weight on the company.

What Bausch needs to prove, Raffat said, is that the company has a clear path to growth in spite of its debt. The way forward, he said, is investing is innovation and new drugs.

During the earnings call, chief financial officer Paul Herendeen said Bausch spent an additional US$26 million on research and development this quarter in comparison to the third quarter of 2017.

Herendeen admitted that productivity was slower than expected but won’t “sacrifice the productivity of our investments … for speed.”

In the call, Papa outlined three products — a non-opioid to help those with withdrawal, a bowel cleanser and an acne treatment lotion — that have launched since August. Two more drugs, both for psoriasis treatments, are expected to be launched in the coming months.

The launch of these products contributed to Morgan Stanley upgrading Bausch to overweight from equal weight and moved its target price for the New York listed shares to US$32 on Monday. Equity analyst David Risinger wrote that he excepts the company to accelerate toward durable revenue growth in 2020.

In a report on Bausch’s third quarter earnings, Stifel Nicolaus analyst Annabel Samimy said she expects a positive move for Bausch’s stock after another quarter of stability.

“We think as BHC demonstrates its success in stabilizing and transforming, the market will again grant the company appropriate value for its franchises, which in our view has been overwhelmed with negative sentiment,” she wrote.

Bausch was boosted in August when Moody’s upgraded its credit rating to positive from stable. It’s shares closed Tuesday at $26.72 in New York and $35.19 in Toronto.