EUR 850.00 For Business Accounts Only

Morningstar | BHC Updated Forecasts and Estimates from 13 Mar 2019

Bausch reported fourth-quarter results with 1% organic growth and a 40.5% adjusted EBITDA margin that put the company slightly ahead of our year-end expectations, especially as channel inventory reductions in some product categories weighed on this quarter’s growth. Accounting for the inventory adjustments that mostly affected the gastrointestinal segment, growth would have been 5.3%. Bausch’s ophthalmology and gastro divisions remain the core strength of operations, with organic growth of 5% and 1%, respectively, and offsetting the ongoing weakness in the dermatology and diversified segments. However, we don’t anticipate any major change to our fair value estimate and no-moat rating as we make a few changes to our model.

Our forecast for $8.49 billion in 2019 revenue comes at the high end of management’s outlook for between $8.3 billion to $8.5 billion, but our EBITDA forecast falls slightly short of the company’s guidance of between $3.35 billion to $3.5 billion for the year. We plan to boost our profitability forecast slightly as generic competition on some products hasn’t eroded gross margin as much as we anticipated. A portion of the better gross margin has been offset by increased investment in R&D and marketing efforts, which should continue in 2019 as management moves to improve the pipeline and drive results from newer products. Regardless, we don’t envision a material shift in our long-term forecasts, especially as we still have concerns about pricing power, success of the pipeline, and a still-high debt load. While some new products like eye redness reliever Lumify and Vyzulta for glaucoma appear to be performing well, we still have modest expectations for products like Siliq and the potential upcoming approval of Duobrii for psoriasis thanks to the crowded market as well as safety concerns in the case of Siliq. Bausch ended the year with a net debt/EBITDA of approximately 6.9.

There’s likely some positive from management’s attempt to purchase products from bankrupt Synergy Pharmaceuticals, especially irritable bowel syndrome with constipation drug Trulance, that potentially mesh well with the rest of the company’s gastrointestinal business. Despite the modest potential $200 million price tag for the assets, we imagine acquisitions will remain a rare occurrence for Bausch given the firm’s balance sheet constraints and management’s stated priority to reduce financial leverage.