J.P Morgan’s Chris Schott recently met with Bausch Health (BHC) management to talk about the future of the pharmaceutical company. At the meeting, Chief Financial Officer Pail Herendeen highlighted the transition of the business away from legacy issues to more “normalized” operations. Schott refers to the company’s loss of exclusivity [LOE] as being a recurring headwind for the company. Yet, the analyst sees some upside for core assets Xifaxan and B&L, which should enable a trough for Bausch’s EBITDA in 2019.
“[…] we see new launch trends as representing a key unknown in the story with strong performance needed to drive EBITDA growth over time in our view. On leverage, BHC’s debt load remains challenging (BHC remains the most-levered name in our coverage at ~7x), although the company has successfully pushed out its refinancing needs,” Schott said.
In response, the analyst reiterates an Underweight rating with a price target of $21, which implies about 25% downside from current level. (To watch Schott’s track record, click here)
The analyst predicts low-to mid-single-digit growth for the acquired companies B&L/International, which accounts for about 55% of BHC sales and modest growth for Salix, which Schott believes will be offset by continued erosion of the company’s diversified products portfolio. The analyst believes the factors listed will translate to modest revenue growth for Bausch Health in 2019.
The company revealed it anticipates increasing R&D spend next year, mostly in the Ortho Derm, B&L vision-care/ophthalmology and Salix divisions, and will also need to deploy resources for DTC spend for assets like Lumify and Xifan. The analyst predicts this as a pressure to the operating margin and because of this forecasts a modest decline year-over-year in EBITDA for 2019.
“We see Bausch’s pipeline as critical to driving growth in 2019 and beyond as the company looks to offset LOEs (which are slowing but still represent a headwind to growth). While some assets like Lumify (~26% share in the category with the company planning continued DTC investment in 2019 to expand the market) have clearly outperformed expectations, other launches are off to a slower than expected start with Siliq and Vyzulta ramping more slowly than expected (coverage expansion may improve Vyzulta dynamics over time). Ultimately, we continue to have a fairly tempered outlook on the company’s “Significant Seven” portfolio and expect fairly slow launches/ramps for the assets. Along these lines, we are forecasting only modestly growth off of BHC’s trough 2019 EBITDA levels,” the analyst explains.
Schott expects growth for the product Xifaxan (a medication to cure traveler’s diarrhea, IBS and hepatic encephalopathy) to be more closely aligned with volume trends next year – which are high-single digit TRx growth with price contribution in the mid single digits. Due to the fact the company has only been able to slowly attend to debt maturities, Schott says leverage remains a challenge and expects a fairly gradual delivering process. Furthermore, the analyst takes into account the effort BHC took to tighten copay cards and other assistance programs, which resulted in higher gross-to-net numbers for products under the Salix, Ortho Derm and Neuro portfolios, but still the analyst believes the progress will only have been recognized one time in Q3 and will not carry into 2019.
Overall, BHC has a mixed bag of reviews from those who are keeping an eye on the stock. TipRanks analytics reveals out of 12 analysts, six are bullish, five are sidelined and 1 is bearish. The consensus price target stands at $27.92, which shows an 18% upside from where the stock is currently trading. (See BHC’s price targets and analyst ratings on TipRanks)