Why Bausch Health Still Has More Upside After The Big 32% Rally
Dec. 23, 2019 12:50 PM ET
Positive sentiment for drug stocks is lifting Bausch Health stock, too.
New product launches, licensing, and litigation settlements are positive developments.
Updated price target
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Since Sep. 23, 2019, when I called Bausch Health (BHC) a good buy, the stock returned a solid 32.7%. At $29.87 and above my near-term fair value target of $28, investment discipline would dictate automatically selling the stock. But what if fundamentals, sentiment, and facts changed enough in the last quarter? That would justify holding BHC stock for longer.
Bausch stock would have held the $31.97 yearly high if the company did not settle a class action. Although it did not admit any wrongdoing, the company will raise $1.2 billion in debt to drop the suit related to the stock's drop in 2013-2015. Admittedly, I owned BHC stock over a decade ago when the company was known as Biovail Corporation. In that time, a class action settlement netted me a few dollars' worth of settlement. But the ultimate returns came for shareholders later on when Valeant aggressively restructured its business and became Valeant.
Bausch is not yet at a major inflection point to more quickly cut down its debt. Still, it is deploying capital in a disciplined way to slowly increase profitability. Growing its platform in China will more likely net greater returns in the near term. Previously, U.S. and China trade tensions dominated the headlines but it had no effect on the company's prospects in the region. So, expect Bausch management to execute on opportunities that strengthen its business in China.
Debt Reduction
Bausch did a good job cutting debt in the last few years. And because it will use a leverage level, not an absolute dollar level, to set its targets, the company may prioritize growing free cash flow. It will continue to grow its adjusted EBITDA to get there. The next major debt maturity is in 2023-24 when $3.8 billion comes due. Still, the company has three years to grow its core businesses and launch new products. Re-financing at more favorable rates is an option, too, but investors will prefer stronger cash flow growth to take away the concerns of its leverage levels.
Salix Business Worth More
Thankfully, Bausch did not sell its XIFAXAN business in 2016-17 when sales were at its worst. Instead, it invested in the sales team. This resulted in the company executing on stronger sales and driving the asset value higher. Plus, settling with Teva on the patent challenge in Sep. 2018 removed a distraction. Today, it is in a good position in the GI market.
In August, Bausch resolved outstanding intellectual property litigation with Teva for its Apriso drug. Teva will get a non-exclusive license to market a generic version of the drug, which treats ulcerative colitis, starting in Oct. 2021. Bausch changed its sub-license agreement with Lupin Pharmaceuticals, setting the final patent expiry to 2030.
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