Bausch Health Companies Inc (BHC)

[Paullee]

BHC: Xifaxan IP outcome highly important, possible ripple
“Sometime in August”, BHC expects Judge Andrews to issue a ruling in the Xifaxan
patent dispute (vs. Alvogen-Norwich). Based on the trial, the primary patents-in-dispute
are BHC’s method-of-use patents (Alvogen stipulated infringement of polymorph
patent), which puts the risk of LOE (currently Jan. 1, 2028) possibly earlier, sometime in
2H’24E. Sizing the stock upside is challenging, given the bulk of the SOTP value resides
in a future (planned) spin-off (or distribution) of BLCO shares to BHC holders. At a
minimum, a clear win across all patents-in-dispute would narrow the ~25% discount
(market cap of BHC vs. BLCO) on the 80% of BLCO value that BHC shareholders are
expected to receive, while additional upside depends on whether BLCO actually trades at
a discount due to the Xifaxan outcome (and presumed risk it poses to a clean
distribution). Risk to the downside – similarly unclear given Bausch could still appeal the
ruling and look to execute a spin-off (even following a patent loss scenario) per prior
BHC Chairman Joe Papa. BHC now trades at 7.7x 2022E EBITDA vs. 6-7.6x for spec
pharma peers, thus we see de-rating as a risk in a patent loss scenario with CF durability
(LOE overhang) issues. We maintain Underperform on BHC as we are more cautious on
SOTP value-unlock thesis and risks to protracted time-to-spin.