Description Executive Summary Bausch Health Companies Inc. (BHC) is an attractive and timely event-driven short idea. On 02/06/25 BHC announced that the sale process for its subsidiary Bausch + Lomb Corporation (BLCO) “will not result in a transaction at this time.” With the sale process now dead, BHC has failed in its remaining attempt to transfer corporate value away from creditors to shareholders. BHC is highly and unsustainably leveraged. Up to this point the value of BHC stock has essentially been an option that BHC management might find a way to separate off BLCO in a manner which is beneficial to the equity. BHC originally tried to accomplish this through a spinoff of BLCO (May 2022). The full separation was never completed. Management then tried to sell the BLCO subsidiary outright. That process has now failed as well. With no more realistic avenues for management to pursue to try to strip value away from creditors for the benefit of shareholders, the most likely path forward for BHC is a financial restructuring through bankruptcy which should leave little value to the existing equity. As discussed below, the Company might be able to meet its November and December 2025 debt maturities through a combination of FCF generation, revolver draw and refinancing, but this will only delay the inevitable restructuring which should take place no later than early 2027.
The main event to play for is the restructuring of BHC which should take place no later than early 2027. Other catalysts which are nearer-term include: BHC potentially defaulting on its November and December 2025 debt maturities Insertion of “going concern” language in its SEC filings Currently, the short interest in BHC is 3% of the float at the short interest ratio for the stock is 5.4x. Background BHC was written up on VIC by dsteiner84 in February 2022. Please reference that write-up for additional detail on BHC and BLCO. BHC is the former Valeant Pharmaceuticals (VRX). Benefitting from a favorable tax structure, Valeant pursued a “growth through acquisition” strategy, primarily funded through debt. As the Company grew, its balance sheet steadily expanded and its stock price soared. However, Valeant collapsed in 2015-2016 due to an accounting scandal and regulatory inquiries into its pharmaceutical pricing. The history of Valeant is quite a saga and typing “what happened to Valeant Pharmaceuticals” into Google search will yield many articles which will tell the story. After its collapse Valeant rebranded itself as Bausch Health Companies, Inc. and has been struggling to manage under its high debt load. Company Description BHC is a global, diversified specialty pharmaceutical and medical device company that develops, manufactures and markets, primarily in the therapeutic areas of gastroenterology (GI), hepatology, neurology and dermatology, a broad range of branded, generic and branded generic pharmaceuticals, over-the-counter (OTC) products and aesthetic medical devices. The Company has five reportable segments: Salix (26% of 2023 Revenues) – consists of sales in the US of GI products. Sales of Xifaxan represented ~80% of Salix revenues. Xifaxan is used for the treatment of irritable bowel syndrome in adults. International (12% of 2023 Revenues) – consists of sales outside the US of branded pharmaceutical products, branded generic pharmaceutical products and OTC products Solta Medical (4% of 2023 Revenues) – consists of global sales of Solta Medical aesthetic medical devices Diversified (11% of 2023 Revenues) – consists of sales in the US of (i) pharmaceutical products in the areas of neurology and certain other therapeutic classes, (ii) dermatology products, (iii) generic pharmaceutical products, and (iv) dentistry products. Bausch + Lomb (BLCO) (47% of 2023 Revenues) – consists of global sales of Bausch + Lomb Vision Care, Surgical and Pharmaceutical products. Although BHC reports in five segments, it is easiest to think about BHC as being composed of two parts: Bausch Health (excl. B+L) – composed of Salix, International, Solta and Diversified Bausch + Lomb (BLCO) This is also how BHC presents its financials in its earnings releases. Importantly, Bausch Health (excl. B+L) is the parent company which owns 88% of BLCO. The Problem The problem Bausch Health (excl. B+L) faces is twofold: First, Bausch Health (excl. B+L) EBITDA will decline significantly in 2028 when it loses exclusivity on Xifaxan and faces competition from generics. Presented below are historical and estimated financials for Bausch Health (excl. B+L). Several things to note:
Financials for 2024 are estimated and fall within management’s guidance of $4.775-4.850bn in Revenues and $2.425-2.475bn in EBITDA (see 3Q24 earnings release). The Company is scheduled to report 4Q24 earnings on 02/19/25 Xifaxan sales are based on its percentage of Salix revenues provided by BHC in its earnings presentations (as an example, see slide 11 of BHC’s 3Q24 earnings presentation). Bausch Health (excl. B+L) will lose exclusivity on Xifaxan no later than 01/01/28 and will face competition from generic versions of the drug. Branded drug revenues typically decline by 80% once generic competition is introduced and this assumption is used here. While BHC doesn’t disclose its EBITDA margin on Xifaxan, conversations with multiple sell-side analysts estimate it is ~70%. Inputting this margin estimate, one can back out that the remainder of Bausch Health (excl. B+L)’s portfolio has an EBITDA margin of ~37%. One can then apply these margins to 2028E revenues and the resulting margin is about 41%, as shown in the table below. Based on the above financial estimates, Bausch Health (excl. B+L) EBITDA will decline to ~$1.5bn in 2028. On a consolidated basis, BHC generates ~$1.0bn/year in FCF. The FCF from BLCO is actually minimal, as one can see in its separately published financial filings. Accordingly, Bausch Health (excl. B+L) generates almost all of the $1.0bn/year in FCF. When Bausch Health (excl. B+L) loses Xifaxan exclusivity and EBITDA drops by ~$1.0bn, Bausch Health (excl. B+L)’s FCF will drop to ~$0. Second, Bausch Health (excl. B+L) has $15.3bn in Net Debt and will not be able to meet its maturity schedule, as shown in the chart below (slide 28, 3Q24 earnings presentation). Several things to note: In 2025 BHC has the following maturities: $1.68bn outstanding of 5.500% 1L Notes due 11/01/25 $535mm outstanding of 9.000% Sr. Unsec. Notes due 12/15/25, and $125mm of mandatory amortization ($31.25mm quarterly) on its Term Loan B maturing on 02/01/27 As of 9/30/24, BHC has the following sources of liquidity: $719mm in cash $975mm in undrawn revolver capacity The Company might meet its 2025 debt maturities through a combination of FCF generation, revolver draw and refinancing. It’s not a sure thing but possible. Given the magnitude of the 2025 maturities vs. the Company’s liquidity, BHC might insert “going concern” language into its SEC filings. This would be a negative catalyst for the stock. In addition, failure to meet these maturities would be a significant, negative catalyst for the stock. It does not appear possible for the Company to meet the $4.1bn in debt maturing in 2027, most of which matures in early 2027: $643mm of 8.500% Sr. Unsec. Notes due 01/31/27 $1,000mm of 6.125% 1L Notes due 02/01/27 $1,937mm of SOFR + 525 Term Loan B due 02/01/27, and $500mm of 5.750% 1L Notes due 08/15/27 Based on $15.3bn in current Net Debt outstanding and 2024E EBITDA of $2.468bn, Bausch Health (excl. B+L)’s current Net Leverage is already an elevated 6.2x. The Net Leverage will then jump higher with Bausch Health (excl. B+L)’s EBITDA projected to decline to ~$1.5bn in 2028. With Bausch Health (excl. B+L) being unable to meet its debt maturities in early 2027 or generate any FCF starting in 2028, it appears inevitable that it will need to pursue a significant financial restructuring, likely through bankruptcy. Attempted Separation of BLCO BHC management has been well aware of the twofold problem above for years. Management has significant exposure to BHC’s equity and has been trying shift as much “corporate value” as possible away from creditors to the equity. This is why management has been trying to separate off BLCO from BHC. In May 2022 BHC executed a partial spinoff of BLCO. The stock of BLCO became publicly traded and BHC retained an 88% interest. Management then tried to distribute BHC’s remaining 88% interest in BLCO to BHC shareholders, including themselves. The concept was to take the value of BLCO assets, separate it from BHC, distribute that value to BHC shareholders in the form of BLCO stock, and leave BHC creditors with only a claim on the assets remaining at Bausch Health (excl. B+L). However, in order to consummate the full spinoff of BLCO, BHC needed to get (i) a financial advisor’s opinion that both BLCO and Bausch Health (excl. B+L) would be financially viable entities as separate companies and (ii) Canadian regulatory approval. It appears that BHC was not able to find a financial advisor to issue such an opinion given the high leverage that would be left on Bausch Health (excl. B+L). BHC then pursued an outright sale of BLCO to private equity, with interested parties including Blackstone, Advent International, and TPG Capital. According to industry chatter, a large bid/ask spread existed between BHC and the financial buyer(s) with BHC looking for an unreasonable price. This was not surprising. Given the leverage at Bausch Health (excl. B+L), the sale price of BLCO had to be high enough for BHC management to receive any value to their equity. On 02/06/25 BHC announced that the sale process “would not result in a transaction at this time.” As a side note, speculation is that financial buyers see the financial challenge BHC is facing and are waiting to pick up the BLCO asset at a more appropriate price when BHC enters bankruptcy. New Advisors On 01/22/25 press reports appeared that BHC management hired Evercore as its new investment bank and Proskauer Rose as its new law firm, replacing its former advisors Houlihan Lokey and White & Case, respectively. BHC’s former advisors obviously did not “deliver the desired outcome” and BHC hired new advisors in the hope that they could get the results wanted. This appears to be an act of desperation on the part of BHC management. Both Houlihan Lokey and White & Case are very respectable firms which have specialty in distressed situations. Either BHC management thinks that hiring different advisors will result in the outcome wanted (low probability) or they recognize that the separation of BLCO is fully off the table and that they need new advisors for the pending financial restructuring of the company.
Restructuring BHC’s capital structure is unsustainable. A financial restructuring of the Company through bankruptcy would likely entail a recapitalization which would negatively impact existing equity holders. What follows here is a description of what a possible restructuring of BHC might look like: Conversations with numerous sell-side analysts have indicated that on a standalone basis, Bausch Health (excl. B+L) would probably be valued at 5.0-6.0x EV/EBITDA. With $1.5bn in EBITDA in 2028, this suggests the value of Bausch Health (excl. B+L) to be $7.5-9.0bn. BLCO’s equity is publicly traded and its current market capitalization is $5.7bn. BHC 88% interest is currently worth $5.0bn. So, the value of Bausch Health (excl. B+L)'s asset base is worth $12.5-$14.0bn. Bausch Health (excl. B+L) will likely generate ~$2.0bn in FCF between now and the beginning of 2027, bringing the Company’s total asset base to $14.5-16.0bn. This is against Bausch Health (excl. B+L) $15.3bn in Net Debt, leaving little, if any, value to the equity. For the sake of argument, let’s assume that a bankruptcy judge approves a restructuring where BLCO is separated off as a publicly traded entity and Bausch Health (excl. B+L) is recapitalized at 4.0x Net Leverage. Accordingly, Bausch Health (excl. B+L) would have a $6.0bn in Net Debt given ~$1.5bn in 2028E EBITDA. For their holdings of $15.3bn in existing Net Debt, BHC creditors would receive: $6.0bn in Bausch Health (excl. B+L) “new debt” $5.0bn in BLCO equity $3.5-5.0bn in Bausch Health (excl. B+L) “new equity”, depending on the valuation of Bausch Health (excl. B+L). This would severely dilute current BHC shareholders. Obviously, this is just one possible outcome in the potential restructuring of BHC. Many other permutations are possible. The main takeaways, though, are: Recovery for BHC’s creditors should be pretty good Recovery for BHC shareholders should be minimal Medicare Part D One other headwind that Bausch Health (excl. B+L) is facing as far as Xifaxan is price negotiations for Medicare Part D. On 01/17/25 the Department of Health and Human Services announced the selection of 15 additional drugs covered under Medicare Part D for price negotiations. In accordance with the Inflation Reduction Act, the negotiations with participating companies for these 15 drugs will occur in 2025 and any negotiated prices will become effective in 2027. BHC's Xifaxan was listed as one of the 15 drugs. This is another net negative for Xifaxan as well as Bausch Health (excl. B+L)’s EBITDA and FCF. Other Considerations Glen Santangelo who covers BHC for Jefferies has been the “vocal bull” on the stock for some time. On 02/06/25 he downgraded BHC stock to Hold from Buy and reduced his price target to $8 from $12. The downgraded was in response to BHC’s announcement that morning that the sale process for BLCO “will not result in a transaction at this time.” Mr. Santangelo recognizes the implications of this announcement and has essentially “thrown in the towel” on the stock.
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