‘Organic’ growth and ‘pivoting’ at Bausch Health? One analyst begs to disagree

One key word that was repeated over and over on Bausch Health’s fourth-quarter earnings call was "organic," as management tried to convince investors that it is pivoting away from some old bad habits. But one analyst wasn’t buying it.

"We believe that [Bausch Health] is not pivoting, but seems similar to the previous Valeant—remaining committed to broad price increases and acquiring products to sell," Wells Fargo analyst David Maris wrote in a note to investors Tuesday, before the Canadian pharma reported full-year results.

Last year was a year of "strong execution" for Bausch, as a 2% "organic revenue growth" marked the first time since 2015, Bausch’s chairman and CEO, Joseph Papa, said on the fourth-quarter call.

By Bausch’s definition, the term "organic" is based on unchanged foreign exchange and excludes all M&As. But Maris said the word should not cover price increases, which Bausch again used to pull off growth.

Maris noted that Bausch in January jacked up prices in the range of 6% to 8% on several key products, including irritable bowel syndrome therapy Xifaxan. He also mentioned that the company’s entire GI-focused Salix Pharmaceuticals unit would not have grown in the third quarter without price actions.

Xifaxan, the company’s key growth driver, posted 12% year-over-year revenue growth—again organic—in Q4 2018, despite reduction in wholesale inventory. Bausch, though, didn’t shy away from the pricing element on Wednesday’s call. Based on whole-year 2018 numbers, the company said about a third of Xifaxan revenue growth can be attributed to "gross pricing improvements."

"What we’re projecting […] in 2019 would be a combination of prescription growth, call it high single-digit there, and then call it some net price improvement, which is a combination of gross price and also some gross-to-net things we’re doing," Papa said.

But again, Papa stressed that Xifaxan is also seeing large volume increase, as January 2019 total prescriptions were up 10%. And Papa said Xifaxan is also seeing double-digit growth in nonretail settings such as nursing homes and hospital institutions, especially in hepatic encephalopathy, that could further drive Xifaxan growth.  

Another tactic that Valeant once used but got itself into deep trouble was M&A. For 2018, Bausch repaid more than $1 billion of debt in 2018, bringing its total debt load to $24.6 billion as of the end of 2018, according to chief financial officer, Paul Herendeen.

"Paying down >$1 billion of debt sounds like a lot, but knowing that at that rate it would take more than 20 years to pay off the current debt balance may be more important," Maris wrote in his note to clients.

Despite all the talk about "organic growth" and "pivoting to offense" on the Q4 call, one question still popped up: Will Bausch use its expected $1.5 billion to $1.6 billion cash flow in 2019 more to pay down debt or toward making acquisitions?

Herendeen reiterated that the company’s priority is still to reduce debt. But "it’s not a priority when you have a great opportunity that we think is value-generative and helpful to all stakeholders," he said. "We’re going to pursue that."

Bausch has already made moves on the M&A front. Last December, it entered into a "stalking horse" agreement to acquire Synergy Pharmaceuticals for $200 million. If Bausch were successful in closing the deal in March, it could gain constipation drug Trulance—which has been underperforming against Allergan and Ironwood’s rival med Linzess—and an investigational GI drug called dolcanatide.

"We think these assets are a natural fit to what we’re already doing in gastroenterology and primary care, and we have some capabilities in terms of scale, supply chain and managed care expertise that can help improve the performance of Trulance," said Herendeen on the call.

On Tuesday it announced a deal to acquire the U.S. rights to Eton Pharmaceuticals’ EM-100, a preservative-free eye drop that’s been submitted to the FDA for review as a treatment for ocular itching due to allergic reactions. In a statement, Papa said the drug is a differentiated product that will complement its Bausch + Lomb portfolio.

However, Maris said the deals do not fit into Bausch’s "pivoting" rhetoric. "Neither of these deals is transformative in our view, but more reflective of low levels of spending on innovative research requiring BHC to look externally for growth," he wrote in the note.

Bausch did have a couple of new launches in Q4 2018, namely acne therapy Altreno and psoriasis drug Bryhali, and it’s expecting a decision from FDA on another psoriasis lotion, Duobrii, whose decision date was delayed. Both Bryhali and Duobrii are among the "Significant Seven" products that Bausch is counting on to drive long-term growth and is expecting annualized peak total revenues of $1 billion by the end of 2022. Citing Iqvia data, Maris said Bryhali had 704 total prescriptions for the week ending Feb. 8.

In total, Bausch’s Q4 revenues of $2.12 billion came above analysts’ expectations of $2.08 billion. But as Evercore ISI analyst Umer Raffat noted in his Wednesday note to investors, the company’s 2019 revenue guidance in the range of $8.30 billion to $8.50 billion is "effectively flattish" versus the 2018 tally of $8.38 billion.

Raffat said the number is not consistent with what Bausch management described in a January conference where they talked about "growth" in 2019 and a three-year CAGR of 4% to 6% on topline. But he suspects management is likely leaving room for guidance revisions, which a company could boast as achievements.

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