Healthcare companies that fall on hard times can, on occasion, turn out to be outstanding bargains for long-term-oriented investors. By the same token, these types of equities can also turn out to be ticking time bombs.
Bausch Health Companies (NYSE: BHC) and Teva Pharmaceutical Industries (NYSE: TEVA) are two high-profile healthcare names that fit squarely into this all-or-nothing paradigm. In brief, both companies are in the midst of a slow-motion turnaround with an uncertain outcome. Which stock has the better chance of making a full recovery? Here's how these two beaten-down healthcare stocks stack up.
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One striking parallel between Bausch and Teva is the fact that the biggest strength of each company is arguably their current leadership. Bausch's CEO, Joseph Papa, took the helm in 2016 when the company was called Valeant Pharmaceuticals. At the time, Valeant was mired in debt and tainted by lawsuits, as well as allegations of price gouging. Teva, by contrast, hired Kare Schultz as CEO in late 2017 to head its turnaround following the disastrous acquisition of Allergan's generic drug business that literally threatened to bankrupt the generic drug giant.
Joseph Papa has been instrumental in turning Bausch around. During Papa's tenure, Bausch has repaid around a quarter of its outstanding debt and successfully extended its outstanding maturities to get some much-needed breathing room, and it now has a solid plan to return to consistent levels of top-line growth in the next decade.
Papa's reboot centers around the so-called significant seven, consisting of Aqualox, Bryhali, Duobrii, Lumify, Relistor, Siliq, and Vyzulta. These seven growth products are expected to eventually generate $1 billion in annual sales combined. Another positive is that Papa's tenure has coincided with the favorable resolution of a number of serious legal issues that were weighing on the company. In all, Bausch has returned to modest levels of revenue growth and significantly reduced its debt load, and is now on much firmer ground, thanks to Papa's strong leadership.
Teva's Schultz, on the other hand, literally walked the drugmaker back from the brink of bankruptcy by instituting a stark $3 billion cost-savings plan. By reducing costs across the board, Teva has been able to knock a healthy $2.6 billion off of its net total debt in just the last five quarters. Equally as critical, the company is also on track to return to growth soon, fueled by newer growth products, like the migraine medicine Ajovy and the Huntington's disease medication Austedo. Schultz's brief tenure, in kind, can only be viewed as an overall success.
The main weakness of each company also happens to be the same: debt. In the most recent quarter, Bausch's debt-to-equity ratio stood at a jaw-dropping 889.3, whereas Teva's came in at a worrisome 196.1. Neither company is in a great position to accelerate their turnaround through a large, bolt-on acquisition, and it's probably going to take upwards of a decade for both drugmakers to change this unfavorable situation.
On the bright side, Bausch's free cash flows are slated to pick up steam in the next decade due to new product launches, like the plaque psoriasis medication Duobrii. The company, in turn, should have considerably more ammunition to address this debt overhang.
Bausch, though, has lately been prioritizing business development activities -- such as the recent acquisition of Synergy Pharmaceuticals' constipation medication Trulance -- over debt repayments. Now, this capital allocation strategy may turn out to be a genius move if Trulance's flagging commercial launch can get back on track. But the company is taking a big risk by diverting money away from its debt repayment plan -- especially on questionable assets like Trulance. Trulance, after all, was a big reason Synergy ultimately had to declare bankruptcy.
Teva is also forecast to return to top-line growth by no later than 2021, which bodes well for the company's prospects of getting out from underneath this mountain of debt. Unfortunately, Teva arguably needs at least one more major growth product to generate the type of free cash flows capable of getting the job done in a reasonable time frame. Making matters worse, the drugmaker was recently named in a sprawling lawsuit over alleged price fixing for older medications, which could result in a multibillion-dollar fine. A fine in the billion-dollar range would certainly hamper the company's ability to repay debt or pursue value-adding business development activities.
Bausch is already starting to move into the next phase of its turnaround plan with the acquisition of Synergy's former flagship drug, as well as the launch of several new high-value products. As such, Bausch is arguably a far more compelling buy at this point in time than Teva. Teva, after all, needs some luck in the clinic to round out its product portfolio, and this lawsuit is likely to weigh heavily on its shares for a while.
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