Bausch Health(BHC) - 2021 Q4 - Annual Report

Part I Business Bausch Health is a global healthcare company focused on eye-health, GI, and dermatology, pursuing strategic separations of Bausch + Lomb and Solta Medical to unlock value - The company plans to separate its Bausch + Lomb eye-health business and conduct an IPO for Solta Medical to create three distinct public entities, aiming to unlock value by H1 2022[33][64][425] Revenues by Segment (2019-2021) | Segment | 2021 Revenue (in millions) | 2021 Pct. | 2020 Revenue (in millions) | 2020 Pct. | 2019 Revenue (in millions) | 2019 Pct. | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Bausch + Lomb | $3,765 | 45% | $3,415 | 42% | $3,778 | 44% | | Salix | $2,074 | 24% | $1,904 | 24% | $2,022 | 23% | | International Rx | $1,166 | 14% | $1,181 | 15% | $1,154 | 13% | | Ortho Dermatologics | $564 | 7% | $548 | 7% | $560 | 7% | | Diversified Products | $865 | 10% | $979 | 12% | $1,087 | 13% | | Total Revenues | $8,434 | 100% | $8,027 | 100% | $8,601 | 100% | - The business strategy focuses on durable products in core therapeutic areas, expanding geographic reach, and refreshing its pipeline through R&D and strategic acquisitions[40][41][43] - The three largest customers, AmerisourceBergen, McKesson, and Cardinal Health, accounted for 18%, 16%, and 12% of total revenue in 2021, respectively, indicating significant customer concentration[111] Segment Information The company operates five reportable segments, with Bausch + Lomb and Salix being the largest, and plans a segment structure change for the Solta IPO - The Bausch + Lomb segment, a fully integrated eye-health business, accounted for 45% of total company revenues in 2021[46][48] - The Salix segment, focused on U.S. GI products, saw its key product Xifaxan® generate $1.644 billion in 2021, an 11% increase from 2020[56][59] - The Ortho Dermatologics segment includes the Solta medical aesthetics business, planned for an IPO, with global Solta revenues growing to $308 million in 2021 from $253 million in 2020[61][64][65] - The company plans to change its segment structure in Q1 2022, moving the medical dermatology unit to Diversified Products and making Solta a standalone segment, to align with the proposed Solta IPO[74] Research and Development The company's R&D efforts focus on advancing core business programs, with approximately 200 projects in its pipeline and stable R&D expenses at 6% of revenue R&D Expenses (2019-2021) | Year | R&D Expense (in millions) | R&D as % of Revenue | | :--- | :--- | :--- | | 2021 | $465 | ~6% | | 2020 | $452 | ~6% | | 2019 | $471 | ~5% | Intellectual Property and Government Regulations The company protects its products through patents, trademarks, and regulatory exclusivity, operating under extensive global government regulations covering R&D, manufacturing, marketing, and data privacy - The company relies on patents, trademarks, and regulatory data exclusivity, including five years under Hatch-Waxman and 12 years under BPCIA for biologics, to protect its products[79][81][83] - Products and facilities are extensively regulated by global authorities like the FDA, Health Canada, and EMA, with non-compliance potentially leading to significant penalties, product recalls, or approval withdrawals[89][90][93] - The company is subject to complex global data privacy laws, including HIPAA, GDPR, and PIPEDA, governing sensitive health information and imposing strict non-compliance penalties[98][101] Competition and Manufacturing Operating in a highly competitive industry, the company faces generic competition, manages 36 manufacturing sites, relies on third-party production, and navigates single-source supply chain risks - The company faces intense competition from generic manufacturers upon patent or regulatory exclusivity expiry, leading to significant price reductions and market share loss for branded products[115] - The company operates approximately 36 manufacturing sites globally and subcontracts about 20% of its product sales to third-party manufacturers[118][120] - Several significant products, including Siliq®, Duobrii®, Trulance®, Vyzulta®, and Xenazine®, rely on a single source for finished product or active pharmaceutical ingredients, posing a supply chain risk[121] Human Capital Resources As of year-end 2021, Bausch Health employed approximately 19,600 people globally, prioritizing employee health, safety, diversity, inclusion, and talent development - As of year-end 2021, the company employed approximately 19,600 people globally, with 7,380 in the U.S. and Canada[123] - The company prioritizes employee health and safety, reporting a Days Away Rate (DAR) of 6 days per 100 employees in 2021, significantly better than the industry average of 24[128] - Bausch Health has a formal Diversity, Equity & Inclusion (DE&I) strategy overseen by an executive council, supporting Employee Resource Groups (ERGs) to foster an inclusive environment[130][132] Risk Factors The company faces significant risks from planned business separations, ongoing legal proceedings, substantial debt, potential tax reforms, generic competition, supply chain issues, and IT system breaches - The planned separation of Bausch + Lomb and the Solta IPO are subject to significant risks, including transaction failure, unachieved benefits, business disruption, and adverse tax consequences[165][178] - The company is subject to ongoing legal proceedings and investigations regarding historical practices, potentially resulting in material liabilities and reputational harm[190][191] - Substantial debt with restrictive covenants poses a risk; non-compliance or insufficient cash flow could trigger defaults and debt acceleration, materially harming the business[209][215] - Expiration or loss of patent protection for key revenue-generating products could lead to intense generic competition and materially adverse effects on sales and financial results[240][241] Properties Bausch Health owns and leases numerous global properties, including its Quebec headquarters and approximately 36 manufacturing sites, totaling about 10 million square feet Principal Properties | Location | Purpose | Owned/Leased | Approx. Square Footage | | :--- | :--- | :--- | :--- | | Laval, Quebec, Canada | Corporate HQ, R&D, manufacturing | Owned | 338,000 | | Bridgewater, New Jersey | Administration | Leased | 310,000 | | Rochester, New York | Offices, R&D, manufacturing | Owned | 953,000 | | San Juan del Rio, Mexico | Offices, manufacturing | Owned | 853,000 | | Waterford, Ireland | R&D, manufacturing | Owned | 500,000 | Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Bausch Health's common shares trade on the NYSE and TSX, with no dividends paid or planned due to debt restrictions, and the stock has underperformed benchmarks over five years - The company's common shares are traded on the NYSE and TSX under the symbol 'BHC'[387] - No dividends were paid from 2019-2021, and the company does not intend to pay cash dividends, partly due to debt covenant restrictions[394] Five-Year Cumulative Total Return on $100 Investment | Group | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Bausch Health Companies Inc. | $100 | $143 | $127 | $206 | $143 | $190 | | S&P 500 | $100 | $122 | $116 | $153 | $181 | $233 | | S&P/TSX Composite | $100 | $109 | $99 | $122 | $129 | $161 | | 2022 Peer Group | $100 | $114 | $116 | $144 | $165 | $200 | Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue increased 5% to $8.43 billion in 2021, but operating income decreased due to goodwill impairment and higher SG&A, as the company pursues strategic separations and debt reduction Financial Performance Highlights (2019-2021) | Metric (in millions, except per share) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Revenues | $8,434 | $8,027 | $8,601 | | Operating income (loss) | $450 | $676 | $(203) | | Net loss attributable to BHC | $(948) | $(560) | $(1,788) | | Diluted Loss per share | $(2.64) | $(1.58) | $(5.08) | - Revenue for 2021 increased by 5% to $8.434 billion from $8.027 billion in 2020, driven by volume recovery from the COVID-19 pandemic, partially offset by divestitures and lower net pricing[536] - Operating income decreased by $226 million to $450 million in 2021, largely due to a $469 million goodwill impairment in Ortho Dermatologics and a $257 million increase in SG&A expenses[537] - The company has repaid approximately $10 billion in net debt from January 1, 2016, through December 31, 2021, utilizing divestiture proceeds and cash from operations[435][477] Overview of Strategy and Business Trends The core strategy focuses on unlocking value through Bausch + Lomb and Solta separations, supported by divestitures, core business investments, capital structure improvement, and legacy litigation resolution - The primary strategic focus is the separation of Bausch + Lomb and the IPO of Solta Medical to create three separate, well-capitalized companies, with proceeds intended for debt repayment[423][426] - In 2021, the company sold Amoun Pharmaceutical for approximately $740 million, using net proceeds to repay $600 million of Term Loan B facilities[436][437] - The company is managing upcoming loss of exclusivity (LOE) for several products between 2022-2026 and is actively engaged in patent litigation to defend key products like Xifaxan®, Bryhali®, and Duobrii®[524] - The company is monitoring potential tax law changes, including proposed U.S. tax reforms and the OECD's global minimum corporate tax rate of 15%, which could materially affect its effective tax rate[505][508] Results of Operations In 2021, total revenues increased 5% to $8.43 billion, but operating income decreased to $450 million due to a $469 million goodwill impairment and higher SG&A expenses - Provisions to reduce gross product sales increased to 39.4% of gross sales in 2021 from 38.9% in 2020, primarily due to higher rebate rates on key branded products like Xifaxan®[556][557] - SG&A expenses increased by $257 million (11%) in 2021, driven by the absence of 2020's cost controls and $111 million in separation-related costs[565] - A $469 million goodwill impairment was recognized in Q1 2021 for the Ortho Dermatologics reporting unit due to revised long-term forecasts reflecting slower product launches and insurance coverage pressures[574][575] - The benefit from income taxes decreased to $87 million in 2021 from $375 million in 2020, primarily due to a smaller release of the valuation allowance against deferred tax assets in 2021[596] Reportable Segment Revenues and Profits In 2021, most segments saw revenue growth, with Bausch + Lomb up 10% to $3.77 billion and Salix up 9% to $2.07 billion, while Diversified Products declined due to generic competition Segment Performance (2021 vs. 2020) | Segment | 2021 Revenue (in millions) | YoY Change | 2021 Segment Profit (in millions) | YoY Change | | :--- | :--- | :--- | :--- | :--- | | Bausch + Lomb | $3,765 | +10% | $958 | +5% | | Salix | $2,074 | +9% | $1,493 | +12% | | International Rx | $1,166 | -1% | $403 | +4% | | Ortho Dermatologics | $564 | +3% | $265 | +16% | | Diversified Products | $865 | -12% | $624 | -13% | | Total | $8,434 | +5% | $3,743 | +5% | - On an organic (non-GAAP) basis, total company revenue grew 6% in 2021, with the International Rx segment showing 7% organic growth despite a 1% reported decline[614] - The Salix segment's profit margin improved to 72% in 2021 from 70% in 2020, driven by higher revenue and lower third-party royalties[607][620] - The Diversified Products segment's revenue declined 12%, primarily due to a $72 million decrease in volume from generic competition for products like Migranal® and Xenazine®[628] Liquidity and Capital Resources Liquidity is driven by cash, operating cash flow, and credit facilities; net cash from operations increased to $1.43 billion in 2021, while total debt decreased to $22.9 billion, with further financing actions taken in early 2022 Summarized Cash Flow (2020-2021) | (in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,426 | $1,111 | | Net cash provided by (used in) investing activities | $409 | $(261) | | Net cash used in financing activities | $(1,513) | $(2,294) | | Net increase (decrease) in Cash | $303 | $(1,428) | - As of December 31, 2021, total contractual debt principal was $22.9 billion, a decrease from $24.2 billion at year-end 2020[643] - In early 2022, the company initiated financing transactions to facilitate the B+L Separation, including issuing $1 billion of 6.125% Senior Secured Notes due 2027 and announcing a credit agreement refinancing[671][672][674] Critical Accounting Policies and Estimates Financial statements rely on critical accounting policies and estimates, including revenue recognition, goodwill impairment, loss contingencies from legal proceedings, and income tax provisions - Revenue recognition requires significant estimates for variable consideration, such as returns, rebates, and chargebacks, based on historical data, inventory levels, and contractual terms[705][873] - Goodwill is tested for impairment annually or upon triggering events, with fair value estimated using a discounted cash flow model based on assumptions about growth rates, profits, and discount rates[715][716] - The company accrues for loss contingencies from legal matters when a loss is probable and reasonably estimable, involving significant judgment about future events and outcomes[731] - Income tax provisions are based on estimates of taxable income and the realizability of deferred tax assets, with a valuation allowance established if realization is not more likely than not[733][735] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal year 2021, including balance sheets, income statements, cash flows, and detailed accompanying notes Notes to Consolidated Financial Statements The notes provide critical details supporting financial statements, including planned B+L and Solta separations, acquisitions, divestitures, $22.9 billion debt, legal proceedings, and segment performance - Note 2 outlines the planned separation of the Bausch + Lomb business and the Solta Medical IPO, confirming these transactions are not yet reflected in the financial statements[825] - Note 8 details the $469 million goodwill impairment charge for the Ortho Dermatologics reporting unit in Q1 2021, resulting from revised long-term forecasts due to slower product launches and market pressures[980] - Note 10 provides a detailed breakdown of the company's $22.9 billion in long-term debt obligations as of December 31, 2021, including credit facilities and various senior notes[993] - Note 20 describes significant legal proceedings, including the $1.21 billion settlement of the U.S. Securities Litigation (subject to appeal), ongoing opt-out lawsuits, and various antitrust litigations[1133][1138] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2021 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[754] - Management concluded that the company maintained effective internal control over financial reporting as of December 31, 2021, based on the COSO framework[759] - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the effectiveness of internal control over financial reporting as of December 31, 2021[760][795] Part III Directors, Executive Officers, Corporate Governance, Executive Compensation, and Other Matters Information for Items 10-14, covering directors, executive officers, corporate governance, executive compensation, and related matters, is incorporated by reference from the 2022 proxy statement - Information regarding directors, executive officers, corporate governance, executive compensation, security ownership, and principal accounting fees is incorporated by reference from the registrant's 2022 proxy statement[766][768][769][770][771] Part IV Exhibits and Financial Statement Schedules This section lists documents filed as part of the Form 10-K, including consolidated financial statements, a comprehensive index of exhibits, and CEO/CFO certifications - This section contains the index to the consolidated financial statements and a list of all exhibits filed with the Form 10-K[776][777]