Bausch Health Companies (BHC) lost $592 million in 2023 on revenue of $8.76 billion. That hardly seems like a stock that investors would be keen on.
However, in Wednesday’s trading, not only did BHC stock have a volume of 6.34 million, nearly three times its 30-day average, but it also had an unusually active options volume of 77,509, nearly four times the 30-day average.
Since the beginning of 2024, BHC’s daily options volume has exceeded 70,000 on two occasions: yesterday and March 1. Meanwhile, it had four unusually active options on Wednesday -- defined as a Vol/OI interest of 1.25 or higher, excluding options expiring in less than a week -- with all four of the call variety and two with Vol/OI ratios in double digits.
While both of the calls in double digits are intriguing bets, only one is a no-brainer. Here’s why.
The Business Case for Investing in BHC
As I said in the intro, the Quebec-based pharmaceutical company lost a bunch of money on a GAAP basis in 2023. I wouldn’t blame you if that were an immediate disqualification for inclusion in your portfolio.
However, for those willing to play a little bit fast and loose with its financials, there is an argument that at these prices, it remains a good entry point despite its shares being up 34% in 2024.
Let me explain.
If I knew nothing about the business -- which isn't too far off because I haven't paid attention to the company since it separated its Bausch + Lomb (BLCO) eyecare business on May 22 -- I’d look at its adjusted EBITDA margin for 2023 at 34.3% and think it was performing exceptionally well.
In 2023, its revenue was $8.76 billion, up 7.9% from $8.12 billion a year earlier, or 7% on an organic basis. Its adjusted EBITDA was $3.01 billion, flat compared to a year earlier.
“During the year, we made meaningful progress in driving performance across each of our business segments, continued to focus on our balance sheet and liquidity, and made significant progress on our key R&D initiatives, all helping to position the Company for continued growth and performance,” stated CEO Thomas Appio in its Q4 2023 press release.
Excluding Bausch + Lomb’s results, three of Bausch Health’s four operating segments increased revenue in the past year, led by an 8% increase from Salix Pharmaceuticals, its largest business, accounting for nearly half its revenue and 59% of its segment profit.
Approximately 80% of Salix’s sales come from Xifaxan, an antibiotic for treating travelers’ diarrhea.
It might not be a glamorous product, but it’s necessary nonetheless, and its 69% segment profit margin certainly doesn’t hurt.
What’s Holding BHC Back?
In one word. Debt. It’s got lots of it.
The company finished the year paying out $1.33 billion in interest, down slightly from $1.46 billion a year earlier. Excluding 947 million in cash on its balance sheet at the end of 2023, its net debt was $21.65 billion, or 5.7 times its market cap. That’s a staggering amount.
Even if you go with its non-GAAP EBITDA profit in 2023, its total debt is nearly eight times that amount.
The good news is that $4.64 billion of the $22.6 billion in total debt is Bausch + Lomb’s. The bad news is that it expects to pay out $1.8 billion in interest in 2024. That means there won’t be GAAP profits this year and likely next year.
However, as interest rates fall in the second half of the year, and perhaps into 2025, it can refinance some of this debt at a lower cost while also pushing out the maturities on its debt.
So, it’s fair to say that the risks present are not small, making an investment in its stock appropriate for only the most risk-tolerant investors.
This is one reason its options are getting above-average uptake from investors. They lower the risk.
The Unusually Active Options
As I said earlier, there were two calls of interest, both expiring on May 17. One had a $13 strike, while the other had a $11 strike. The Vol/OI ratios were 36.32 and 19.60, respectively.
With 50 days to expiration (7 weeks), the former had a volume of 24,555, or nearly one-third of Bausch Health’s entire options volume on the day.
I call it a no-brainer because the $0.35 ask is a down payment of just 2.9% of its $13 strike. Worst-case scenario, you’re out $35 per contract. At the same time, with a delta of 0.23593, its shares only have to increase by $1.48 (14% on the $10.49 closing price) for you to double your money on the call by selling before expiration.
To actually consider exercising your right to buy 100 shares, you’d need BHC's share price to increase by at least 27% over the next seven weeks. It’s doable—BHC gained 27% between Feb. 5 and March 1 (25 days)—but it’s unlikely.
The other fly in the ointment here is that Bausch Health still owns 88.5% of BLCO stock, which is both a blessing and a curse. To understand why, read Fitch Ratings’ October 2023 commentary on the subject.
In addition, it’s in the middle of litigation over Xifaxan, its top-selling product. The company is waiting for the U.S. Court of Appeals for the Federal Circuit’s decision.
If the company receives a positive court decision, that would accelerate Bausch + Lomb's full separation from its business, adding significant value to both companies’ share prices.
But it’s a big question mark at this point.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
