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Stock of the Week: Bausch Health

The market reacts severely to a recent court ruling.

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Andrew Willis: The last time we spoke about Bausch Health, we discussed their drug business that we thought the market had seemingly discounted to zero. Fast forward to a month-and-a-half later, the stock is down around 50% in one day on one ruling. As equity analyst Aaron Degagne puts it, while our very high Morningstar Uncertainty Rating for Bausch Health was meant to capture some of the risk, the market's reaction was more severe than we anticipated.

The court ruling in question concerns Norwich Pharma's ability to bring out a generic version of the drug Xifaxan, which makes up around 30% of total sales. Now, instead of a patent loss in 2028, Bausch Health could lose around 50% of the sales of the irritable bowel syndrome drug. Painful, but is it a dealbreaker? Maybe. Knock-on effects related to the company's planned distribution of Bausch & Lomb shares to existing shareholders could pose a problem. Bausch Health is now essentially in a race against the clock to complete the full spinoff of Bausch & Lomb by 2024 when the company's earnings could fall below a target ratio if Norwich brings a generic to the market.

We share the concerns with investors on these recent developments and are now putting both Bausch entities under review. However, the situation isn't black and white. Some rulings in the recent decision went in Bausch's favor. So, Norwich should come to the negotiating table, and an appeal is a possibility.

For Morningstar, I'm Andrew Willis.

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Andrew Willis does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.