Pharmaceutical provider Bausch Health Companies (NYSE:BHC) is having significant troubles using cash for new growth, because it must devote nearly all of its capital to debt repayments. In addition, its recent clinical program to investigate its anti-inflammatory drug, Virazole, for the treatment of COVID-19 might possess significant flaws. Is the company a safe investment for long-term shareholders? Or will loss of exclusivity on key products and lack of growth potential hamper share appreciation in the long run?

A hospital sign on the outside of a hospital building.

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What seems to be the problem?

Normally, pharmaceutical companies must commit a large portion of their revenues to research and development. This is because patents covering new drug discoveries last 20 years after the initial date of filing. After that date, branded drugs will see nearly all of their revenues eroded as authorized generic products begin flooding the market to bring down prices and make prescription drugs more affordable.

Hence, branded-drug companies need to allocate massive amounts of capital to conducting clinical trials and bringing new drugs to market in order to protect their competitive moats. With regard to this metric, Bausch Health is performing poorly.

Last year, the company's spending on research and development amounted to just $471 million, or 5.5%, out of its $8.49 billion in revenues. Meanwhile, competitors in the sector spend an average of 20% to 24% on R&D.

Usually, in cases such as this, a pharmaceutical company would raise new debt or equity or find collaborative partners to fund new clinical opportunities. For Bausch Health, however, this is simply not the case. Currently, the company has more than $21 billion in net debt (mostly racked up from levered acquisitions) and is generating merely $3.4 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Nearly half of this cash flow ($1.6 billion) is used for the payment of interest on existing debt alone.

A company simply cannot have a fresh start while drowning in debt. This is reflected in the performance of the company's ophthalmology, gastrointestinal, dermatologics, and diversified segments. While its gastrointestinal drugs saw growth of more than 20% in 2019, overall revenues grew by a mere 2.6% year over year, well below other pharma companies.

What about Virazole?

One growth catalyst that has investors talking is Virazole, an antiviral used to treat several respiratory illnesses and viral hemorrhagic fever. Because of its demonstrated ability to combat related infections, the drug is being considered  as a way to stop the viral reproduction of the COVID-19 coronavirus. An open-label study currently ongoing in Canada is investigating the drug administered with other standards of care to COVID-19 patients with respiratory distress.

Virazole's potential, however, might be doomed from the start. In a pharmacotherapy recommendation guide published by Nebraska Medicine, Virazole was listed as having mixed results in efficacy against COVID-19. Moreover, serious adverse events, such as anemia, have been associated with the drug. Therefore, it is unlikely Virazole will help Bausch Health's bottom line this year, especially considering there has been no updated guidance as to when its clinical trial will end.

Is there any long-term potential for Bausch Health?

In fact, the company might not meet its revenue and earnings-per-share guidance due to widespread disruptions in the pharmaceutical supply chain related to COVID-19 and the lack of a promising candidate to treat the virus. Although the stock is trading at a mere 4 times forward earnings (non-GAAP), it's unlikely the company's valuation can improve given its subpar levels of growth and too much debt burden. Hence, investors interested in pharmaceutical stocks should instead look for companies with no debt, optimal levels of growth, and reasonable prices.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.