Description

Bausch Health (BHC) is a multinational specialty pharmaceutical company that develops and manufactures a variety of eye care, pharma and skin care products.  The upcoming IPO’s of two businesses that should trade at much higher valuations than BHC should help to unlock significant value for shareholders.  The company plans to IPO the Bausch + Lomb eye-care business and Solta Medical dermatology businesses in two separate transactions with the Bausch + Lomb business expected to IPO before the Solta business.  Bausch + Lomb recently filed an S-1 and will soon complete its IPO.  BHC will retain a minimum of ~80% of Bausch + Lomb after the completion of the offering and will transfer its ownership to shareholder through a dividend, one or more distributions in exchange for BHC shares or a combination of these options.  The proceeds from the Bausch + Lomb IPO, debt raise at Bausch + Lomb (target leverage ratio of less than 2.5x) and proceeds from the Solta Medical IPO (initial IPO of 20% to 30% of the business) will be used to achieve BHC’s leverage ratio target of 6.5 to 6.7x.  Solta Medical is not expected to be distributed to shareholders and will be used to maintain the targeted leverage.  These transactions should help the market realize the value of these attractive assets, which we believe are undervalued in the diverse portfolio of BHC businesses.  In addition, both Bausch + Lomb and Solta Medical will be more focused companies with independent management teams, proper incentives and strong balance sheets.  A sum of the parts valuation suggests a valuation of well over $30 for BHC.  

Here is an overview of Bausch + Lomb, Solta Medical and Bausch Parma (Remain Co.):

Bausch + Lomb

Bausch + Lomb is a leading global eye health company with a comprehensive portfolio of over 400 eye care products with a presence in over 100 countries.  Products include contact lenses, multi-purpose solution, eye drops, eye vitamins, pharmaceutical products to treat eye disorders and surgical eye equipment and tools.  62% of revenue is from vision care, 19% is from ophthalmic pharmaceuticals and 19% from surgical.  Over 90% of Bausch + Lomb’s products are not impacted by branded pharmaceutical pricing issues.  The company has a 600 person R&D team that had created 260 new products since 2017.  

Bausch + Lomb estimates that the global eye health market was nearly $50 billion in 2019 revenue, which is expected to grow at a 4% CAGR through 2025.  Growth tailwinds include an aging global population, growth in the middle class in emerging markets, and growth in diabetes prevalence.  BHC CEO Joe Papa will be CEO of the new B&L spin-off and we view him as a highly capable executive.  While Bausch + Lomb and its key competitors were negatively impacted by the pandemic (Alcon’s revenue down 9% in 2020 and Cooper down 8%), most of Bausch + Lomb’s revenues will return to pre-pandemic levels in 2021 and should continue to recover in 2022 as elective procedures recover.  We expect Baush + Lomb to grow revenues at a MSD rate over the long-term (organic revenue growth from Q4 17 to Q4 19 was 6%), in line with the industry growth rate.  In addition, Bausch + Lomb should be able to return its EBITDA margin to pre-COVID levels over time, which should drive elevated EBITDA growth over the next few years.    

Solta Medical 

Solta Medical designs, develops, manufactures, and markets medical device systems and products for aesthetic applications.  The key product is the Thermage CPT system, a non-invasive radiofrequency energy treatment for skin tightening.  The business has delivered impressive growth with 2018 revenue of $135 mil. that grew to $253 mil. in 2020.  The Next Generation Thermage FLX (launched in 2018), a fourth-generation platform designed to improve patient outcomes has been the key growth driver for Solta over the past few years.  There is a large international growth opportunity for Thermage FLX with expansion targeted in several countries.  Over 70% of Solta’s revenue is from the sale of consumables and product service and this creates a recurring revenue driven business model.  We expect robust revenue growth to persist and for Solta Medical’s attractive EBITDA margins to continue growing over time.  

Bausch Pharma 

Bausch Parma’s largest product is Xifaxan (an established GI franchise), which was acquired through the 2015 acquisition of Salix (47% of segment revenue).  Xifaxan accounts for about 35% of Bausch Parma’s revenue and has grown in recent years with 2% growth in 2020 and 22% growth in 2019 and 2018.  Xifaxan revenue grew a solid 12% in Q3 21.  Other businesses include International (27% of revenue), Neuro & Other (14% of revenue), Ortho Dermatologics (6% of revenue), Genetrics (4% of revenue) and Dentistry (2% of revenue).  Other notable drugs for Bausch Parma include Wellbutrin, Jublia, Relistor, Trulance, Aplenzin, and Bedoyecta.  The business has an attractive EBITDA margin of ~50% and has operations in ~70 countries.  Bausch Pharma’s organic revenue increased 4% in 2021 YTD.  We believe that Bausch Pharma is a relatively mature and slower growing pharma company that will continue to generate attractive EBITDA margins and cash flow.          

VALUATION 

We expect the upcoming IPO’s to help the market properly value the Bausch + Lomb and Solta Medical businesses.  Based on a 18x EV/22 EBITDA multiple for Bausch + Lomb (10% discount to peers) and a conservative 14x EV/22 EBITDA multiple for the rapidly growing Solta Medical business, the implied valuation for Bausch Pharma is just 4.8x EV/22 EBITDA, well below peers (see below).  In a sum of the parts valuation and assuming a low end of the peer group multiple for Bausch Pharma of 6.6x EV/22 EBITDA, the valuation for BHC is $36 (over 40% upside potential).  

RISKS 

BHC has significant leverage. 

Net debt to EBITDA for the total company is 6.4x as of Q3 2021 and the Bausch Pharma net debt to EBITDA will be elevated at 6.5x to 6.7x but the business generates consistent FCF and should be able to reduce debt over time.  Management is targeting reducing leverage by 0.75 turns per year.    

BHC is the successor company to Valeant Pharmaceuticals.

In 2015, Valeant underwent an accounting scandal resulting in a revenue restatement, SEC fines and settlements.  The company has a new management team and these issues are now behind the company but this may be an issue for some investors.

Patent exclusivity will eventually end for pharma products. 

This is more of a risk for the Bausch Pharma business but the company must continuously innovate and develop new drugs.  Based on recent legal settlements, BHC is confident that Zifaxan will have exclusivity until 2028.    

BHC may face tax liabilities or could receive unfavorable tax treatment from the IRS.  

Potential tax liabilities may arise as a result of these transactions.   

Catalyst

Upcoming IPOs of Bausch + Lomb and Solta Medical.