CHICAGO, ILLINOIS – MAY 5: Bausch + Lomb eye vitamins are displayed for sale at a drugstore in Chicago, Illinois on May 5, 2022. Bausch + Lomb's parent company, Bausch Health, is spinning off the eye care company with an upcoming initial public offering that will be listed on the New York Stock Exchange and the TSX under the ticker symbol “BLCO.” (Photo by Scott Olson/Getty Images)
Scott Olson | Getty Images News | Getty Images
Bausch Healthformerly Valeant Pharmaceuticals, is a multinational specialty pharmaceutical company headquartered in Canada. It serves various therapeutic areas, including dermatology, gastroenterology, neurology and ophthalmology.
The company operates through five main business segments: Bausch + Lomb, Salix Pharmaceuticals, International Rx, Solta Medical and Diversified Products. Bausch Health remains a significant player in the healthcare sector, particularly due to the strength of its Bausch + Lomb eye care division.
Activist investor Carl Icahn filed a 13D with the U.S. Securities and Exchange Commission on Bausch Health on February 11, 2021, in which he stated that he intends to engage in discussions with the company's management and board of directors about ways to increase shareholder value. These steps include the company's strategic review, which was still ongoing at the time, and potential representation on the board. Later that month, Icahn and the company entered into a director nomination and appointment agreement, under which the company agreed to increase the size of the board from 11 to 13 directors and to appoint Icahn portfolio managers Brett Icahn and Steven Miller as directors.
In May 2022 Bausch + Lomb (BLCO) was spun off as a separate publicly traded company, but remains a core part of Bausch Health's business through its 88% stake. At that time, former Icahn portfolio manager Richard Mulligan was added to Bausch Health's board of directors. In June 2022, John Paulson was appointed chairman, having previously served on the board from June 2017 to May 2022. The board currently consists of 10 directors and includes Brett Icahn, Steven Miller and Richard Mulligan, with John Paulson as non-executive chairman.
Stock chart symbolStock chart symbol
Bausch + Lombs Performance 2024
Last weekend, the Financial Times reported that BLCO has hired Goldman Sachs to explore a sale of the company. BLCO currently has an enterprise value of around $10 billion, but that value is depressed by several factors, including Bausch Health's controlling interest and the high level of debt on Bausch Health's consolidated balance sheet – $20.4 billion, of which $4.6 billion is BLCO debt consolidated into Bausch Health. As a result, a sale of control to a new company would solve both problems and likely fetch a much higher value than BLCO currently trades at. This would greatly benefit BLCO shareholders, of which Bausch Health is the largest.
Understanding valuation in the event of a sale
BLCO's estimated earnings before interest, taxes, depreciation and amortization are $966 million in 2025. The Cooper companies and Alcon trade at 19.5 and 18.5 times enterprise value/EBITDA multiples, respectively. Assuming an average multiple for BLCO of 19, that gives an enterprise value of $18.35 billion. With $4.35 billion of net debt on BLCO's balance sheet, the implied equity value would be $14 billion. With 351.9 million shares outstanding, that gives an equity price of $39.79 per share. BLCO closed Friday's session at $15.55 per share — ahead of the Financial Times report. As an 88 percent owner of BLCO, Bausch Health's value from such a sale would be $12.32 billion.
In addition, the company's four other business units generated a total of $2.45 billion in EBITDA over the last 12 months. The Salix business unit, which deals with gastroenterology, was the company's most profitable business unit after Bausch + Lomb, with $2.25 billion in revenue and $1.55 billion in operating profit over the last 12 months. However, 87% of this business comes from the drug Xifaxan, whose patent expires in January 2028. With 3.5 years of patent life remaining and assumed annual sales growth of 5% (last year growth was 6%), the Xifaxan business would have a net present value of $4.25 billion, assuming absolutely no sales after 2027, which is an extremely conservative assumption. The value Bausch Health would realize from the BLCO sale and the Xifaxan business alone would be more than sufficient to pay off the remaining net debt of $15.45 billion, leaving the Company with net cash of $1.43 billion and four profitable business units (“RemainCo”) with total EBITDA of $1.17 billion, after allocating all of Xifaxan’s overhead costs, which are not included in the above valuation of Xifaxan.
So what is RemainCo worth? The best competitor to the international Rx business (26.8% of RemainCo's operating income) is Recordati, which trades at 15.99x EV/EBITDA. The diversified products business (45.9% of RemainCo's operating income) should be similar to lower-growth pharma companies including Viatris and Organon & Co., which trade at 7.13x EV/EBITDA and 8.37x, respectively. Solta's medical business (12.3% of RemainCo's operating income) is more difficult. Rival InMode trades at just 4.23x EV/EBITDA, but its revenue is down 31.15% in H1 2024 from H1 2023, while Solta's revenue is up 18% over the same period. This means that Solta's multiple is sure to be significantly higher than InMode's. The final part of RemainCo would be the remaining part of Salix (the non-Xifaxan part), which represents 14.9% of RemainCo's operating income and whose competitors Takeda Pharmaceuticals and Ironwood Pharmaceuticals trade at 9.57x and 9.72x EV/EBITDA, respectively.
Valuation analysis for a company as complex as BHC using peer multiples is both an art and a science, and certainly some of these multiples can be too high and others too low. While a weighted average multiple would be 9.8x, we think an 8x multiple is appropriate. That would imply a value of $9.36 billion for RemainCo. Adding the value of the proceeds from the BLCO sale, the Xifaxan cash flows, and RemainCo gives a total value of $25.93 billion for Bausch Health. After subtracting 100% of Bausch Health's debt, the equity value comes to $10.49 billion, or $28.19 per share. The stock closed Friday at $6.32.
Most articles about reported M&A announcements or explorations include the phrase “the sale process may not result in a transaction,” and this situation is no different. However, with four out of 10 directors at Bausch Health being hedge fund portfolio managers and three out of 10 at BLCO (Brett Icahn, Icahn portfolio manager Gary Hu and John Paulson), these boards are not thinking like a typical corporate board. In addition, BLCO CEO Brent Saunders is a highly respected CEO in healthcare, but also a known dealmaker and would likely not show the resistance typically shown by CEOs of companies being sold.
Ken Squire is founder and president of 13D Monitor, an institutional research service on shareholder activism, and founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments.