Eye Care Business Spin-off Opportunity (Bausch Health), Oct. 2020

Bausch Health Companies Inc.(BHC US; BHC TSE)

Sector: Specialty Pharma

Price (Oct. 6th, 2020): $15.3

Target price (12m): $26

Expected Share Price Return: +72%

Investment Risk: Medium

Rationale for investment

  • Planned spin-off of the eye care business, which will split the company into two should unlock shareholder value
  • EBITDA multiple valuation is at 50% of peers ;
  • COVID 19 impact is temporary

Profile

Bausch Health (formerly Valeant Pharmaceuticals International) is Canada’s largest publicly traded drug maker.

The Company develops drugs for unmet medical needs in central nervous system disorders, eye health, and gastrointestinal diseases, as well as contact lenses, intraocular lenses, ophthalmic surgical equipment, and aesthetic devices. Bausch Health Companies serves customers worldwide.

Its core specialty areas are eye care (largely due to the work of its Bausch + Lomb subsidiary), gastroenterology, and dermatology. Subsidiary Salix Pharmaceuticals makes such gastrointestinal medications as Xifaxan, Relistor, and Lucemyra. Products in Bausch Health’s dermatology segment include genital herpes treatment Zovirax and acne treatment Acanya.

Investment Case

Laden with long-term debt and focusing on its core growth areas of eye health, gastroenterology, and dermatology, BHC has been divesting or discontinuing a host of non-core operations. Sales from its three core areas have been solid and now represent more than 70% of revenue, up nearly 10 percentages points in just three years. Through these asset sales, BHC has reduced its debt levels from $30 billion in 2015 to $24 billion.

Planned spin-off of the eye care business will split the company into two. While further details of the separation will emerge over time, we see a path to significant upside as the company separates its high-multiple eye care franchise from its traditional pharmaceutical business.

BHC’s recovery from COVID headwinds appears slower than anticipated, we see this as a near-term issue and forecast a full recovery for the company’s business as we look out to 2021 and beyond.

Valuation

The company trades at EV/EBITDA multiple of 9x versus an average of the sector of 28x, while BHC’s EBITDA margin is at 39% is in line with the sector. I suspect the company has been penalized due to high debt levels, complex M&A activity and especially the planned spin-off of the eye care business, which will split the company into two.

I estimate the EBITDA multiple should more than double over the next one year to 19-20x 2021E EBITDA, which translates into a target price of $30. I further apply a 20% discount for lack of visibility for the outcome of the split-off and higher debt hence I arrive at a target price of $26.

Investment Risks

  • High level of debt;
  • Risks with development of new products (i.e. Xifaxan)
  • M&A related risks

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2 thoughts on “Eye Care Business Spin-off Opportunity (Bausch Health), Oct. 2020

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