Op-ed: Here’s why a sale of Bausch + Lomb could lead to a windfall for Bausch Health investors

Bausch Well being, previously generally known as Valeant Prescribed drugs, is a multinational specialty pharmaceutical firm with world headquarters in Canada. It serves numerous therapeutic areas, together with dermatology, gastroenterology, neurology and ophthalmology.

The corporate operates by way of 5 principal enterprise segments — Bausch + Lomb, Salix Prescribed drugs, Worldwide Rx, Solta Medical and Diversified Merchandise. Bausch Well being stays a major participant within the health-care sector, significantly as a result of power of its Bausch + Lomb division in eye care.

Activist investor Carl Icahn filed a 13D with the U.S. Securities and Alternate Fee on Bausch Well being on Feb. 11, 2021, stating that he supposed to have interaction in discussions with the corporate’s administration and board, concerning methods to boost shareholder worth. These steps embrace the corporate’s strategic evaluation, which was ongoing on the time, in addition to attainable board illustration. Later that month, Icahn and the corporate entered right into a director appointment and nomination settlement, pursuant to which the corporate agreed to extend the scale of the board to 13 administrators from 11 and appoint Icahn portfolio managers Brett Icahn and Steven Miller as administrators.

In Might 2022, Bausch + Lomb (BLCO) was spun off as a separate publicly traded entity, however it continues to be a core a part of Bausch Well being’s enterprise by way of its retained 88% possession. At the moment, former Icahn portfolio supervisor Richard Mulligan was added to Bausch Well being’s board. In June 2022, John Paulson was named chair, after beforehand serving on the board from June 2017 by way of Might 2022. The board is presently comprised of 10 administrators and contains Brett Icahn, Steven Miller and Richard Mulligan with John Paulson as non-executive chair.  

This previous weekend, the Monetary Occasions reported that BLCO retained Goldman Sachs to discover a sale of the corporate. BLCO presently has an enterprise worth of roughly $10 billion, however this worth is depressed by numerous components together with its management possession by Bausch Well being and the massive quantity of debt on Bausch Well being’s consolidated stability sheet – $20.4 billion, of which $4.6 billion is BLCO debt that’s consolidated at Bausch Well being. Because of this, a sale of management to a brand new entity would remedy each points and sure garner a a lot greater worth than the place BLCO presently trades. This could enormously profit BLCO stockholders, of which Bausch Well being is the biggest.

BLCO’s estimated 2025 earnings earlier than curiosity, taxes, depreciation and amortization is $966 million. Friends like The Cooper Corporations and Alcon commerce at a 19.5-times and 18.5-times enterprise worth/EBITDA a number of, respectively. Assuming a mean a number of for BLCO of 19-times yields an enterprise worth of $18.35 billion. With $4.35 billion of web debt on the BLCO stability sheet, the implied fairness worth can be $14 billion. With 351.9 million shares excellent, that could be a per share fairness value of $39.79. BLCO ended Friday’s session at $15.55 per share — that’s, earlier than the Monetary Occasions’ report. As an 88% proprietor of BLCO, Bausch Well being’s worth derived from such a sale can be $12.32 billion.

Furthermore, its 4 different divisions have an mixture $2.45 billion of final 12 months’ EBITDA. The Salix division, which pertains to gastroenterology, has been the corporate’s most worthwhile division after Bausch + Lomb, with $2.25 billion of LTM income and $1.55 billion of LTM working earnings. Nonetheless, 87% of that enterprise is derived from the Xifaxan drug, that comes off of patent in January 2028. With 3.5 years remaining beneath patent and assuming 5% annual income development (development was 6% final 12 months), the Xifaxan enterprise would have a gift worth of $4.25 billion assuming there are completely zero gross sales after 2027, which is an especially conservative assumption. The worth Bausch Well being would attain from simply the BLCO sale and the Xifaxan enterprise can be greater than sufficient to retire its $15.45 billion of remaining web debt, leaving an organization with $1.43 billion of web money and 4 worthwhile enterprise strains (“RemainCo”) with an mixture EBITDA of $­­1.17 billion, after allocating the total company overhead from Xifaxan that’s not included within the Xifaxan valuation above.

So, what’s RemainCo price? The Worldwide Rx enterprise’ (26.8% of RemainCo working earnings) greatest peer is Recordati which trades at 15.99-times EV/EBITDA. The Diversified Merchandise enterprise (45.9% of RemainCo working earnings) ought to be much like lower-growth pharma companies together with Viatris and Organon & Co. which commerce at 7.13-times and eight.37-times EV/EBITDA, respectively. The Solta medical enterprise (12.3% of RemainCo working earnings) is trickier. Peer InMode trades at solely 4.23-times EV/EBITDA, however its income has declined 31.15% within the first half of 2024 versus the primary half of 2023 whereas Solta’s income has grown at 18% throughout the identical time interval. Which means Solta’s a number of ought to definitely be at a cloth premium to InMode. The final piece of RemainCo can be the remaining portion of Salix (the non-Xifaxan piece), which includes 14.9% of RemainCo working earnings and whose friends Takeda Prescribed drugs and Ironwood Prescribed drugs commerce at 9.57-times and 9.72-times EV/EBITDA, respectively.

A valuation evaluation for a corporation as complicated as BHC utilizing peer multiples is as a lot of an artwork as it’s a science and definitely a few of these multiples could also be too excessive whereas different could also be too low. Whereas a weighted common a number of can be 9.8-times, we expect utilizing an 8-times a number of is truthful. That might indicate a price of $9.36 billion for RemainCo. Including the worth of the proceeds from BLCO sale, the Xifaxan money flows and RemainCo yields a complete worth of $25.93 billion for Bausch Well being. After subtracting 100% of the Bausch Well being debt, that will yield an fairness worth of $10.49 billion or $28.19 per share. The inventory ended Friday at $6.32.

Most articles about reported M&A bulletins or explorations will embrace the phrase “the sale course of could not lead to a transaction” and this case is not any completely different. Nonetheless, with 4 of 10 administrators at Bausch Well being being hedge fund portfolio managers and three of 10 at BLCO (Brett Icahn, Icahn portfolio supervisor Gary Hu and John Paulson), these boards don’t assume like the standard company board. Additional, BLCO CEO Brent Saunders is a extremely revered health-care CEO, but additionally a famous dealmaker and would probably not present the resistance usually seen from CEOs of firms being bought.

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.