Sale of Bausch + Lomb may lead to windfall for Bausch Health investors

Bausch Health, formerly known as Valeant Pharmaceuticals, is a multinational specialty pharmaceutical company with global headquarters 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 health-care sector, particularly due to the strength of its Bausch + Lomb division in eye care.

Activist investor Carl Icahn filed a 13D with the U.S. Securities and Exchange Commission on Bausch Health on Feb. 11, 2021, stating that he intended to engage in discussions with the company’s management and board, regarding ways to enhance shareholder value. Those steps include the company’s strategic review, which was ongoing at the time, as well as possible board representation. Later that month, Icahn and the company entered into a director appointment and nomination agreement, pursuant to which the company agreed to increase the size of the board to 13 directors from 11 and 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 entity, but it continues to be a core part of Bausch Health’s business through its retained 88% ownership. At that time, former Icahn portfolio manager Richard Mulligan was added to Bausch Health’s board. In June 2022, John Paulson was named chair, after previously serving on the board from June 2017 through May 2022. The board is presently comprised of 10 directors and includes Brett Icahn, Steven Miller and Richard Mulligan with John Paulson as non-executive chair.  

This past weekend, the Financial Times reported that BLCO retained Goldman Sachs to explore a sale of the company. BLCO presently has an enterprise value of roughly $10 billion, but this value is depressed by various factors including its control ownership by Bausch Health and the large amount of debt on Bausch Health’s consolidated balance sheet – $20.4 billion, of which $4.6 billion is BLCO debt that is consolidated at Bausch Health. As a result, a sale of control to a new entity would solve both issues and likely garner a much higher value than where BLCO presently trades. This would greatly benefit BLCO stockholders, of which Bausch Health is the largest.

BLCO’s estimated 2025 earnings before interest, taxes, depreciation and amortization is $966 million. Peers like The Cooper Companies and Alcon trade at a 19.5-times and 18.5-times enterprise value/EBITDA multiple, respectively. Assuming an average multiple for BLCO of 19-times yields an enterprise value of $18.35 billion. With $4.35 billion of net debt on the BLCO balance sheet, the implied equity value would be $14 billion. With 351.9 million shares outstanding, that is a per share equity price of $39.79. BLCO ended Friday’s session at $15.55 per share — that is, before the Financial Times’ report. As an 88% owner of BLCO, Bausch Health’s value derived from such a sale would be $12.32 billion.

Moreover, its four other divisions have an aggregate $2.45 billion of last 12 months’ EBITDA. The Salix division, which pertains to gastroenterology, has been the company’s most profitable division after Bausch + Lomb, with $2.25 billion of LTM revenue and $1.55 billion of LTM operating income. However, 87% of that business is derived from the Xifaxan drug, that comes off of patent in January 2028. With 3.5 years remaining under patent and assuming 5% annual revenue growth (growth was 6% last year), the Xifaxan business would have a present value of $4.25 billion assuming there are absolutely zero sales after 2027, which is an extremely conservative assumption. The value Bausch Health would attain from just the BLCO sale and the Xifaxan business would be more than enough to retire its $15.45 billion of remaining net debt, leaving a company with $1.43 billion of net cash and four profitable business lines (“RemainCo”) with an aggregate EBITDA of $­­1.17 billion, after allocating the full corporate overhead from Xifaxan that is not included in the Xifaxan valuation above.

So, what is RemainCo worth? The International Rx business’ (26.8% of RemainCo operating income) best peer is Recordati which trades at 15.99-times EV/EBITDA. The Diversified Products business (45.9% of RemainCo operating income) should be similar to lower-growth pharma businesses including Viatris and Organon & Co. which trade at 7.13-times and 8.37-times EV/EBITDA, respectively. The Solta medical business (12.3% of RemainCo operating income) is trickier. Peer InMode trades at only 4.23-times EV/EBITDA, but its revenue has declined 31.15% in the first half of 2024 versus the first half of 2023 while Solta’s revenue has grown at 18% during the same time period. That means Solta’s multiple should certainly be at a material premium to InMode. The last piece of RemainCo would be the remaining portion of Salix (the non-Xifaxan piece), which comprises 14.9% of RemainCo operating income and whose peers Takeda Pharmaceuticals and Ironwood Pharmaceuticals trade at 9.57-times and 9.72-times EV/EBITDA, respectively.

A valuation analysis for a company as complex as BHC using peer multiples is as much of an art as it is a science and certainly some of these multiples may be too high while other may be too low. While a weighted average multiple would be 9.8-times, we think using an 8-times multiple is fair. That would imply a value of $9.36 billion for RemainCo. Adding the value of the proceeds from BLCO sale, the Xifaxan cash flows and RemainCo yields a total value of $25.93 billion for Bausch Health. After subtracting 100% of the Bausch Health debt, that would yield an equity value of $10.49 billion or $28.19 per share. The stock ended Friday at $6.32.

Most articles about reported M&A announcements or explorations will include the phrase “the sale process may not result in a transaction” and this situation is no different. However, with four of 10 directors at Bausch Health being hedge fund portfolio managers and three of 10 at BLCO (Brett Icahn, Icahn portfolio manager Gary Hu and John Paulson), these boards do not think like the typical corporate board. Further, BLCO CEO Brent Saunders is a highly respected health-care CEO, but also a noted dealmaker and would likely not show the resistance normally seen from CEOs of companies being sold.

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