Bausch Health Companies Inc. has long been considering strategic options for its eye health business. But now that it has paid down $8 billion in debt and divested $4 billion in non-core assets, it expects that the time is now right to spin out the eye health business as a separate publicly traded entity.

The newco will be known as Bausch + Lomb, but the process is expected to take about a year and a half. Bausch Health expects to reorganize its reporting segments starting with earnings for the first quarter of 2021, which is an early step to facilitate the spinoff.

Unlocking value?

“The spin-off will establish two separate companies, a fully integrated, pure play, eye health company built on the iconic Bausch Health brand and a long history of innovation, and an international diversified pharmaceutical company with leading physicians in gastroenterology, dermatology, aesthetics, neurology and an international pharma business,” said Bausch Health chairman and CEO Joseph Papa on an Aug. 6 earnings call. “Four years ago, we initiated a multi-year plan: first, to stabilize; and then to transform Bausch Health into a company positioned to deliver long-term organic growth.”

“We've looked at the value of our pure health companies like Alcon and Cooper and believe that Bausch + Lomb would compare very favorably when investors have an opportunity to make a judgment about the relative value of the stand-alone business,” he later added. “We also believe that now is the right time to begin the separation process, which requires us to complete several steps before a spin-off can occur.”

The precise details and terms including executive leadership, capital structure and anticipated financial impact have yet to be determined. Bausch has a market cap of $7.2 billion, which has hovered in a tight range for about the last five years. It also reported poor earnings for last quarter, under pressure from the pandemic. Newco competitor Alcon similarly spun out from Novartis in April 2019, and is currently valued at almost $30 billion.

The newco Bausch + Lomb will consist of the global vision care, surgical, consumer and ophthalmic Rx businesses, which had 2019 revenue of about $3.7 billion and a compound annual growth rate (CAGR) for 2017 through 2019 of 4.1%. This accounts for roughly 45% of the business, according to Morningstar.

Alcon comp

“Novartis’ spin-off of eye health company Alcon is a good comparable, and that took ten months from announcement to post-spin-off trading, though we expect the Bausch + Lomb separation to take longer as Bausch likely intends to pay off over $1 billion of debt before completing the spin-off, and because we think the spin-off is unlikely to occur in an environment with significant uncertainty during the COVID-19 pandemic,” said Morningstar analyst Aaron Degagne. “Bausch may attempt to capitalize on general market optimism if COVID-19 is brought under control by mid-2021 from the distribution of safe and effective vaccines, though we see a long path ahead before the formal separation.”

The newco will be largely centered around durable eye care brands including Bausch + Lomb Ultra, Biotrue, Oneday, Lumify, Ocuvite, Preservision and Infuse. The final contact lens brand received 510(k) clearance last quarter and is slated to launch soon.

The remaining BHC businesses had 2019 revenue of about $4.9 billion with a compound annual growth rate (CAGR) of 1.8% from 2017 to 2019. It will continue to encompass Salix, international prescriptions, Solta, neurology and medical dermatology businesses

BHC pharmaceutical brands will include gastrointestinal medications Xifaxan, Trulance and Relistor; dermatology treatments Jublia, Duobrii and Thermage FLX; and neurology drugs Wellbutrin and Aplenzin.

Laval, Quebec-based Bausch Health reported $1.66 billion in second quarter revenues, which was a 23% decline from $2.15 billion during the second quarter of 2019. The company chalked up a $500 million negative impact to the COVID-19 pandemic.

Wall Street seems upbeat about the prospects for the spinoff. “This has long been contemplated, but now more concrete action is being taken, and we believe only reinforces and supports our thesis, which is that this division is sustainable, durable, should grow indefinitely with adequate R&D replenishment, and should now receive a more appropriate valuation,” said a Cowen note from analyst Ken Cacciatore. “The capital structure/debt allocation has not yet been decided, but even with an abnormally high leverage for this standalone franchise, it will likely still receive a value closer to our intrinsic discounted cash flow.”

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