Joseph Papa, CEO, Bausch Health
Scott Mlyn | CNBC
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After receiving this note, we will initiate a position in Bausch Health (BHC), buying 1,500 shares at approximately $ 24.68. Upon completion of the transaction, Bausch Health will represent approximately 0.9% of the Charitable Trust.
At a high level, we like the idea of increasing our exposure to healthcare as it represents a defensive posture that we deem appropriate given the increased uncertainty resulting from the Omicron variant. This adds additional pressure on the global supply chain and reared its ugly head as the Federal Reserve changed its mind on inflation, noting that it will last longer than expected and that a quicker tightening. than expected monetary policy policy is therefore justified.
At the company level, we believe CEO Joe Papa has made significant progress in the turnaround of the ship Bausch Health (formerly Valeant) since taking office in mid-2016.
- First, when Dad took over, the company had over $ 30 billion in debt on its balance sheet; that figure has been reduced by $ 10 billion.
- Second, when Dad took over, the company faced legal issues related to incorrect revenue recognition and misleading disclosures. These old legal issues were resolved in July 2020 when the company agreed to pay a penalty of $ 45 million to settle the charges.
- Finally, if the two issues mentioned above were certainly priority issues, Papa also put the company back on the path of organic growth.
This is a brief overview of what has happened so far, however, it is what will happen next that we believe makes Bausch Health an attractive investment. Thanks to Papa’s intense, multi-year focus on solving legal issues, strengthening the balance sheet, and investing in growth (research and development as a percentage of revenue almost doubled, to 6%, under his direction), Bausch Health is able to unlock values via a three-way break.
- On August 6, 2020, management announced its intention to split its Eye Health business, a move that would result in the creation of two separate companies: Bausch + Lomb, “a fully integrated and pure eye health company,” and the remaining company, “a diversified pharmaceutical company with leading positions in gastroenterology, aesthetics / dermatology, neurology and international pharmaceuticals.” Management believes the move will generate value by enabling greater strategic focus on the eye care front – a factor that should drive profitability, while improving financial transparency – something that allows investors to better value the company. and thanks to the increased confidence that provides, perhaps rewarding stocks with a higher valuation multiple.
- However, nearly a year after the Eye Health spin-off was announced, management announced plans to further separate the remaining company by divesting its medical aesthetics business Solta Medical, “a leading global supplier of medical aesthetics with innovative and effective skin rejuvenation and body contouring solutions including Thermage RF systems, Fraxel laser, Clear + Brilliant laser and VASER ultrasound systems. “
- This move is expected to help further reduce debt and unlock value by allowing investors to assess the company on its own merit, with management believing that a higher multiple will be assigned to the company given its profile. improved growth (sales grew at a compound annual growth rate, or “CAGR,” of 32% from 2017 to 2020) and medical aesthetic peer reviews.
Ultimately, what is now Bausch Health is set to become three separate entities: an eye health business, a rapidly growing medical aesthetics business, and a diversified pharmaceutical operation. Now that we have an idea of what current shareholders will end up owning, the question is, what exactly is the value of these three entities individually and is that more than the value of the current company?
- Let’s start with the growing Solta operation. Although announced later, this will in fact be the first part to be separated via an IPO in early 2022. In the first three quarters of 2021 (+ 27% year-to-date), Solta achieved revenue of $ 219 million. Additionally, EBITDA grew at a CAGR of 87% from 2017 to 2020, and had $ 135 million of Adjusted EBITDA in 2020. Additionally, although we do not know the Adjusted EBITDA numbers for 2021, Applying the 27% growth rate to the basis of 2020 Adjusted EBITDA, we get a 2021 Adjusted EBITDA estimate of $ 171.5 million – a figure that we believe could prove to be careful.
- Now for the multiple. Aesthetics companies are highly valued by investors. For example, Beauty Health Company (SKIN) shows an incredible multiple of Adjusted EBITDA of 108x based on estimates through the end of 2021 (or ~ 73x Projected Adjusted EBITDA for next year), while InMode is trading at around 30x next year’s projected EBITDA numbers. Add that roughly 30 times lower multiple to our projected EBITDA of $ 171.5 million for Solta and we get a market cap of about $ 5.15 billion.
- As for Busch + Lomb, the eye health business achieved $ 909 million in “EBITA” in 2020, up from $ 1.1 billion in 2018 and 2019. In addition, the operation grossed $ 699 million. of “EBITA” in the first three months of 2021. on an estimated “EBITA” (based on 2020 results) in the fourth quarter of $ 248 million and we obtain an “EBITA” estimate for fiscal year 2021 d ‘approximately $ 947 million for Operation Bausch + Lomb.
- While its peers on this front are limited, Alcon, a Swiss company specializing in surgical equipment for ophthalmologists and more mainstream products like contact lenses, lens care products, etc., is trading at around 22.4 times the adjusted EBITDA expectations for 2021. Put that on the $ 947 estimate from Bausch + Lomb and we get a market cap of around $ 21.1 billion.
- Finally, there is the rest of Bausch Pharma. Since this is the hardest part of the business, we’ll just use the current multiple of Adjusted EBITDA of around 2.6x. Given current projections for the whole company (pre-splits) to generate $ 3.35 billion to $ 3.5 billion (call it $ 3.425 billion midway through) this year, and subtracting the ~ $ 1.118 billion that we allocated to Solta and Bausch + Lomb, we get a remaining EBITDA base of about $ 2.3 billion. Apply the multiple of 2.6x and we estimate this to be around $ 6 billion.
- Add in the three coins that we have now individually valued on their own merit (a coin valuation sum or “SOTP”) and you have a combined market cap of around $ 33.3 billion. However, there is of course still a debt to consider, worth $ 21.9 billion. Subtract that and we get a combined estimated market cap of around $ 10.4 billion or just over $ 29 per share for BHC when dismantled and value unlocked!
As a result, we believe this exercise indicates a strong reward for risk as the sum of the parts is greater than the whole, a factor that should support a strong floor in the share price at current levels as management executes the spin- outs and frees up value. .
Finally, as we launch stocks with a target of $ 29 based on this SOTP valuation, we believe it is a conservative target given our use of the lower multiple on Solta and the margin of progression resulting from increased strategic focus on the eye health sector. and the ability to manage for increased efficiency at Bausch Pharma.
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(Jim Cramer’s charitable trust is long BHC.)