BAUSCH HEALTH: VALUE IS IN THE EYE OF THE BEHOLDER

By Dabin Im, Pharmaceutical Analyst

Bausch Health is a multi-national pharmaceutical company headquartered in Quebec, Canada. Despite its notorious past, Bausch Health has quite the exciting news. It will now be splitting up into two different companies, Bausch + Lomb and Bausch Pharma, which will be separately traded. That way, Bausch + Lomb can focus solely on its eye-care products, while Bausch Pharma can focus on its diversification, with products in gastroenterology, neurology, aesthetics, and dermatology. Spin-offs can be risky because that means the company must be independent and strong enough on its own. However, spin-offs can also be extremely successful. For example, AbbVie was a spin-off from Abbott Laboratories, a medical device company. Even though it only occurred less than 10 years ago, in 2013, AbbVie became the third largest pharmaceutical company in the world by revenue.  

In Bausch + Lomb’s case, it is extremely robust as it accounts for 41% of Bausch Health’s 2020 revenue of $8 billion. Bausch + Lomb specializes in eye care, but it is strong enough to be its own company because its products completely dominate the eye industry. It makes different types of contact lenses suitable for various target populations, such as those with nearsightedness/ farsightedness, astigmatism (distorted vision), cataracts (blurred vision), and presbyopia (difficulty focusing on nearby objects).  It also makes multi-purpose solutions, specialty lens care products, allergy relief eye drops, prescription products, and even eye vitamins and surgical products. For this company, products for treatment and prevention are not enough. It also partakes in diagnostics through its ocular allergy diagnostic system (OADS). It is a three-minute test that can tell which specific substance the patient is allergic to within 10 to 15 minutes.  

Bausch + Lomb is expected to be start operating separately by 3Q 2021. Since it’s going to be a spin-off, it must be intentional with its future growth and pipeline. Bausch + Lomb’s pipeline looks extremely original, with products being developed to treat inflammation, allergies, pain, and even open-angle glaucoma and ocular hypertension. It is not only developing treatments for conditions that require prescriptions, but also implementing technology in its eye care. It currently has a contract with Lochan & Co to develop a cloud-based software called eyeTELLIGENCE. Through AI technology, this software can detect eye diseases and help ophthalmologists make the most optimal clinical decisions. 

Sometimes, it’s not so much about waiting for the next new thing but fixing what is already there. Should people not let the past define this company and just focus on its future potential? Bausch Health does have quite the notorious origin. It was previously known as Valeant Pharmaceuticals, which reached its peak in August 2015 with its stock price at $262.52 per share. Six years later, on August 2nd, 2021, Bausch Health’s price plummeted to $29.80 per share. The company’s vision and management as Valeant Pharmaceuticals was completely different from what it is now as Bausch Health. Valeant Pharmaceuticals reached its peak by digging themselves a huge hole of debt. It acquired many smaller pharmaceutical companies and sold their products for a much more expensive price. It was unethical how much they were marking up the drug prices. For example, they acquired companies that developed Wilson’s disease treatments, Cuprimine and Syprine. These medications had been around for several decades and were sold for $500 a month until Valeant marked it up to $24,000 for a one-month supply. It was hopeless for patients that needed these medications to survive. Valeant Pharmaceuticals was also sued for insider trading (an illegal practice of trading based on confidential information). In one way or another, Valeant’s business practice had to eventually come to an end, and it did so by re-branding as Bausch Health. Its past is coming back full circle because one of Valeant’s acquisitions back in 2013 was Bausch + Lomb. 

With still a lot of debt to pay off and limited budget set aside for research and development, Bausch Health may not be a stable option for most investors. It is also losing a patent in 2028 for one of its irritable bowel syndrome medications that accounts for 24% of its sales. Although it has come a long way, from its peak debt of $30 billion in 2016 to now $23.7 billion, there is still a long road to recovery left ahead. Bausch Health currently has very low valuations, trading for 1.5x its sales and 15x free cash flow. Its stock price has been recovering since its lowest of $9.02 in 2017 to now $25.04 (August 4, 2021).

Judging from Bausch Health’s stock price, you may think it’s not a big company. But keep in mind that the stock price represents many different factors. For example, Shopify is currently selling at $1500 per share, and Pfizer is trading at $45 per share. But that does not mean Shopify is over 33x bigger than Pfizer. In fact, in 2020, Pfizer’s revenue was $42 billion whereas Shopify’s was $2.93 billion. So what are these stock prices based on? Well, to make things simple, the stock market really cares about future value projections. When looking ahead, some industry sectors are simply more appealing than others. The Internet software sector is trading at 14.85x its price/sales (hint: Shopify). On the other hand, the price to sales ratio for the pharmaceutical sector is 4.91. But even when we compare apples to apples, Bausch Health is still very undervalued with its price to sales ratio at 1.5x. That means for every dollar it makes in sales, its stock price is worth $1.50. Although it may seem like a Black Friday deal, it can be a double-edged sword. The low valuation implies that the future might not look so bright. 

Is it time to give Bausch another chance? It is still paying for its past mistakes with $500 million of its cash going straight to repaying debt in the first half of 2021. But in the second quarter of 2021, its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) was $826 million. Therefore, it is still inherently profitable. Overall, this spin-off is one to watch out for. Its spin-off, Bausch + Lomb, may bring exciting returns. Eye care will always be needed and continues to grow due to its cosmetic and health implications. It also won’t have to worry as much about the debt that its parent company is climbing out of. Bausch + Lomb has already proven itself with its current products in high demand, steady profits, and an exciting pipeline with new partnerships. This spin-off will provide a fresh start for Bausch + Lomb to unleash its full potential within the eye industry.