We’re starting a new trust position in a health stock
Joseph Papa, CEO, Bausch Health
Scott Mlyn | CNBC
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We will initiate a position once we have received this note. Bausch HealthBHC), purchasing 1,500 shares for $24.68. Bausch Health, which will account for approximately 0.9% in the Charitable Trust’s value after the trade.
High up, we love the idea of increasing our coverage for health care. It is a defensive strategy that we consider appropriate considering the risk posed by the Omicron variant. The Omicron variant is adding further pressure to the global supply system and raising its ugly head at the same moment that the Federal Reserve has changed its opinion on inflation. It now believes that the Fed will tighten its monetary policy quicker than it anticipated.
Our company believes that Joe Papa, the CEO, made great strides in repairing the Bausch Health, formerly Valeant ship, since his takeover in mid-2016.
- Papa assumed control of the company in 2005 with over $30 Billion in outstanding debt. Since then, that number has fallen to $10 billion.
- Second, Papa took control of the company despite it being facing serious legal challenges relatedincorrect revenue recognition, and misleading disclosures. In July 2020, the company paid a $45million penalty in settlement of these legal issues.
- Papa also guided the company on a path to organic growth, despite the fact that the above two problems were definitely priority issues.
We have provided a summary of all that has been accomplished so far. But it is the future we see making Bausch Health an appealing investment. Thanks to Papa’s intense multiyear focus on resolving legal issues, strengthening the balance sheet, and investing in growth (research & development as a percentage of revenue nearly doubled, to 6%, under his leadership), Bausch Health is in a position to unlock additional value via a three-way breakup.
- The management will change on Aug. 6, 2020. announced its intention to spin off its Eye Health business, a move that would result in two separate companies: Bausch + Lomb, “a fully integrated, pure play 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 unlock value by allowing for improved strategic focus on the eye care front — a factor that should aid earnings power, while enhancing financial transparency — something that allows investors to better value the business and thanks to the improved confidence that provides, perhaps reward shares with a higher valuation multiple.
- But, almost one year after Eye Health was announced, management resigned. announcedThe plan is to spin off Solta Medical the medical aesthetics company, which “is a world leader in skin and body contouring with cutting-edge and innovative solutions such as Thermage, Fraxel and Clear + Brilliant lasers and VASER ultrasonics.”
- It is anticipated that this move will aid in further debt reduction as well as unlock value. This allows investors to evaluate the business on its merit. The management believes that an increased multiple will be given to the business due to its higher growth profile (sales increased at a compounded annual rate or “CAGR” of 32% between 2017 and 2020), and peer medical aesthetics assessments.
Ultimately, what is now Bausch Health is set to become three separate entities – an eye health business, a fast growing medical aesthetics business, and a diversified pharmaceutical operation. Once we know what future shareholders will own, it is time to ask the question: What are these entities individually worth and how much is the current company valued?
- Let’s begin with Solta, the rapidly growing operation. Although it was announced late, this will in fact be the first of two parts to be split via an early 2022 initial public offering. Solta’s sales increased by 27% in the first quarter of 2021 to $219 million. EBITDA has also grown by 87% from 2017-2020, with $135 million of adjusted EBITDA for 2020. Additionally, while we don’t know the adjusted EBITDA numbers for 2021, applying the 27% top-line growth rate to the 2020 adjusted EBITDA base we get a 2021 adjusted EBITDA estimate of $171.5 million – a figure we think could prove conservative.
- The multiple. The aesthetics industry is valued high by investors. The Beauty Health Company (SKIN), for example, has a staggering 108x adjusted EBITDA multiple based upon estimates to the end 2021 or 73x the projected adjusted EBITDA next year. InMode is at 30x the projected EBITDA next year. Add that lower multiple of 30x to Solta’s estimated EBITDA at $171.5 Million and you get a market cap around $5.15 Billion.
- Busch + Lomb reported that the company’s eye-care business generated $909 million of “EBITA” revenue in 2020. This is a decrease from $1.1billion in 2018, and 2019 respectively. In the first three months 2021, $699 million was reported in “EBITA”. Add to that a $248 million fourth-quarter “EBITA”, based on 2020 results, and you get a figure of 947 million for Bausch + Lomb’s FY2021 “EBITA”.
- Alcon, which is a Swiss company, sells surgical equipment to ophthalmologists as well as more mass-market products such contact lenses. Alcon’s adjusted EBITDA estimates for 2021 are 22.4x higher than its peers. We get a market capitalization of approximately $21.1 million if we add Bausch + Lomb’s 947 estimates.
- There is still Bausch Pharma. This is the hardest part of the business so we’ll just use the current adjusted EBITDA multiple of 2.6x. We have a base EBITDA of $2.3billion based on current estimates for the company’s entire operation (pre-splits). This operation is valued at approximately $6 billion if we apply the 2.6x multiplier.
- The market value of all three pieces, which have been valued on their merits (a total of the parts valuations or “SOTP”) is 33.3 trillion. There is $21.9 billion in debt that we still need to take into account. Add that to the market and you get an estimate of $10.4 billion, or $29 per share for BHC after it has been broken down and unlocked value!
This exercise, therefore, suggests a solid return on investment as the summation of the parts is more than the whole. A factor that we think should help to support a steady floor in share price at current levels while management executes the spinouts, unlocks value, and supports a strong market for the shares.
Finally, even though we have a target price of $29 for shares based upon this SOTP valuation we believe it to be conservative. This is due to our lower multiple on Solta as well as the possibility for upside due to the increased focus on the eye business and Bausch Pharma’s ability to improve efficiencies.
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(Jim Cramer’s Charitable Trust has been long BHC.