Covid-19 has hurt the sales of
Bausch Health Companies
this year. But when the specialty drug company showed its bruised June quarter results this month, it also announced plans to spin off its valuable Bausch + Lomb eye-care business.
That move could double the value of Bausch investors’ holdings, says J.P. Morgan analyst Chris Schott in a Monday report. From a Bausch Health stock (ticker: BHC) that trades at $16.85 today, the spinoff would deliver two securities that Schott thinks will be worth at least $32.
In trading Monday morning, Bausch stock was up nearly 3%.
Wall Street has been clamoring for a spinoff for more than a year. It could happen by late 2021 or early 2022, the J.P. Morgan analyst says, allowing the Bausch eye-care business to get the higher valuation now enjoyed by stand-alone eye-care companies like
(ALC) and the
(COO). Covid’s impact on the rest of Bausch’s business, meanwhile, will pass.
“While Bausch’s recovery from Covid headwinds appears slower than anticipated,” Schott writes, “we see this as a near-term issue and forecast a full recovery for the company’s business as we look out to 2021 and beyond.”
On Aug. 6, Bausch reported that its second-quarter sales fell 23%, to $1.7 billion, leaving it with a loss of $326 million, or 92 cents a share. Putting aside noncash charges and expenses that it deemed nonrecurring, the company said its cash earnings in the quarter were $622 million, down from $880 million in the period a year earlier.
On the earnings call, however, Chief Executive Joseph Papa said that Bausch had overcome many of the problems he had inherited from the time when the company was called Valeant Pharmaceuticals International. Those problems included a U.S. Securities and Exchange Commission investigation into Valeant’s accounting and disclosure around its former dealings with a pharmacy known as Philidor Rx Services. Without admitting wrongdoing, Bausch resolved the SEC investigation in July with a $45 million payment.
Bausch’s legacies have left it trading at less than eight times the J.P. Morgan estimate for 2021 earnings before interest, taxes, depreciation, and amortization (Ebitda). Stand-alone eye care companies like Alcon trade at about 20 times their next year’s earnings.
So analyst Schott thinks Bausch’s spinoff could surely trade at 15 times the $870 million in 2021 Ebitda that he expects for the unit. That would value the spun off company at $13 billion.
The remaining specialty drug businesses of Bausch might garner a multiple of 7.5 times the $2.7 billion in Ebitda he foresees for them in 2021.
Together with the spinoff, that would leave today’s stockholders with two stocks worth more than $33 billion. Minus Bausch’s $22 billion in debt, that represents $31 a share—or 92% upside.
At slightly higher multiples of 17.5 times and 8.5 times, Bausch’s respective pieces would add up to $45 a share in value. That would nearly triple investors’ money.
The J.P., Morgan analyst rates Bausch stock at Overweight.
Write to Bill Alpert at email@example.com