Bausch & Lomb faced underinvestment as a subsidiary of Bausch Health, partly due to the high debt load of Bausch Health

Business Strategy and Outlook

As a new public company, Bausch & Lomb will be primarily focused on ramping up research and development to become more competitive in its key markets of contact lens and solution, eyecare surgery, and ophthalmic pharmaceuticals. Bausch & Lomb faced underinvestment as a subsidiary of Bausch Health, partly due to the high debt load of Bausch Health since the collapse of the historical Valeant business, which drew both financial resources and time from senior leadership. With Joe Papa moving to Bausch & Lomb as CEO, the company will have a leadership team that is already very familiar with the business, both areas of strength and product lines that may require more investment. While the near-term results are sure to be lumpy as Bausch finds its footing as public company and incurs short-term separation costs, the business should achieve consistent profitability in the longer term—justifying the narrow economic moat rating—and even if growth continues to trail peers, the returns on invested capital to remain at a decent level, further evidence of underlying business strength.

Bausch’s research and development efforts to focus initially on the contact lens, cataract equipment, and intraocular lens markets. The contact lens business is a market that requires consistently high rates of investment, and Bausch recently entered the daily silicone hydrogel sub-market with the launch of its premium Infuse lens. This lens will be further expanded for toric and presbyopia patients within the next few years. In the surgical space, Bausch trails market-leader Alcon with an approximate 20% share in cataract and vitrectomy (compared with Alcon’s 50%), and the company is overdue for a launch of a new phacoemulsification system, as well. A new phaco launch within five years, which should provide a boost to growth and profits considering the high-margin nature of newer systems. Bausch currently does not have much of a presence in premium intraocular lenses, and also it will be a main research focus for Bausch as the company attempts to play catch up with its peers.

Financial Strength

Bausch & Lomb has adequate financial strength. Following the spinoff from Bausch Health, the company will hold about $2.5 billion of debt with an additional $500 million on a revolver, and the firm will have debt/EBITDA leverage of about 2.9 times. While this is higher than the initial post-spinoff leverage target of 2.5 times, current leverage is reasonable, and the company will work to somewhat reduce leverage over the next few years from free cash flow, it will average over $500 million per year through the five-year explicit forecast period. Interest coverage ratios remain high, as well. The operating income to exceed 2.5 times interest costs for the foreseeable future, and the interest coverage to rise over time. On the other hand, though, some risk related to rising interest rates, which may increase interest expense over time, considering that Bausch’s $2.5 billion term loan is a floating debt instrument. Still, on balance, it does not show that Bausch faces material financial risk, and the firm would be able to handle any marginal increases in debt service costs

Bulls Say’s

As a standalone public firm, Bausch & Lomb will have the necessary financial flexibility to make investments for the longer term, and patient investors could be rewarded.

Bausch & Lomb stands to benefit from several secular trends in eyecare: an increasing prevalence of myopia, demand for better eye care from a growing middle class in emerging markets, and an aging population.

Investors’ worry about Bausch & Lomb’s potential exposure to Bausch Health debts is misplaced, as the firm now operates as a separate legal entity and therefore should be valued as an independent company.

Company Profile

Bausch & Lomb, headquartered in Laval, Quebec, Canada, is the fourth-largest vision care company by sales in the United States and the market leader in consumer vision care in India and China. The firm, which was previously a subsidiary under parent company Bausch Health, was spun off to become a public company once again in May 2022. The firm reports in three segments—vision care and consumer (60% of revenue), surgical (20%), and ophthalmic pharmaceuticals (20%). The company is geographically diversified, with 48% of revenue in the Americas, 30% from EMEA, and 22% from Asia-Pacific countries.

(Source: MorningStar)

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