Bausch Health Companies (NYSE/TSX: BHC) plans to spin off its leading eye health business into an independent publicly traded company. Bausch Health Companies was formerly known as Valeant Pharmaceuticals International, and is based out of Laval, Quebec. The reason for the spin-off is to unlock value in the Iconic Bausch and Lomb brand and the integrated portfolio of eye health products.
Timeline for the Spin off
Bausch Health will prepare stand-alone carve-out financial statements. The Eye care segment will be reported as a separate segment starting the first quarter of 2021. BHC would need approval from its Board of Directors. There will be tax considerations and one-time costs associated, getting regulatory approvals. The transaction also has to comply with the U.S. and Canadian securities laws and stock exchange rules. Considering all these factors, the spin off may happen around the second quarter of 2021.
What happens during a Spin off?
A spinoff is when a company takes a portion of its operations and breaks it off into a separate entity. The shares of the new company are distributed tax-free to shareholders of the parent company. If a company has largely diverse businesses and the stock price is not going anywhere, management then separates these divisions as diverse companies. Both the parent and the spinoff company have their own management teams, independence, regulatory requirements and capital structure.
How to benefit from a Spin off?
The existing shareholders of a company get the shares of the new company at a discount. If the spun off company is a low grade one, usually the parent company benefits. If it’s a great business on the other hand, it will do very well. Since the parent company has a stake in it, the parent company’s shares also benefit.
Business Fundamentals
Total market capitalization of $6.5 billion
Total Revenue in 2019 was $8.601 billion
Long-term debt of $24 billion
Cash generated from operations for 2019 was $1.501 billion
Revenue breakdown by product categories
BHC has three broad core areas: eye health, under its Bausch & Lomb division; gastrointestinal diseases, under Salix Pharmaceuticals; and dermatology, under Ortho Dermatologics.
- Bausch + Lomb/International segment: 55%
- Salix segment: 23%
- Ortho Dermatologics: 7%
- Diversified products: 15%
BHC has executed its strategy well
Legal issues resolved
About 68 litigations of various nature were resolved and fines have been settled.
Our legal team continues to make outstanding contributions, achieving dismissals or other positive outcomes in resolving litigation, disputes and investigations in some 68 matters in 2018. Some key resolutions include the XIFAXAN® intellectual property litigation, which preserves the market exclusivity until 2028; the Securities and Exchange Commission’s legacy investigation of Salix4, the Allergan securities litigation.
Debt load reduced
Debt reduced by more than $8 billion since 2016. The cash from operations and divestitures were used to pay down debt.
Bolt on acquisition of Synergy Pharmaceuticals Inc
BHC acquired certain assets of Synergy for $195 million as part of Synergy’s bankruptcy sale. This strategic acquisition added Trulance® which augments the Salix gastroenterology portfolio.
Bausch +Lomb Silicone Hydrogel daily disposable contact lenses approved
Silicone Hydrogel (SiHy) daily contact lenses receive approval in China, Canada and US. The new product launch would add to the revenue and bottom line.
Investment Thesis
BHC is planning to spin off its eye care business as a separate entity. This may result in the B&L Eye to grow a lot post spin off as it’s a crown jewel brand. At that time, the new shares received as part of the spinoff may grow a lot in value. BHC would use the capital from the spinoff to pay off a major portion of its massive debt. That may unlock the value for the parent company as well. However, for this thesis to play out may take at least a couple of years but the rewards can be worth it.