Bausch Health Spin-Off of Eye Care Business Follows a Familiar Playbook

As Bausch Health pursues a spin-off of its eye health business into an independent company, it’s following a playbook that’s scored well in ophthalmology, and the play is already getting favorable early reviews from industry watchers.

Bausch Health has stated that the spin-off will be “a fully integrated, pure play eye-health company built on the iconic Bausch + Lomb brand and long history of innovation.” It will also allow Bausch Health to focus on gastroenterology, aesthetics and dermatology, neurology, and international pharmaceuticals.

Bausch Health’s board of directors and management team decided the separation would give each business “greater flexibility to pursue strategic opportunities in their respective markets.”

In 2019, the eye care business brought in $3.7 billion, approximately 43% of the parent company’s total revenue. Bausch Health’s businesses that will remain after the spin-off generated $4.9 billion in revenue combined last year. The eye care business generated more than half of its revenue outside the US.

After the spin-off was announced, Bausch Health stock spiked 14.5% before rolling back down. It closed Wednesday at $17.39 a share, 10% lower than the pre-announcement close.

Creating Value
William J. Link, PhD, managing partner, Flying L Partners, said that past spin-offs of ophthalmic companies out of larger corporate structures into the public market created value. Two notable examples are AMO (Advanced Medical Optics), spun off from Allergan in 2002, and Alcon, from Novartis in 2019.

“Bausch Health’s decision to spin its eye health business into a stand-alone public company is very positive for Bausch Health and for the ophthalmic market,” he told OIS Weekly. “Bausch + Lomb is a long-time leader in the eye health market and, as a stand-alone, will be strongly supported by both investors and long-time customers.”

Seeking Alpha said of the move: “Management is now taking decisive action to create value; spinning off its crown-jewel eye-care business. Should this spin-off sell for a multiple closer to its peer group than Bausch currently does, it’d bring the company’s debt into a safe long-term range. Bausch trading at less than two times 2019 EBITDA [earnings before interest, taxes, depreciation, and amortization] means any multiple revision can generate massive returns for investors.”

Spin Off in Stages
Bausch Health has not set a date for the spin-off, and completing the transaction will depend on several factors including regulatory approvals, stated Ruchi Gupta at Market Realist. She said Bausch Health plans to proceed with the spin-off in stages, starting with breaking off Bausch + Lomb’s financial results next year. The move is in line with other reorganization actions Bausch Health has taken in recent years, such as divesting about $4 billion in non-core assets and $8 billion in debt reduction, Gupta said.

This move mimics others that some have embraced and some have resisted, she wrote: “For example, PayPal and eBay also separated in a spin-off transaction in 2015. Since then, their shares have soared. Amazon has faced calls to spin off its cloud computing business from the online retail business. However, the company has insisted that the businesses are better together. While the retail business generates the most revenue, the cloud business is Amazon’s profit machine.”

Wither Valeant
Carmen Reinicke at Markets Insider said shares of Bausch Health “skyrocketed as much as 27%” in premarket trading after the company announced the spin-off. The spin-off returns the eye care business to an independent company, which it was before Valeant Pharmaceuticals International acquired it in 2013.

Ciara Linnane at MarketWatch said the spin-off further breaks apart the former Valeant, which acquired Bausch + Lomb for $8.7 billion under then-CEO Michael Pearson. “Under Pearson,” she said, “Valeant had used acquisitions to aggressively grow and become a popular stock, until the company was caught up in a series of drug pricing and accounting scandals.”