Valeant Era Nears an End With Bausch Eye Spinoff

(Bloomberg Opinion) -- The Valeant era may truly be nearing an end for Bausch Health Health Cos. with the planned spinoff of its eponymous Bausch+ Lomb eye-care unit, announced Thursday.

Bausch, which changed its name in 2018, became a Wall Street darling then pariah and corporate problem child under its prior moniker — Valeant Pharmaceuticals Ltd. — as a result of aggressive business practices and a massive debt-fueled acquisition spree led by ex-chief Michael Pearson and championed by investor Bill Ackman. The business has stabilized under new management, to its credit. But long-term damage remains, and not just in the form of lingering legal issues. The company's past left it as a strange amalgam of branded and generic drugs, dermatology products, and a profitable and pedigreed eye-care business, all hampered by an enormous pile of debt.

The spinoff offers a better and more focused future for both the eye-care and legacy drug operations, and the stock surged on the news in early trading. While neither business promises enormous growth opportunities, each will have more stability, which may increase their appeal.

During the Pearson era, Valeant was pitched as a "platform," a vehicle for acquiring a variety of assets and profiting handsomely via a lean business model and excellent management. It turned out that Pearson wasn't consistently good at picking assets, and the company's modus operandi of aggressively pricing old medicines and slashing R&D costs didn't turn marginal businesses into gold or redeem overspending.

Bausch + Lomb, acquired for $8.7 billion in 2013, is an exception to company's poor deal track record and a steady cash generator with a valuable brand. The general rationale for a spinoff is to unlock hidden value. That's often a questionable line used to pitch deals, but in this case it fits. The portions of the business that will be spun off generated $3.7 billion in pro forma revenue last year, 43% of the firm's total, and have grown steadily if modestly in recent years.

Valeant was trading at 80% of its expected 2021 revenue before Thursday's announcement. Alcon Inc., the eye care business spun off by Novartis AG in 2019, trades at a price to sales ratio over four times as high. While the Bausch + Lomb spinoff might not get all the way there, it seems like a decent bet to close the gap a bit.

The rest of the business doesn't have quite the same standalone appeal. It will still have patchwork aspects, and there's not much rationale for having branded and generic drugs, consumer products, a dentistry unit, and aesthetics under the same roof. Growth questions remain, the company's newer products are still only modest contributors, and older drugs will continue to drag. 

However, it will be that much more more focused and in a better financial position. Part of the rationale for the deal is to leave both companies with a healthier capital structure. The company continues to pay off debt and has reduced the overhang with a balletic series of maturity extensions. It's still an enormous burden on its valuation and ability to invest; any reduction from the proceeds and structuring of the split will be helpful.

The legacy of Valeant will always be destroyed value. This split may bring at least a little back. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Max Nisen is a Bloomberg Opinion columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

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