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We are raising our price target on shares of Bausch Health (BHC) to $36, up from $29 previously, ahead of the company’s presentation at the annual J.P. Morgan Healthcare Conference on Jan. 12 — the most newsworthy healthcare conference of the year. At the event, we expect to hear positive updates on the company’s strategic initiatives — most notably, the upcoming (date not yet announced, though expected early this year) IPO spinoff of Solta Medical. Recall, Solta is the company’s rapidly growing (32% compounded annual sales growth rate or “CAGR” from 2017 to 2020) leading global medical aesthetics business.
As a reminder, when we initiated the position we used a sum of the parts (SOTP) analysis and applied a 22.4x adjusted EBITDA multiple on Bausch + Lomb, in line with Swiss peer Alcon and a conservative 2.6x multiple on the remaining Bausch Pharma business due to it being the most challenged aspect of the company.
Additionally, we used a 30x adjusted EBITDA multiple on our 2021 EBITDA estimate of $171.5 million, which we noted was on the lower end given that peers the Beauty Health Co (SKIN) and InMode traded at ~73x and 30x forward adjusted EBITDA expectations at the time of the alert.
With the Solta IPO expected shortly and the potential for further clarity on the timeline to be provided at next week’s conference, we believe investor focus on this sum of the parts view will increase and that shares will benefit as a result. We therefore want to update and revise our model as it relates to Solta. We will leave the other two segments unchanged for now.
Given that we have now entered 2022, and expect increased clarity on the Solta IPO in the coming days to weeks, we want to roll forward our EBITDA numbers to FY2022. However, regarding the appropriate growth rate used to generate our estimate, we believe we were too conservative the first time around when we applied a 27% rate (the top line growth rate) to EBITDA, which compounded at 87% from 2017 to 2020.
Of course, that 87% benefits greatly from a small starting base, so, we must account for that. In FY2020, adjusted EBITDA grew 55% YoY, down from 81% in FY2019 and 140% in FY2018. If we assume a 40% rate in 2021 followed by a 35% rate in 2022, our FY2021 estimate goes from $171.5 million to $189 million while our FY2022 estimate comes in at $255 million.
Given that the growth rate is coming down to a level more in line with InMode’s expected future EBITDA CAGR (~39.5% from FY2019 to FY2023, per FactSet), we will leave our multiple unchanged at 30x, in line with InMode’s forward valuation multiple.
Using this FY2022 adjusted EBITDA, we generate an expected enterprise value (based on a 30x multiple) of $7.65 billion, up from our prior estimate of $5.15 billion. Adding this updated figure to our Bausch + Lomb and Bausch Pharma targets of $21.1 billion and $6 billion, respectively, we get a combined SOTP-based enterprise value (market cap + net debt) of $34.75 billion. Subtract out the ~$21.9 billion of net debt and we get to an equity value ~$12.85 billion, up from our previous combined estimate of $10.4 billion or ~$36 per share.
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(Jim Cramer’s Charitable Trust is long BHC.)
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