Bausch Health (NYSE: BHC) stock has been on a wild ride recently, with a dramatic surge in value over the last month. The catalyst for this surge is a wave of rumors suggesting that Bausch + Lomb (NYSE: BLCO), Bausch Health’s spinoff eye care business, is considering a buyout.

This potential sale has sparked significant interest among investors, as it could lead to a much-needed financial boost for Bausch Health, potentially alleviating its substantial debt burden and enhancing its overall valuation.

A Pharmaceutical Giant in Transition

Bausch Health Companies Inc. is a global pharmaceutical company with a long history dating back to 1853. The company's portfolio spans a wide range of products, including eye care, pharmaceuticals, and medical devices. Bausch Health has been through a period of significant transformation in recent years.

The decision to separate its eye health business, Bausch + Lomb, into a standalone publicly traded entity was announced in August 2020. This strategic move was aimed at streamlining operations and unlocking value for shareholders. In May 2022, Bausch Health sold common shares of Bausch + Lomb pursuant to an initial public offering (IPO). While Bausch + Lomb is now a separate entity, Bausch Health remains a significant shareholder, retaining an 88% ownership stake.

Bausch + Lomb: A Visionary Force in Eye Care

Bausch + Lomb is now a standalone company and a leading player in the eye care market, focusing on Vision Care, Surgical, and Pharmaceuticals. Bausch + Lomb is recognized for its innovative contact lens portfolio, including its popular ULTRA brand and advanced surgical equipment offerings, driven by its premium IOL portfolio.

Unveiling the Numbers

To fully grasp the potential impact of a Bausch + Lomb buyout on Bausch Health, it's crucial to examine the financial performance of both companies. Bausch Health’s earnings report for the second quarter of 2024  reflected an 11% upward trend in revenue. However, the company's net quarterly income was a modest $10 million, marking a decrease from the previous year. This decrease was primarily due to higher selling and advertising costs, particularly associated with launching new products like XIIDRA and MIEBO, which offset the positive impact of increased gross profit contributions. Bausch Health's EBITDA for the quarter was $749 million, reflecting its efforts to expand its product portfolio.

The company’s long-term financial picture shows that Bausch Health's financial performance has been less than stellar. Over the past five years, the stock has lost around 65% in value, raising concerns among long-term investors. However, the trailing twelve-month earnings per share (EPS) for Bausch Health suggests a potential growth rate of 4.10% for the current year and 15.18% for next year.

Bausch + Lomb, on the other hand, delivered strong revenue performance. In the second quarter of 2024, Bausch + Lomb’s earnings report revealed $1.216 billion in revenue, an increase of 17% compared to the previous year. Excluding the unfavorable impact of foreign exchange, revenue growth on a constant currency basis was 20%. This strong growth was driven by the success of Bausch + Lomb's dry eye portfolio, which includes LUMIFY and eye vitamins, and its contact lens business. Launching new products like BLINK NutriTears and INFUSE for Astigmatism also contributed to the positive results. Bausch + Lomb's EBITDA for the quarter came in at $209 million, reflecting the strong profitability of its core business segments.

However, Bausch + Lomb's net income was a loss of $151 million, a significant decrease from the previous year. The primary factors driving this unfavorable change were an increase in the provision for income taxes, a rise in interest expense, and a decline in operating results.

The Challenge of High Leverage

Bausch Health's high debt load has been a significant concern for investors, impacting its valuation and ability to operate efficiently as of the most recent reporting Bausch Health had approximately $21.66 billion in outstanding debt. A successful sale of Bausch + Lomb could generate substantial proceeds that would be used to alleviate Bausch Health's debt burden. This would positively impact the company's debt-to-equity ratio and enhance its financial stability.

Obstacles to a Smooth Transition

Despite the potential for a positive outcome, several key risks remain. The eye care market is highly competitive, with established players like Alcon (NYSE: ALC) already demonstrating strong performance. The success of a potential Bausch + Lomb sale depends on finding a suitable buyer willing to offer a compelling price.

Determining a fair valuation for Bausch + Lomb could be challenging. Considering its impressive contact lens and surgical equipment businesses, Bausch Health will need to find a buyer willing to offer a price that reflects its true market value.

The current economic climate presents its own set of challenges. Inflation, interest rate fluctuations, and other macroeconomic factors could impact the transaction's success. Investors must consider how these factors could influence the sale process and the potential outcome.

The spinoff process itself is subject to regulatory approvals and other conditions. The deal's success relies on Bausch Health securing the necessary approvals and smoothly completing the separation. Any delays or disruptions could significantly impact the timeline and the overall outcome.

Opportunities and Uncertainties

A potential sale of Bausch + Lomb presents a significant opportunity for Bausch Health. The deal could provide the company with a much-needed financial boost, reducing its debt burden and enhancing its valuation. This could make Bausch Health an attractive investment opportunity for those seeking undervalued stocks with high upside potential.

However, investors must carefully weigh the potential rewards against the risks involved. The market's reaction to the potential sale will be crucial. The ability to successfully navigate the spinoff process and the broader economic environment will play a key role in determining the ultimate outcome for both companies.