Dry Eye Treatments And Aging Demographics Will Drive Long Term Eye Care Demand

Catalysts

About Bausch + Lomb

Bausch + Lomb develops and markets eye health products spanning pharmaceuticals, vision care and surgical solutions worldwide.

What are the underlying business or industry changes driving this perspective?

• Rising global prevalence of dry eye and greater diagnosis in both primary care and specialist settings support sustained prescription growth for Miebo, Xiidra and future combination therapies, underpinning double digit revenue expansion and higher earnings from the Pharma segment.
• Ongoing innovation in contact lenses, including the first of its kind bioactive lens, expansion of the silicone hydrogel daily platform and a lens to slow myopia progression in children, positions the company to continue outgrowing a mid single digit market, lifting consolidated revenue and mix driven margin improvement.
• An aging population driving more cataract and premium refractive procedures, combined with the rapid recovery and expansion of high margin premium IOL platforms such as enVista Envy and LuxSmart, is expected to accelerate Surgical segment growth and support overall gross margin expansion.
• New and reformulated consumer eye health products, including LUMIFY, PreserVision, Blink Triple Care and other dry eye and vitamin brands, leverage increasing consumer self care adoption and practitioner recommendations, which is expected to translate into steady, higher quality over the counter revenue and improved operating leverage.
• Disciplined execution under the Vision 27 financial excellence program, including SG&A mix optimization, manufacturing efficiencies and focused R&D spend on near to mid term launch assets, is expected to support adjusted EBITDA growth above sales growth and drive expanding net margins and earnings power.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Bausch + Lomb's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -6.1% today to 4.3% in 3 years time.
• Analysts expect earnings to reach $252.2 million (and earnings per share of $0.68) by about December 2028, up from $-305.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $313.5 million in earnings, and the most bearish expecting $136.6 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 31.7x on those 2028 earnings, up from -19.6x today. This future PE is greater than the current PE for the US Medical Equipment industry at 30.6x.
• Analysts expect the number of shares outstanding to grow by 0.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.87%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The strong secular growth in dry eye treatment, highlighted by 110% prescription growth for Miebo and continued volume gains for Xiidra, could sustain double digit expansion in the Pharma segment for several years. This may lift revenue and earnings faster than the share price implies.
• Innovation led tailwinds in contact lenses and consumer eye care, including rapid adoption of Daily SiHy lenses, revitalized Blink and expanding Artelac and vitamin franchises, may allow Vision Care to keep outgrowing a mid single digit market. This could support structurally higher revenue growth and improving net margins.
• The aging population and steady cataract procedure volumes, combined with faster than expected recovery of high margin premium IOL platforms such as enVista Envy and LuxSmart, could drive mix led gross margin expansion and stronger earnings than a flat share price would reflect.
• The broad Vision 27 financial excellence program, already showing SG&A leverage and 400 basis point sequential EBITDA margin improvement, may deliver sustained margin expansion and stronger free cash flow generation. This could support a re rating of the shares and higher earnings.
• Durable growth from a differentiated pipeline, including next generation lifitegrast, combination therapies, first in class bioactive lenses and new consumer formulations, could extend Bausch + Lomb's competitive edge and accelerate long term revenue and EBITDA growth beyond current expectations.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $17.25 for Bausch + Lomb based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $21.0, and the most bearish reporting a price target of just $13.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $5.9 billion, earnings will come to $252.2 million, and it would be trading on a PE ratio of 31.7x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of $16.89, the analyst price target of $17.25 is 2.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.