Dry Eye Dependence And Execution Risks Will Undermine Long Term Earnings Quality

Catalysts

About Bausch + Lomb

Bausch + Lomb is a global eye health company focused on pharmaceuticals, vision care products such as contact lenses, and surgical ophthalmic devices.

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

• The dry eye treatment category is expanding, but heavy reliance on Miebo and Xiidra to sustain growth leaves Bausch + Lomb exposed if prescription growth slows or competitors capture share, which could put pressure on revenue and adjusted EBITDA.
• The company is focusing on higher margin premium intraocular lenses after the enVista recall. Any setback in regaining surgeon share or consignment levels could limit the mix benefit that management is targeting for gross margin and overall earnings quality.
• Contact lens demand is tied to a market that management characterizes in the mid single digit range, with some softness in regions like Southeast Asia and mixed signals in China. Any prolonged weakness in consumer spending could temper Vision Care revenue growth and cap margin expansion.
• The Vision '27 and financial excellence programs depend on hundreds of internal projects and manufacturing efficiencies that are spread over several years. If execution slips, the expected SG&A leverage and gross margin improvement may not fully materialize, affecting adjusted EBITDA and free cash flow.
• The company is counting on an expanded R&D pipeline in areas such as dry eye combinations and new contact lens materials to support long term growth. Delays, regulatory hurdles or weaker than expected uptake would limit the return on increased R&D spend and weigh on future earnings and cash generation.

Assumptions

This narrative explores a more pessimistic perspective on Bausch + Lomb compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Bausch + Lomb's revenue will grow by 5.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -6.1% today to 4.3% in 3 years time.
• The bearish analysts expect earnings to reach $247.0 million (and earnings per share of $0.67) by about January 2029, up from $-305.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $341.6 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 24.4x on those 2029 earnings, up from -20.2x today. This future PE is lower than the current PE for the US Medical Equipment industry at 30.8x.
• The bearish 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 company’s dry eye portfolio is seeing strong prescription and revenue momentum, with Miebo revenue of US$84 million in the quarter and 110% TRx growth alongside Xiidra TRx growth of 8%. This could support sustained Pharmaceuticals revenue and earnings if category expansion continues.
• Contact lenses and consumer products are tied to large, long-term eye health needs, and brands like Daily SiHy, Biotrue, Ultra, Blink and Artelac are reporting steady growth in the quarter. This may underpin recurring Vision Care revenue and support margin stability over time.
• The Surgical segment is recovering from the enVista recall, with total enVista sales in the quarter at 82% of pre recall levels and Envy at 91%, and premium IOL revenue improving sequentially. This may support gross margin mix and adjusted EBITDA if this trajectory continues.
• Management is emphasizing financial excellence and reporting lower SG&A as a share of revenue, margin expansion in the quarter and adjusted free cash flow of US$87 million. If maintained, this could support net margin improvement and stronger earnings and cash generation.

Valuation

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

• The assumed bearish price target for Bausch + Lomb is $13.0, which represents up to two standard deviations below the consensus price target of $17.25. This valuation is based on what can be assumed as the expectations of Bausch + Lomb's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• 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 more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $5.8 billion, earnings will come to $247.0 million, and it would be trading on a PE ratio of 24.4x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of $17.4, the analyst price target of $13.0 is 33.8% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• 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.