Could another major med-tech M&A transaction be on the way?
Rumors are now in flight that large private equity group Warburg Pincus is ready to sell its large eye care business Bausch & Lomb. While recent reports suggest that Warburg would prefer an outright sale at this point, it sounds like an IPO could be in the works as a back-up plan. But the larger question for investors is whether there are any motivated bidders out there likely to meet Warburg's price target.
Where Is Bausch & Lomb At Today?
Financial information is scant on the company, but assuming that Bausch & Lomb has posted growth rates on the higher end of the sector, the company could be at between $3.5 billion and $4 billion in revenue (assuming a 7% to 9% growth rate from the last reported revenue in 2007).
Given that Bausch & Lomb was in pretty rough shape when Warburg took it private, I would imagine that the operating income/EBTIDA growth has been quite a bit stronger since then. I doubt that the company has been able to match Alcon's former levels of profitability, but assuming that the company is in the ballpark of others like Novartis (NVS) [which acquired Alcon] or Cooper, margins are in the range of 15% to 20%. I do want to emphasize, though, that there is a lot of guesswork in these numbers and they're only rough estimates of where the company may be.
Can Ophthalmology Justify A $10 Billion Deal?
While Warburg has, of course, said nothing publicly about a sale of Bausch & Lomb, the reports talking about the sale process have stated that it is looking for an offer on the order of $10 billion. Top-tier med-tech franchises can certainly sell for premiums, but I'm not sure this company qualifies or that Warburg will meet its goal.
Bausch & Lomb has an appealing multi-prong approach to the market, but would seem to lack leadership. The company is the #4 player in soft contacts, with about 10% share - well behind leaders like Johnson & Johnson (40%+) and Novartis (20%+). While the company is a formidable player in areas like implants (intraocular lenses) and surgical instruments (the Storz line), its pharmaceuticals business still needs work, even with the acquisition of ISTA Pharmaceuticals earlier this year.
More to the point, though, is the anticipated growth rate of the ophthalmology market. For the most part, this is a market growing at a mid-single digit rate. While there are still worthwhile opportunities in areas like macular degeneration, glaucoma, and dry eye, those are not easy or cheap drugs to develop. What's more, Bausch & Lomb wouldn't seem at first glance to offer the sort of superior market share in growth markets that recently prompted Johnson & Johnson to pay up for Synthes in orthopedics or that motivated Novartis' expensive deal for Alcon a few years ago.
Who Might Kick The Tires
Several names would be logical candidates to at least do some due diligence on Bausch & Lomb. Given that Novartis is already the market leader in so many segments, I'd scratch it from the list immediately. Likewise, I'm not sure Johnson & Johnson would want to go beyond its contact lens-focused business (and JNJ would probably have to divest Bausch & Lomb's contact lens business to get a deal done).
Drug companies like Sanofi (SNY), Merck (MRK), and GlaxoSmithKline (GSK) have all been tapped as potential bidders. Sanofi has certainly made more noise about building its ophthalmology business (including spending about half a billion dollars for Fovea in 2009). Likewise, Glaxo acquired Inspire back in 2010 and Warburg was a significant shareholder of Inspire at the time. Unfortunately, the problem with all of these potential buyers is that Big Pharma has largely been shedding non-pharmaceutical assets and streamlining operations; even though Bausch & Lomb has a respectable OTC aspect to its business, I'm not sure any of these companies would want to pay up to get into devices and instruments.
Abbott (ABT) has also been mentioned as a potential suitor, and this could make more sense. Abbott's ophthalmology business is largely based around Advanced Medical Optics, and Advanced Medical Optics tried to buy Bausch & Lomb for about $4 billion back in 2007. I'm not sure if Abbott would contemplate a split bid with Abbvie to accommodate the pharmaceutical side of the business, but I suppose it's possible. The issue here, though, could be about growth - the Abbott/Abbvie split was supposed to be motivated, at least in part, by a desire to create a more growth-focused device business, and I'm not sure ophthalmology really fits that bill.
Last and not least, I wouldn't completely rule out a company like Roche (OTCQX:RHHBY). Roche hasn't really done much in ophthalmology outside of Lucentis, but it is not unfamiliar with businesses that have drug, device, and OTC aspects. I do believe Roche would rather focus on growth-oriented areas like oncology, molecular diagnostics, and life sciences [including perhaps another bid for Illumina (ILMN)], but I wouldn't completely dismiss the possibility.
The Bottom Line
While $8 billion to $10 billion would not be an unreasonable price for the company if revenue is in fact in the "high $3 billion" range, I'm not sure Big Pharma needs or wants to make a deal for a company where a lot of the value is outside of drugs and where a lot of the drug value is still in the pipeline. Likewise, I'm not sure there are going to be many device companies lining up for a company that at least superficially looks like a modest grower with some serious competition at JNJ and Novartis. When it's all said and done, my money is on Warburg Pincus taking Bausch & Lomb public through an IPO.