CNBC Investing Club: Bausch drops details on one of its planned IPOs that will unlock value

Published Wed, Feb 9 20222:22 PM EST

Bausch Health (BHC), a relatively new Investing Club holding, has filed a registration statement (form S-1) for its proposed initial public offering of Solta Medical, the fast-growing medical aesthetics business being separated out to help unlock value. (The Bausch + Lomb unit is also set to be publicly offered and that S-1 was out last month .) As members know, we're looking to these IPOs as a means of unlocking value by separating the three core operating business (the third being what's left of Bausch Health), which we delve into in our BHC initiation note in Dec. 20, 2021. A little more than two weeks later, we revised our price target upward. (The thinking about the mechanics of the value unlock remains unchanged). Bottom line The Solta S-1 — filed Tuesday with the Securities and Exchange Commission — served to increase our conviction that there's significant value to be unlocked by separating out Solta Medical and allowing it trade as a public stock alongside peers such as InMode and Beauty Health Company , which currently at trade at respective multiples of 21x and 30x compared to Bausch Health's current 8x enterprise value-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple based on calendar year 2022 estimates. At the company level, we believe that CEO Joe Papa, has made significant progress in righting the Bausch Health (formerly Valeant) ship since he took over in mid-2016. Portfolio and sales mix Here's a deeper dive on Solta, which maintains a portfolio of over 200 patents globally and offers four key product lines used to addresses aesthetic needs — including, according the S-1, "skin tightening, body contouring, smoothing fine lines, wrinkles, reducing pore size, collagen boosting, skin tone, pigment, skin permeability, sun damage, actinic keratosis ("AK"), acne scars, surgical scars, wrinkles, melasma, and unwanted fat." Let's take a look at the product lines and what they address (following sales mix based on nine months ending Sept. 30, 2021 and descriptions taken from the S-1): Thermage (78% of total sales) "utilizes [Monopolar RF] to heat the deeper collagen rich layers of the skin, which can cause an immediate collagen contraction and tightening. As the collagen is deposited and remodeled, it enables tightening over time and improved collagen density." It's used to address skin tightening, body contouring, smoothing, fine lines, and wrinkles around the eyes, face and body. Clear + Brilliant (8% of total sales) "utilizes fractional laser technology to create microchannels that penetrate into the dermis. By utilizing the principle of factional photothermolysis, the laser stimulates collagen remodeling and promotes elastic tissue formation." It's used to address fine lines, pore size, boost collagen, skin tone, pigment, and skin permeability in the face and body. Vaser (8% of total sales) works by "acoustic energy delivered through a probe results in dislodging of fat cells, then the groves on the probe create a large fluid that further separates the fat cells while leaving other tissues intact." It's used to address stubborn, unwanted fat in the face and body. Fraxel (6% of total sales) "creates microscopic laser columns that penetrate into the dermis to expedite the body's remodeling of collagen." Ir's used to address dyschromia, pigment, sun damage, AK, acne scars, surgical scars, wrinkles, and melasma around the eyes, face and body. Breaking down sales another way, and here's the part we find particularly attractive, 71% sales were driven by "tips and other consumables," as described in the S-1. While consumables aren't necessarily recurring in the way that recurring software sales may be they nonetheless represent sales that are continually sold into the company's installed base as they're used up and must be replenished. An additional 26% of sales come from Systems with the remaining 3% being attributed to "Other". Regarding the growing opportunity for these consumable sales, we must call out that Systems' installed base grew 41% in 2019 and 28% in 2020, providing the basis for tips and other consumables sales growth of 48% in fiscal year 2019, 33% in fiscal year 2020 and 42% in the first nine months of 2021. As of December 2020, the installed base for Solta totaled over 13,800 systems spanning roughly 50 countries. By geography, the Asia Pacific region makes up the bulk of sales with a 67% share, followed by North America at 27%, Europe/Middle East at 5% and Other at 1% of total sales in the none months ending Sept. 30, 2021. Industry growth Regarding the large and growing opportunity, management in the S-1 cited statistics from various industry sources that point to roughly 25 million aesthetic procedures taking place globally in 2019, with over $8 billion spent in the U.S. alone on over 4.5 million procedures. Even better, the team called out Data Bridge Market Research expectations for the global medical aesthetics market to grow at an compounded annual growth rate (CAGR) of 12% between 2019 and 2026. Management believes that roughly 60% of patients are concerned with issues for which Solta has a solution. Drivers of demand Management in the S-1 highlighted several tailwinds that they believe support demand including the following: An aging population, specifically Baby Boomers that seek to "battle the effects of aging" and Millennials, which comprise 22% of the US population and have "an affinity to spend on premium treatments" An increase in disposable income as we emerge from the pandemic and that global economy grows is another that management believes will support demand The proliferation of social media and virtual communications (think video conferencing) is another factor as "influencers" drive demand in younger cohorts such as Millennials and Gen Z; this is in line with the thesis we called out when we held a position in Estee Lauder noting that the "selfie generation" supports increased use of make-up and skin care products, especially given the ability of today's smartphones to basically pick up every single pore on your face. Favorable economics that is motivating physicians to "establish or expand the menu of elective, private-pay aesthetic medical procedures that they offer;" put another way, this is primarily a cash-based industry, and therefore offers reduce reimbursement risk for both Solta