Bausch + Lomb Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Bausch + Lomb Corporation is a global eye health company that develops, manufactures, and markets a comprehensive range of products in vision care, ophthalmic pharmaceuticals, and surgical segments, addressing various eye health needs.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview Bausch + Lomb (BHC) operates a diversified business across three core segments:

  • Vision Care: This segment focuses on contact lenses, lens care products, and eye drops for both daily and extended wear. The company manufactures these products using various methods that often incorporate patented technologies. They also sell solutions, rewetting drops, lens cases, and other related accessories.
  • Ophthalmic Pharmaceuticals: This includes pharmaceutical products and over-the-counter (OTC) medicines aimed at treating different eye ailments, including ocular allergies, inflammation, eye infections, glaucoma, dry eye, and age-related macular degeneration.
  • Surgical: This consists of surgical products and equipment related to vision procedures. Products in the segment include refractive and cataract surgical systems, phacoemulsification and vitrectomy equipment, intraocular lenses and solutions.

Moat Analysis: 2 / 5 Bausch + Lomb’s moat is relatively narrow with a 2/5 rating. While the company has a strong history, well-established brands, and some intellectual property protection for its products, these advantages are not exceptionally durable. Here’s why: Intangible Assets (brands and patents): While Bausch + Lomb owns some well-known brands (e.g., Biotrue, Ocuvite) in the eye care market, these brands face competition from other established players. Their success relies on the ability to command price premiums and generate repeat purchases. Moreover, the patents on key products have a limited life, making it a challenge to sustain long-term competitive edge. They do, however, have an innovative product pipeline which seems promising. In the earnings calls the company has often stressed that they are working on R&D and innovation and have good products on pipeline. Switching Costs: Although some products, such as specialty contact lenses may have higher switching costs, the switching costs are typically low for the average customer for most segments of BHC business. Also, there is constant innovation from the other firms that may disrupt their product line. Network Effect and Cost Advantage: There is little to no network effect at play here, as customer preference is not entirely contingent on other users. As such there are no network effects associated with BHC. The company has some scale, especially in distribution, but the low cost is not a key driver for the business.

  • Rationale for Rating

The competitive dynamics in the healthcare sector, especially for consumer-oriented products, are high. So the company requires heavy spend on marketing and has to battle multiple competitors at all points. While there are some strengths, it isn’t enough to be called a wide moat. It is more of a narrow moat.

Risks to Moat and Business Resilience Bausch + Lomb faces a number of risks that could impact the company’s moat and overall resilience:

  • Technological Disruption: Technological advancements can quickly disrupt the optical and pharmaceutical market. For instance, a new technology that corrects vision better, could pose a threat to the contact lens business.
  • Competition: The eye health market is competitive with a lot of companies that offer similar products and services. A price war or the advent of substitutes could damage the company’s profitability and erode the moat.
  • Regulatory Risks: As a pharmaceutical company, changes in regulations or patent disputes could drastically impact the company’s revenue streams. If regulations become tighter and a company is unable to get regulatory approval for their product, that may prove a big hurdle for growth.
  • Dependence on Key Products: The company relies heavily on their key product lines which could be a risk, as there is always the chance of technology disrupting a product line. A product recall or the expiration of patents on key products can impact profits severely.
  • Economic Downturn: The company’s products might not be as high in demand during an economic downturn, which could limit revenue and profits during these tough periods.
  • Supply Chain and Raw Materials: The company is exposed to disruption in supply chain and price volatility of raw materials.

Business Explanation

Bausch + Lomb is a well-established name in the eye health space, with over 170 years of operating history, although under its different ownership structures. They primarily provide vision care, pharmaceutical and surgical products. The company has a major presence in the US and operates in over 100 countries globally. However, its market share is varied across different regions and product segments. The business is diversified and also cyclical in nature, the market is also fairly consolidated. For instance, the eye care industry has a few major players that often dominate the landscape. This is mostly due to economies of scale, and first mover advantage.

Revenue Distribution Here is how the business’ revenue is distributed as of the latest financial report

  • Vision Care: Primarily includes sales from contact lenses, and lens care solutions. Most sales in this segment are driven by the contact lenses.
  • Ophthalmic Pharmaceuticals: Majority of sales come from prescriptions and OTC medications.
  • Surgical: This primarily includes sales from intraocular lenses, devices, and surgical equipment.

Financial Analysis Bausch + Lomb’s financial health is moderate. Here are some key observations

  • Profitability: While the company’s profitability metrics such as operating margins have been stable, they tend to be slightly lower than peers.
  • Growth: The company is seeing steady revenue growth, driven by their Vision Care and Pharmaceutical segments, but it is not explosive. In the latest earnings calls, the management has mentioned they are working on growth and are optimistic on the future.
  • Liquidity: The company is able to fulfill its short-term debts. But its liquidity position is not excellent due to its high debt load.
  • Debt: The company has substantial debt levels which may impact its financial flexibility going forward. A lot of their earnings are being used to pay back debt. While, the management has mentioned that the company is focused on reducing the debt levels, they haven’t made significant progress as of now.

Recent Concerns / Controversies and Management’s Response In the latest earnings call (Q3 2023), the management addressed concerns over the ongoing Russia-Ukraine conflict and its impact on their European business. Management has taken steps and believes there isn’t going to be any major disruptions. Also, the management has talked about how they were able to combat high inflationary pressures in the current environment. The leadership also pointed out positive traction on their recent launches including the LUMIFY, and the new eye lens lines. Overall, the tone of the earnings call is fairly positive as there were significant earnings growth compared to the prior year and the management has stressed the long term financial goals.

A major concern, however, is their high debt load that has hurt their balance sheet which should be focused on by investors.

Understandability Rating: 3 / 5 Although the business has some complexity due to its diversified segments, it isn’t too hard to understand. It’s not a simple business to completely understand but with some effort, it is understandable. As such, the understandability score is 3/5.

Balance Sheet Health: 3 / 5 Bausch + Lomb’s current balance sheet health is above average, but not very good due to its high debt load, liquidity issues, and current profitability. They have large liabilities that need to be paid off using their operating income. So it is given a score of 3/5.