September 24, 2022

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Busted Bausch + Lomb IPO To Doom IPO Market, Cash Burning Startups

On May 5, the company formerly known as Valeant Pharmaceuticals took its eye care unit Bausch + Lomb (BLCO) public.

The motivation for taking it public was profit — but it looks like parent company Vaughan, Ontario-based Bausch Health Companies (BHC) — named as such to make investors forget about Valeant’s stormy history — is taking a 28% haircut on this disappointing IPO.

This is bad news for the IPO market and for money-losing startups that are already struggling to raise more venture capital. VCs are seeing the possibility of a profitable exit fade too far into the future. And I see no reason to buy shares of the newly public Bausch + Lomb.

Bausch + Lomb Is Valeant Eyewash

Bausch + Lomb has a storied history in the public and private markets. The company traded on the NYSE for 50 years until 2007 when two private equity firms bought it for $4.5 billion.

In 2013, the governance-challenged pharmaceutical company Valeant bought Bausch + Lomb for $8.7 billion. After weathering an accounting scandal and facing scrutiny for acquiring drugs then steeply hiking their prices — in 2018, it changed its name from Valeant to Bausch Health Companies, according to the Financial Times.

The IPO takes public Bausch + Lomb — BHC’s eyecare division — which sells contact lenses, eye drops and implantable lenses for cataract surgery in more than 100 countries. It sells more than 400 products, more than 260 of which came on the market since 2017.

Disappointing Valuation

A regulatory filing described a plan to offer 35 million shares in a price range between $21 and $24 per share. If the plan had gone through, the company would have raised $788 million at a valuation of $8.2 billion — some $500 million below the price at which BHC acquired it six years ago.

I do not find its growth or profitability worth getting excited about. Bausch + Lomb grew modestly last year — in 2021, its revenues increased 10.6% to $3.8 billion, and it generated $182 million in profit.

So it came as no surprise to me that BLCO’s IPO was a disappointment. As the Wall Street Journal reported, Bausch + Lomb priced its IPO at $18 a share — 20% below the midpoint of its hope-for price range — raising $630 million (33% lower than the top of the hoped for range).

That price values Bausch + Lomb at about $6.3 billion — a whopping $2.4 billion below what BHC paid for the company back in 2013.

Bad News For the IPO Market

Unless BLCO stock soars — for example, closing above $30 a share — when it ends first-day trade on the NYSE today, I expect other companies waiting on the IPO runway to delay going public. According to the Journal and Bloomberg, such companies include:

  • Intel’s $50 billion-or-more self-driving car unit Mobileye
  • Steinway Musical Instruments
  • ServiceTitan
  • Quick Quack Car Wash
  • Chobani, the yogurt maker, and
  • Social media platform Reddit

BLCO’s IPO was thought of as offering hope for a moribund 2022 IPO market. As the Journal reported, IPOs have “been virtually shut down since stocks started falling earlier this year. After a record year in 2021, traditional IPOs have raised less than $3.3 billion in 2022, the slowest start since 2016.”

Expect Layoffs From Cash Burning Startups

A basic rule of market physics is what goes up quickly often plunges soon thereafter. So after a record 2021 IPO and venture funding market (up about 100% to $330 billion raised by U.S. ventures in 2021), 2022 is looking to be very hard on both.

Venture backed companies whose investors were hoping to cash out are now telling their portfolio companies to become self sufficient financially.

This comes as no surprise to me — which is why I lamented in my 2019 book, Scaling Your Startup, that most startups were skipping the second stage of scaling — e.g., streamlining operations to get cash flow positive before taking on more capital.

Companies that skipped right to stage three — sprinting to liquidity — are now forced to go back and do the second stage (or more likely burn through their remaining cash and find a buyer or shut down). Here are some examples from Axios:

  • Amazon Third-party business acquirer Thrasio — valued at more than $5 billion — canned 20% of its staff and replaced its CEO
  • Instant delivery service GoPuff terminated at least 3% of its people
  • Fintech Blend cut 10% and Better.com is in the midst of an “ongoing implosion”
  • Digital health service, Noom, “is cutting hundreds of weight loss coaches, after raising more than $500 million.”

Biotech — which often takes startups public despite no revenue — is also cutting jobs. As I wrote in April, this February and March, Akebia Therapeutics, Bluebird Bio
BLUE
, and Yumanity Therapeutics announced plans to cut employment by 30% to 60%, while in early April microbiome firm Kaleido Biosciences shut down altogether.

If Bausch + Lomb is the canary in the coal mine, the IPO market is dead — so is the funding climate for startups.

https://www.forbes.com/sites/petercohan/2022/05/06/busted-bausch–lomb-ipo-to-doom-ipo-market-cash-burning-startups/