Third Time's the Charm for This Small-Cap Buyout
After months of doing the waltz, ISTA Pharmaceuticals (NAS: ISTA) shareholders finally have a place they can call home: Bausch & Lomb.
Last night in after-hours trading, Bausch & Lomb, a privately owned but well-known eye-health company, agreed to buy ISTA Pharmaceuticals in an all-cash deal. The deal values ISTA at $9.10 per share, about a 9% premium to yesterday's close, and is expected to close in the second quarter of 2012.
The deal makes a ton of sense for Bausch & Lomb, which currently manufactures almost all of ISTA's product line in the United States. That's just one more cost-cutting measure for Bausch & Lomb as it looks to make further acquisitions and internalize new treatments. The deal is expected to be accretive to B&L's earnings immediately.
I can definitely say that this deal made a lot more sense for ISTA than the buyout attempt from Valeant Pharmaceuticals (NYS: VRX) back in October for just $314 million, or $6.50 per share. The offer was taken public in December after ISTA's rejection and subsequently raised to $7.50. Valeant withdrew the second, higher offer, just weeks later.
In my opinion, ISTA may have actually sold itself at a discount despite the fact that the stock was trading for below $4 through the first half of December.
ISTA's products, while not blockbuster treatments, do have long-term growth potential that will make the company profitable in 2012. ISTA successfully switched Xibrom customers, which it discontinued producing in February 2011 because of its patents expiring, to Bromday, its once-per-day eye drops for patients recovering from cataract surgery. It continues to maintain commanding market share despite the introduction of a generic version of Xibrom by Mylan (NAS: MYL) .
Perhaps the best growth aspect of ISTA's pipeline is Bepreve, which is used to treat itching associated with allergic conjunctivitis. Although the drug only accounted for 10% of ISTA's total revenue in 2010, sales grew by 82% year over year, and its relevance jumped to 18% of total revenue in 2011.
Based on estimates at Yahoo! Finance, and ISTA's closing price yesterday before the buyout was announced, the company was valued at 13 times forward earnings with an expected five-year growth rate of 20%. To me, it appears that B&L got a screaming deal, and the rest of the pharmaceutical space missed out.
Both companies dominate the over-the-counter dry-eye market with Allergan also dominating in prescription dry-eye treatments with Restasis. At the moment, ISTA isn't much of a threat, but I think it's a foolish move on its part to let B&L stake its claim.
In the end, the deal is done and ISTA shareholders have found their new home. Tell your fellow Fools below if ISTA's management made the right choice or if they sold out too cheaply.
At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. As a Detroit Lions fan he's never had dry eyes from all the years of crying. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Motley Fool newsletter services have recommended buying shares of Novartis. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that'll never give you the stink-eye.
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