Bausch & Lomb's Trail of Tears

The stock sags again as safety concerns mount.
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Eye-care giant

Bausch & Lomb

(BOL)

could be due for a full-blown crying fit.

B&L now faces a possible liquidity squeeze, one expert says, as problems with the company's contact-lens solutions continue to spread. Banc of America analyst David Maris predicted on Thursday that B&L could run low on cash after paying off bondholders who are still waiting for the company to file its overdue financial statements. The analyst's warning came shortly after B&L offered to buy back $384 million worth of outstanding debt -- or pay a fee in exchange for certain waivers -- as threats to its ReNu brand spread across the Atlantic and into Europe.

Already, dozens of ReNu users in the U.S. and Asia have come down with a rare eye fungus, known as Fusarium keratitis, that can lead to blindness. B&L has so far responded by halting sales of one ReNu cleanser, known as ReNu with MoistureLoc, but continues to keep other ReNu solutions on the shelves. Meanwhile, both government investigators and the company itself continue to seek reasons for the fungus outbreak.

B&L continues to struggle with financial challenges as well. Notably, it faces possible defaults under its current debt agreements because accounting issues have kept the company from filing reliable financial statements since the second half of last year. The company has now offered to pay fees to bondholders who are willing to wait until Oct. 2 for those filings.

B&L CFO Stephen McCluski said that the company could buy the bonds outright with cash on hand and still have an untapped $400 million revolver left over. But Maris expressed serious concern about that prospect.

"Based on our back-of-the envelope calculation, these transactions appear to be extremely expensive," cautioned Maris, who currently has a sell recommendation on the company's stock. They "could leave BOL with little cash and unknown potential medical liabilities if they are found at fault for the Fusarium cases. ... And with ReNu being so important to free cash flow, we wonder how long BOL can persist with low cash balances without having to draw down its revolver -- which, in and of itself, carries additional costs."

B&L has offered to buy three issues of debt and two issues of convertible debt that are currently outstanding. To retire just one of those debt issues -- totaling $184 million -- Maris estimates that the company will face some $30 million in added expense.

B&L itself has expressed comfort with the deal, saying it will allow the company to "prudently manage debt and the related future interest expense." But Maris has questions nevertheless.

"What drove this decision on the debt?" he asked. "Did the debt situation influence the decision to not suspend all of ReNu sales? And would they be cash-flow negative if the ReNu situation persists or worsens?"

Crying Game
Yearlong selloff at Bausch

B&L did not return a phone call from

TheStreet.com

seeking comment for this story. Meanwhile, the company's stock tumbled 7.3% to a new 52-week low of $40.75 on Thursday.

Estimated Damages

The latest slide came after

The Wall Street Journal

reported that B&L has now confirmed "a handful" of Fusarium keratitis cases among ReNu users in Europe. As a result, some experts now fear possible problems at B&L's plant in Italy -- which supplies Europe and other foreign markets -- in addition to the domestic facility that's currently under examination.

"Given that the infection reports are now spreading outside the Greenville, S.C., manufacturing facility, as well as to other brands (e.g., MultiPlus has been on the market since 1997), the stream of news is severely confounding," wrote Harris Nesbitt analyst Joanne Wuensch, who currently has a neutral rating on the company's stock. "Either this is a bad formulation or a Grisham novel."

At first, Wuensch simply trimmed her 2006 estimates for the company by $55 million to account for lost sales of ReNu with MoistureLoc in the U.S. and certain Asian markets. Now, however, she has slashed that estimate by another $220 million to eliminate all cleanser sales from the South Carolina plant. Should the problem continue to spread -- and wipe out cleanser sales altogether -- she foresees a $415 million hit instead.

In other words, more than 15% of the company's revenue could simply go away.

Looking further ahead, however, Wuensch sees some reason for hope. Ultimately, she believes that the company will resolve the ReNu mystery and then go on to increase its revenue next year.

Still, she remains clearly cautious for now.

"It is surprising to us that (infection) cases have extended beyond ReNu MoistureLoc into ReNu MultiPlus, that cases are now being reported in Europe (which are manufactured out of Milan, not Greenville) and that the company still cannot find a cause," she wrote on Thursday. Thus, "our single-point price target is lowered to $44 from $65. ... (And) risks to our price target include the lack of SEC filings, the unknown impact on the contact lens solution franchise, collateral damage to other franchises and permanent damage to the Bausch & Lomb name."