Valeant Continues Aggressive Strategy with Medicis Buy
Valeant Pharmaceuticals ( VRX ) has more than tripled its annual revenue over the past three years, and it didn’t get there by working overtime in the lab coming up with new elixirs.
Instead, the Canadian drugmaker has relied heavily on acquisitions to enter new markets and beef up its product line.
Valeant’s aggressive M&A strategy has reached an even higher gear this year amid a series of buyouts — including its announcement earlier this month to buyMedicis Pharmaceutical ( MRX ) for $2.6 billion — that have expanded the company’s reach even further.
Valeant is a specialty pharmaceuticals firm that sells branded, generic and over-the-counter products in markets around the world.
The company’s biggest revenue contributor is its U.S. neurology and other division, which includes the Wellbutrin XL, Cardizem CD and Ultram ER brands. But Valeant’s key growth driver lately has been its U.S. dermatology unit, which includes the Zovirax, Acanya, Atralin and CeraVe brands.
All of Valeant’s segments have benefited from the company’s aggressive acquisition strategy. It has made about 50 buyouts since Michael Pearson took over as chief executive in 2008, including more than a dozen this year.
The Medicis acquisition, announced on Sept. 4, would be the largest since Valeant merged with Biovail in 2010.
Medicis, based in Scottsdale, Ariz., develops branded pharmaceutical products to treat dermatological and aesthetic conditions. It had $721 million in sales last year. Its Solodyn and Restylane brands should provide a major boost to Valeant’s lineup of wrinkle and skin care products.
“Valeant’s acquisition of Medicis is a positive event both strategically and financially,” noted Alan Ridgeway, an analyst at Paradigm Capital. “The combined franchise should benefit from scale that neither company could have generated on its own.”
He says Valeant expects to achieve at least $225 million in annual cost synergies within the first six months of closing.
The deal is expected to close during the first half of 2013 and be immediately accretive to earnings. Valeant said it will pay $44 a share for Medicis, a 39% premium over Medicis’ closing price before the deal was announced.
“The acquisition represents a significant next step in our journey to become the leader in dermatology by strengthening Valeant’s presence in acne, actinic keratosis, aesthetic injectables and anti-virals, among others,” CEO Pearson said in a statement.
Both stocks soared on the news. Medicis’ shares rose more than 38%, while Valeant’s stock price gained 14.65% to an all-time closing high of 58.78. Shares peaked at 61.11 on Sept. 7 and currently trade near 56.
But in some respects, it was just another day at the office for Valeant, which seems to announce a new deal every month in just about every corner of the world.
In June the company paid $312 million to acquire OraPharma, a specialty oral health firm. That deal came a month after Valeant bought assets from University Medical Pharmaceuticals and Swiss Herbal Remedies.
In April, Valeant acquired specialty drug firm Pedinol Pharmacal. It also bought certain branded generic assets from Atlantis Pharma, a Mexican pharmaceutical company.
March saw Valeant buy Russian specialty pharmaceutical company Natur Produkt; certain branded generic assets from Austrian drug firm Gerot Lannach; and a 19.9% stake in Brazilian biotech Pele Nova Biotecnologia.
In February, Valeant bought Probiotica Laboratorios, a Brazilian provider of sports nutrition and food supplements.
These deals have helped ease the sting of Valeant’s failed attempt last year to buy specialty drugmaker Cephalon. Valeant was outbid by generic-drug giantTeva Pharmaceutical Industries ( TEVA ), which paid nearly $7 billion for Cephalon.
Valeant’s acquisition strategy is a big reason it saw annual sales grow to nearly $2.5 billion in 2011 from $820 million two years earlier.
The company has already racked up $1.67 billion in sales during the first two quarters of 2012. It has grown the top line at least 34% each of the past seven quarters. Earnings have gained at least 22% each of the last five quarters.
Second-quarter earnings came in at $1.01 a share, up 38% from the prior year and a penny ahead of estimates. Revenue gained 35% to $820.1 million, in line with views. Pro forma organic revenue growth was about 10%.
Product sales climbed 41% to $748.7 million, led by strong performances in its U.S. dermatology, Canada/Australia and Emerging Markets segments.
Meanwhile, Valeant has unveiled plans to improve its gross margin from the current mid-70% range to a level closer to 80%. Much of this work will be completed over the next 18 to 24 months, according to an August note from JPMorgan analyst Chris Schott.
Among other things, Valeant looks to renegotiate certain partnership agreements it inherited in the Biovail merger to make them more profitable.
“While these efforts could modestly impact top-line results, we anticipate they should be clearly positive to the company’s bottom line,” Schott noted. “Further, the company is in the process of consolidating facilities acquired through its various acquisitions and continues to look to outsource manufacturing if possible.”
The company’s near-term profit outlook is strong. Analysts polled by Thomson Reuters expect Valeant to grow earnings 73% this quarter and 43% next quarter.