You wouldn\’t be able to tell by Valeant Pharmaceuticals International Inc.\’s stock price, but things haven\’t gone exactly according to plan.
As new Valeant CFO, merger expert Robert Rosiello prepared to maintain M&A momentum
Valeant Pharmaceuticals International Inc\’s new Chief Financial Officer made his mark being an expert in healthcare mergers and acquisitions, and this is exactly what he really wants to continue doing at Canada\’s largest publicly-traded drug company.
\”This is definitely an organization that totally sweats the facts and understands how to not only employ capital, but make it perform,\” said Robert Rosiello, who had been appointed CFO by the Laval, Que.-based company on Thursday.
The US$78-billion company has been on a mission to become one of the world\’s five leading drugmakers, joining the ranks of Pfizer Inc. and Novartis AG, by looking into making acquisition after acquisition. Answer to this objective was its quest for Allergan Inc., the producer of Botox injections. It lost on that US$60 billion-plus prize to Actavis Plc.
There are few alternatives big enough, with as lucrative of the product line to help Laval, Quebec-based Valeant jolt earnings growth and lower financial leverage. Its debt-fuelled takeover binge has pushed the amount of money it owes banks and bondholders to 6.6 times what it earned before interest, taxes, depreciation and amortization previously 12 months, based on data compiled by Bloomberg. The average Standard & Poor\’s 500 clients are half as indebted.
\”The Allergan deal would be a disappointment for Valeant management,\” said Michael Waterhouse, an analyst for Morningstar Inc.
Even so, Valeant\’s New York-listed stock has climbed 94 per cent in the past Twelve months, its best rolling 12-month performance because the company was formed from a tax-inversion deal in 2010. Even Valeant\’s bonds are outperforming the broader high-yield market, based on Bank of America Merrill Lynch Indexes.
\”We are continuing to pay attention to building diversified, durable businesses with strong organic growth platforms and pursuing disciplined business development opportunities,\” said Laurie Little, a spokeswoman for Valeant. \”With 2015 off to a strong start, we\’re well positioned for another year of outperformance.\”
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Waterhouse and most other equity analysts remain bullish on the company. The typical 12-month price forecast for Valeant has never been higher at US$246 a share, data published by Bloomberg show. The shares closed at US$230.20 apiece Wednesday in New York.
\”There\’s a lot of chance of this company to find attractive deals, so there\’s probably quite a long runway left ahead,\” Waterhouse said.
The issue is, Valeant isn\’t alone. Competition continues to be heating up for deals as other drug giants borrow from Valeant\’s playbook. Many have moved their legal addresses to jurisdictions with lower tax rates, giving them a greater ability to pay up for acquisitions the way Valeant can. This is resulting in bidding wars and driving up prices from the remaining targets.
Since Valeant\’s Allergan bid failed, the largest transaction it\’s been able to get done is Salix Pharmaceuticals Ltd. at US$12.5 billion. Even just in the face of an accounting scandal, Salix drew competing offers which had forced Valeant to increase its original offer by almost 10 %.
Valeant also bought Provenge, cure for advanced cancer of the prostate, from bankrupt drug developer Dendreon Corp. for US$495 million in February. Now, it\’s in advanced negotiations to acquire Egypt\’s Amoun Pharmaceutical Co., which can be valued at as much as US$800 million, based on people with understanding of the matter.
\”Large transactions don\’t grow on trees. Smaller deals certainly appear to these days,\” said David Steinberg, an analyst for Jefferies Group. \”As a business gets larger and larger, to make the math work you need to consummate ever larger acquisitions there are fewer companies of size.\”
It remains to be seen whether Valeant can find another transaction similar to Allergan. Some even question the company\’s whole business design.
\”Valeant\’s entire story is: Buy something, gut it, obtain a one-time boost from firing everybody, jack up prices on products and then go buy something else,\” said Vicki Bryan, an analyst for Gimme Credit. \”It buys low-quality assets, overpays substantially for them and loads up with debt to get it done.\”
There is one thing Valeant has that surely makes a lot its competitors envious: a 5 per cent tax rate. While a number of rivals did their own inversion deals to reduce the amount they owe the federal government, Pfizer paid about 26 percent in 2014. It\’s been looking to get that number down via a large tax- inversion deal. Recall that it is bid for AstraZeneca Plc failed last year.
Valeant CEO Pearson\’s ambition may still be to achieve a US$150 billion market price for the company. But it is conceivable the industry consolidator might get taken over itself.
Valeant would be \”the ultimate inversion,\” Steinberg of Jefferies said. \”Valeant is perceived as a consolidator only, but if a large pharma company wants the lowest possible tax rate, Valeant has it. And everyone has a price.\”
— With the help of Cordell Eddings in Ny.