Topic: How To Invest

Valeant aims at a huge target with hostile bid for Botox maker Allergan

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Pat McKeough responds to many requests from members of his Inner Circle for specific advice about stock picks as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle.

This week an Inner Circle asked us about one of the few major pharmaceutical stocks based in Canada. Valeant Pharmaceuticals was purchased in 2010 by Biovail, then Canada’s largest pharmaceutical firm, and the new company adopted the Valeant name. Valeant is making headlines with its hostile takeover bid for U.S. drug maker Allergan, the maker of the cosmetic drug Botox.

Q: Pat: Valeant Pharmaceuticals is in the news these days with a big acquisition. What do you think of the stock?

A: Valeant Pharmaceuticals (symbol VRX on Toronto; is a multinational specialty pharmaceutical company that develops, makes and markets a broad range of products, mainly in the areas of neurology, dermatology and generic drugs.

On September 28, 2010, Biovail Corporation purchased Montreal-based Valeant Pharmaceuticals International. The combined company took on the Valeant name.

Valeant continues to grow by acquisition: in the past few years, it has spent over $19 billion buying more than 35 companies.

That includes its $8.7-billion purchase of Bausch + Lomb, a maker of eye care products, including contact lenses, surgical instruments and drugs. That deal was completed in August 2013.

In the three months ended December 31, 2013, Valeant’s revenue more than doubled, to $2.1 billion from $986.3 million a year earlier. The gains mostly came from acquisitions, including Bausch + Lomb. Excluding one-time items, earnings per share rose 76.2%, to $2.15 from $1.22.

On December 31, 2013, Valeant held cash of $600.2 million, or $1.80 a share. Its $17.2-billion of long-term debt is 35% of its $49.8-billion market cap.

With Botox as its largest product, sales hit $6.3 billion for Allergan in 2013

Valeant has now reached a market capitalization of $50.5 billion. As it grows, it needs ever-larger acquisitions to keep up a high rate of growth. It is now making a hostile $45.7-billion cash-and-stock takeover bid for Allergan Inc., $169.47, symbol AGN on New York.

Valeant is making the bid in concert with activist investor Bill Ackman’s Pershing Square Capital Management, which recently became Allergan’s largest shareholder by acquiring 9.7% of the company. Pershing, as a hedge fund, was able to build its stake before regulatory requirements forced it to disclose its holding.

This would be Valeant’s biggest acquisition to date. Allergan had sales of $6.3 billion U.S. last year. Its biggest product is Botox, an injection used for cosmetic procedures and migraines. Last year, Botox accounted for $2.0 billion, or 32%, of Allergan’s sales. The company also sells Restasis, a treatment for dry-eye syndrome that generated sales of $940 million U.S. Valeant reported $5.8 billion of revenue last year.

To fight Valeant’s bid, Allergan has contacted Johnson & Johnson (symbol JNJ on New York) and France-based Sanofi SA (ADR symbol SNY on New York) to see if either would be interested in making a friendly offer.

In addition to finding a “white knight” to merge with, Allergan could make itself harder to acquire by purchasing another company. The firm is reportedly preparing a new takeover bid for Irish drug maker Shire plc (ADR symbol SHPG on New York), with which it had previously discussed a merger. Shire’s market cap is $34 billion U.S.

Valeant’s says its strategy is to acquire health-care companies with expenses it sees as too high and then quickly cut them. As well, Valeant explains that by purchasing companies with existing products, such as Bausch + Lomb, it avoids spending the billions that drug makers typically devote to research.

In addition, Valeant hopes to realize at least $2.7 billion in annual cost savings from a combination with Allergan, from economies of scale and other merger benefits.

In the Inner Circle Q&A, Pat analyzes the potential risks of a huge acquisition like Allergan in comparison to the smaller acquisitions that Valeant has made previously. He also considers the added risk that growth by acquisition brings to drug companies faced with the constant threat of competition from breakthrough products. He balances this against the involvement of Bill Ackman and Pershing Square, who have a history of making undervalued companies more profitable. He concludes with his clear buy-hold-sell advice on this stock.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

COMMENTS PLEASE—Share your investment knowledge and opinions with fellow members

Have you owned a stock involved in a hostile takeover bid that produced good results for the company and the shareholders? Do you have an example of a stock involved in a hostile bid that worked out badly for shareholders?


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