What Valeant’s Soaring Stock Price Isn’t Telling You: Real M&A

You wouldn’t be able to tell by Valeant Pharmaceuticals International Inc.’s stock price, but things haven’t gone exactly according to plan.

The $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 making acquisition after acquisition. Key to this objective was its pursuit of Allergan Inc., the maker of Botox injections. It lost out on that $60 billion-plus prize to Actavis Plc.

There are few alternatives large enough, with as lucrative of a product line to help Laval, Quebec-based Valeant jolt earnings growth and reduce financial leverage. Its debt-fueled 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 in the past 12 months, according to data compiled by Bloomberg. The average Standard & Poor’s 500 company is half as indebted.

“The Allergan deal was a disappointment for Valeant management,” said Michael Waterhouse, an analyst for Morningstar Inc.

Even so, Valeant’s New York-listed stock has climbed 94 percent in the past 12 months, its best rolling 12-month performance since the company was formed from a tax-inversion deal in 2010. Even Valeant’s bonds are outperforming the broader high-yield market, according to Bank of America Merrill Lynch Indexes.

“We are continuing to focus on 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 are well positioned for another year of outperformance.”

Still Bullish

Waterhouse and most other equity analysts remain bullish on the company. The average 12-month price forecast for Valeant has never been higher at $246 a share, data compiled by Bloomberg show. The shares closed at $230.20 apiece Wednesday in New York.

“There’s a lot of opportunity for this company to find attractive deals, so there’s probably a pretty long runway left ahead,” Waterhouse said.

The problem is, Valeant isn’t alone. Competition has been 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 of the remaining targets.

Smaller Deals

Since Valeant’s Allergan bid failed, the biggest transaction it’s been able to get done is Salix Pharmaceuticals Ltd. at $12.5 billion. Even in the face of an accounting scandal, Salix drew competing offers that had forced Valeant to increase its original offer by almost 10 percent.

Valeant also bought Provenge, a treatment for advanced prostate cancer, from bankrupt drug developer Dendreon Corp. for $495 million in February. Now, it’s in advanced negotiations to acquire Egypt’s Amoun Pharmaceutical Co., which may be valued at as much as $800 million, according to people with knowledge of the matter.

“Large transactions don’t grow on trees. Smaller deals certainly seem to these days,” said David Steinberg, an analyst for Jefferies Group. “As a company gets larger and larger, to make the math work you need to consummate ever larger acquisitions and there are fewer companies of size.”

It remains to be seen whether Valeant can find another transaction akin to Allergan. Some even question the company’s whole business model.

“Valeant’s entire story is: Buy something, gut it, get 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 do it.”

‘Ultimate Inversion’

There is one thing Valeant has that surely makes a lot its competitors envious: a 5 percent tax rate. While a handful of rivals have done their own inversion deals to lower the amount they owe the 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 its bid for AstraZeneca Plc failed last year.

Valeant CEO Pearson’s ambition may still be to achieve a $150 billion market value for the company. But it’s conceivable that the industry consolidator could 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.”

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