Valeant’s $150 Billion Goal Spells Mega-Merger: Real M&A
This may be the year Valeant Pharmaceuticals International Inc. (VRX) writes the check that vaults the serial acquirer into the top tier of drugmakers.
The Montreal-based company has already expanded its market value to $44 billion from less than $3 billion in 2010 after striking deals including last year’s purchase of Bausch & Lomb Holdings Inc., according to data compiled by Bloomberg. Now, Valeant Chief Executive Officer Mike Pearson says his goal is to snag a spot among the world’s five biggest drugmakers by the end of 2016. To eclipse rivals such as Sanofi and Merck & Co., that means reaching a market value of more than $150 billion.
Valeant, which has focused on niche therapeutic areas such as dermatology and eye care, could achieve that goal by merging with Actavis Plc (ACT), the $31 billion company that made a sizeable entry into women’s health and dermatology last year, CRT Capital Group LLC said. Aegis Capital Corp. said the best fit for Valeant may be Teva Pharmaceutical Industries Ltd. (TEVA) as the generic-drug maker’s valuation languishes amid a recent leadership overhaul.
“This transaction is going to happen in 2014, and it’s going to be a biggie,” Raghuram Selvaraju, head of health-care equity research at Aegis Capital in New York, said in a phone interview. “The prospect of being a $150 billion market cap company is actually not unrealistic at all. There are targets that are appealing, and more importantly, there are targets that are vulnerable. Valeant just needs to act now.”
Pearson said at a Goldman Sachs Group Inc. conference this month that he plans to do at least one “significant” deal in 2014 about the size of the the $8.7 billion acquisition of Bausch & Lomb or larger. After already achieving the goal of becoming a top 15 pharmaceutical company, Pearson now has his eyes set on ranking among the top five. Merck, currently the fifth-largest drugmaker, has a market value of about $153 billion.
Valeant and Actavis held talks about a merger last year, and the discussions eventually stalled because of a disagreement on price, Bloomberg News reported in April. Actavis then spurned an offer from Mylan Inc., people familiar with the matter said in May, deciding instead to acquire Warner Chilcott Plc.
Laurie Little, a spokeswoman for Valeant, said the company doesn’t comment on deal speculation, when asked whether it’s in discussions with Actavis again or with Teva. David Belian, a spokesman for Actavis, also declined to comment.
A representative for Petach Tikva, Israel-based Teva didn’t immediately respond to a request for comment.
Since failing to get a hold of Actavis last year, Valeant has expanded in skin care, eye care and medical devices with the takeovers of Obagi Medical Products Inc., Bausch & Lomb and Solta Medical Inc. The company has been the busiest dealmaker among North American pharmaceutical and biotechnology companies since 2010, with at least 34 purchases, data compiled by Bloomberg show.
Buying Warner Chilcott allowed Actavis to shift its domicile to Ireland from the U.S. and helped the generic-drug maker expand its women’s health and urology businesses, and add gastroenterology and dermatology products. Investors have applauded the deal, with Actavis’ stock rising 25 percent since the transaction closed Oct. 1.
“Actavis, especially after the Warner Chilcott deal, is becoming much more of a specialty pharma company,” Chiang said in a phone interview.
Actavis’s free cash flow yield -- a measure of how much cash from operations the business generates relative to its share price -- is 2.6 percent, which tops the 0.8 percent average for drugmakers larger than $1 billion, according to data compiled by Bloomberg.
To fetch the $150 billion market value that he wants, Valeant CEO Pearson may need to increase revenue to about $30 billion in the next few years, according to Selvaraju of Aegis Capital. That’s based on Valeant’s current valuation of about 5 times this year’s estimated sales of $8.4 billion.
Revenue for Actavis may reach $11.4 billion in 2017, and Valeant is projected to hit about $9.8 billion that year, analysts’ estimates compiled by Bloomberg show.
Today, shares of Valeant rose 2.9 percent to $136.60, while Actavis added 3.3 percent to $186.69.
While a large U.S. generics business such as Actavis is a logical merger partner, it may take a series of transactions to get Valeant to its goal, said David Amsellem, a New York-based analyst at Piper Jaffray Cos.
“Definitely a merger of equals is in the cards,” Amsellem said in a phone interview. “It looks like it’s a matter of not if, but when. We’re looking at potentially at least one merger-type transaction and then maybe more smaller-scale deals.”
On the other hand, Teva’s $20 billion of annual sales would easily get Valeant to the revenue level that Selvaraju estimates it needs. Teva also tops the list of merger candidates because it has a presence in areas where Valeant doesn’t, such as U.S. generic drugs, where Teva is the market leader, Selvaraju said.
Teva was one of the worst-performing drug stocks last year after the abrupt departure of its CEO, who disagreed with the chairman over how to restructure the company. It’s also bracing for potential generic competition to its top-selling branded medicine, the Copaxone multiple-sclerosis treatment.
Since falling to an eight-year low in November, Teva shares have rebounded 21 percent as billionaire George Soros’s Soros Fund Management LLC increased its stake and Teva picked a new CEO. Teva now has a market value of about $38 billion.
“Teva has been like a rudderless ship,” Selvaraju said. The recent stock gain is more likely “a reflection of investor awareness that Teva is on the block.”
Allergan Inc. (AGN), the subject of takeover speculation last year when its stock price dipped, would complement Valeant’s interest in skin and eye care, Herman Saftlas, a New York-based equity analyst at S&P Capital IQ, said in a phone interview.
The Irvine, California-based company, which has a market value of $34 billion, makes Botox anti-wrinkle injections and Restasis eye drops, as well as treatments for acne and psoriasis. Sales of Botox, which is also used to treat migraines and incontinence, may climb to more than $3 billion in 2018 from about $2 billion last year, according to analysts’ estimates compiled by Bloomberg.
Bonnie Jacobs, a spokeswoman for Allergan, declined to comment on whether the company is considering a merger with Valeant. Little, the spokeswoman for Valeant, also declined to comment on Allergan.
Valeant needs to act fast before the U.S. Federal Reserve boosts interest rates, which would increase the cost for Valeant to raise money, said Selvaraju of Aegis Capital. A merger would need to be funded with both stock and debt, he said.
The drugmaker may already have a target in mind and is just waiting for the right opportunity to strike, said S&P’s Saftlas.
“Valeant has shown extreme expertise in finding and executing these mergers,” he said. “I expect them to deliver on their goal and for a deal to occur this year.”
Top 15 Pharmaceutical Companies by Market Value: Johnson & Johnson Roche Holding AG Novartis AG Pfizer Inc. Merck & Co. Sanofi GlaxoSmithKline Plc Novo Nordisk A/S Bristol-Myers Squibb Co. AstraZeneca Plc AbbVie Inc. Eli Lilly & Co. Abbott Laboratories Valeant Pharmaceuticals International Inc. Teva Pharmaceutical Industries Ltd.
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