Where is the cash?
The CEO of the company has been quoted as saying that with this acquisition Valeant will be a worldwide leader in both dermatology and eye health. The question is: at what cost?
Valeant Pharmaceuticals Intl Inc (NYSE:VRX) will finance the acquisition by issuing fresh equity of between $1.5 and $2 billion. For the balance amount it will issue new debt.
Valeant’s annual revenue for the financial year ended December 2012 was $3.55 billion, and the company reported a loss of $116 million. For the quarter ended March 2013, it reported revenue of $1.07 billion and a loss of $27.53 million. Its trailing twelve month EPS is at negative $0.43.
However, what I find interesting is that Valeant’s long term debt as of December 2012 stood at above $10 billion. The Bausch & Lomb deal is not only going to dilute shareholder value but also increase Valeant’s debt by almost $7 billion.
While the acquisition will contribute to Valeant’s revenue from day one and is likely to result in an a large cost saving by 2014, it must also be kept in mind that Bausch & Lomb’s net annual income is an estimated $720 million, and the $8.7 billion valuation by Valeant represents 12 times the target company’s EBITDA.
An industry marked by mergers, acquisitions and takeovers
Biotech is a complex industry and is difficult for those who do not belong to the industry to understand it fully. Small biotech companies do a lot of hard work for discovering, improving and developing alternatives for existing drugs and new candidates for unmet medical needs, but a large number of them fail to carry their hard work to its natural conclusion and end up selling themselves to large pharmaceuticals.
Those who manage to retain their independence end up succumbing to money power. Large pharmaceuticals invest heavily in small biotech companies and manage to become the ultimate licensees in a large number of cases.
Conclusion
I am slightly conservative in my outlook. My concern is that Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is currently valued by the market at $25.88 billion, and its total long term debt will be almost $18 billion on completion of transactions relating to the Bausch & Lomb acquisition. If we turn the clock back just 15 days, Valeant was valued 13% less or $22.52 billion. In January 2013, it was 44% less than what it is now.
While $3.3 billion addition in revenue and $720 million of net income is indeed a big positive for the company, in my opinion, the market is reading too much into this acquisition, as well as that of Obagi Medical Products Inc. (April 2013) and Natur Produkt International, JSC (February 2013). In addition, we have an impending dilution of shareholder value.
I would wait for a correction in the stock price – a substantial one at that – before I think of buying Valeant.
Dr. Kanak Kanti De has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Valeant Biting More Than it Can Chew originally appeared on Fool.com.
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