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Valeant Pharmaceuticals Intl Inc (VRX) Biting More Than it Can Chew

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While the debate goes on whether increasing output by acquiring new businesses through mergers, acquisitions and takeovers is the right way forward, the biopharmaceutical industry continues to be marked by M&A. Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is one such company that is known to swear by the philosophy of aggressive growth-by-acquisition. Last month, the company announced a mega-deal, the biggest acquisition yet by the company at $8.7 billion, to buy Bausch & Lomb.

Valeant Pharmaceuticals Intl Inc (NYSE:VRX)

Mergers, acquisitions and takeovers are not new to the industry, but can Valeant afford this acquisition?

The deal

Bausch & Lomb is a private American company and credited with the invention of soft contact lenses. It is also one of the world’s largest suppliers (currently the fourth largest in the world) of eye health products, including contact lenses, lens care products, medicines and implants for eye diseases. The company operates in three segments – pharmaceutical, vision care, and surgical.

It is an all cash deal instead of a share swap transaction. Out of the $8.7 billion, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) will pay $4.5 billion to private equity firm Warburg Pincus, and the balance goes to retire Bausch & Lomb’s outstanding debt.

What’s in it for Valeant?

On completion of the transaction, Bausch & Lomb will most likely become a part of Valeant’s ophthalmic division. The acquisition marks a major shift as the company is largely focused on dermatology. Bausch & Lomb’s EBITDA in 2013 is expected to be in the region of $720 million over revenues of approximately $3.3 billion.

With the acquisition, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is evidently eyeing the growing demand in emerging markets, particularly China, and betting on its aging population and increase in the incidence of diabetes. According to Valeant’s CE Michael Pearson, the acquisition allows the company entry into China and is an opportunity for expanding its dermatology business.

Eye care is a high growth business. Valeant will now compete with Novartis AG (ADR) (NYSE:NVS)’s Lucentis. Lucentis is used for treatment of age-related wet macular degeneration and diabetic retinopathy – vision impairment in diabetic patients. Revenue from Lucentis grew from $1.5 billion to $2.4 billion in 2012.

Regeneron Pharmaceuticals Inc (NASDAQ:REGN) also has a drug for age-wet macular degeneration, Eylea, which was approved in November 2011. In September 2012, the company got FDA approval for Eylea injection for treatment of macular edema following CRVO (central retinal vein occlusion) and is now being tested for use in diabetic macular edema. In first quarter of 2013, Eylea accounted for revenue of $314 million out of total revenue of $440 million. Riding on Eylea’s approval and another drug for metastatic colorectal cancer (Zaltrap) developed in partnership with Sanofi, Regenron has returned almost 100% to investors in one year.

The market has taken the acquisition positively, and Valeant’s stock price surged 13% on May 24, 2013 when the news of the merger surfaced, from $73 to $84.

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