Valeant Pharmaceuticals Intl Inc (VRX) is Expanding its Eye Care Business

Valeant PharmaceuticalsThe pharmaceutical industry is getting hotter with increasing M&A activities. Recently, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) agreed to buy out Bausch + Lomb for around $8.7 billion in cash, including $4.2 billion used to pay the target’s debt. Right after the announcement, Valeant jumped more than 13% on the market to nearly $84.50 per share, reaching its all-time high.

Strategic eye care acquisition

Bausch + Lomb, the global leader in eye health, is the owner of several eye health brands including PreserVision, PureVision, renu and VICTUS. It was estimated to generate around $3.3 billion in revenue and about $720 million in 2013 EBITDA. Thus, with around a $8.7 billion offering price, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has valued Bausch + Lomb at around 12 times its EBITDA. Valeant seems to make the right move to leverage the increasing demand in eye health, resulted from a growing demand in emerging markets, aging population and an increasing number of diabetes patients. Michael Pearson commented that with Bausch + Lomb’s eye care comprehensive portfolio, it would be a great “strategic fit” with Valeant’s ophthalmology business. He said: “With this transaction, Valeant will be a worldwide leader in both dermatology and eye health.”

Valeant Pharmaceuticals Intl Inc (NYSE:VRX) reported that they would finance the acquisition with around $1.5 billion to $2 billion of new equity, and debt. After the transaction, Valeant pro-forma debt/adjusted EBITDA would be around 4.6. Interestingly, the company commented that if we assumed the transaction occurred at the beginning of the year and full synergies had been achieved, the acquisition would have been accretive as much as 40% to its 2013 cash EPS. By the end of 2014, it was expected to realize around $800 million in annual cost savings. Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is trading around $85 per share, with the total market cap of around $25.90 billion. With Bausch + Lomb’s acquisition, its 2013 EBITDA would be around $2.7 billion.

Competing directly with Novartis and Allergan

Valeant would be competing directly with other leading players in ophthalmology, including Novartis AG (NYSE:NVS) and Allergan, Inc. (NYSE:AGN). Novartis has Lucentis as its leading ophthalmic product. It was a biotech eye therapy, used in the treatment of wet macular degeneration and visual impairment caused by diabetes, with approval in more than 100 countries. Lucentis has experienced a consistently high growth in business franchise revenue, from more than $1.5 billion in 2010 to nearly $2.4 billion in 2012.

Allergan is also the leader in eye care, with its best selling product being Restasis. According to the company, it is the biggest prescription ophthalmic product in the U.S. as measured by revenue. Its eye care pharmaceutical product was the biggest revenue contributor, accounting for as much as 47.4% of its total 2012 revenue. For the past three years, its eye care pharmaceuticals product revenue also consistently increased, from $2.26 billion in 2010 to $2.7 billion in 2012.

Novartis AG (NYSE:NVS) is trading at around $74.40 per share, with the total market cap of $182.8 billion. The market values the company at around 11.52 times EV/EBITDA. Allergan, Inc. (NYSE:AGN) is a bit bigger than Valeant Pharmaceuticals Intl Inc (NYSE:VRX), with around $29 billion in its total market cap. The market values Allergan at around 15.5 times EV/EBITDA. Income investors might like Novartis the most with its high dividend yield of 3.4%. While the dividend yield of Allergan, Inc. (NYSE:AGN)is minimal at only 0.2%, Valeant has not paid any dividends for more than two years. After the deal, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) seems to be the most leveraged company among the three, with the net debt/EBITDA of 4.6. Novartis AG (NYSE:NVS) has a stronger financial foundation with net debt/EBITDA of only 0.42. Allergan has the strongest balance sheet with the net cash of around $85 million.

My Foolish take

The acquisition of Bausch + Lomb is quite a sensible move to expand its footprint in the ophthalmology field. The EV valuation of 12 does not seem to be an expensive price compared to the other players’ valuation. With the potential synergy with Bausch + Lomb and Michael Pearson’s leadership, I personally think that Valeant could become much stronger in the near future.

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Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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