Believe In This M&A Mastermind

by James Brumley | September 5, 2012 8:46 am

At first glance, Valeant Pharmaceuticals (NYSE:VRX[1]) acquiring Medicis Pharmaceutical (NYSE:MRX[2]) seems like a no-brainer. Both companies make and market dermatology products, and likely can accomplish more by working together.

It’s that pesky second glance that can trip up an otherwise good idea, however.

What Valeant Is Getting

While neither corporation could be considered a household name, each carries a little weight within the dermatology pharmaceutical market. Valeant Pharmaceuticals offers acne treatments Acanya and Atralin, and owns the rights to commercialize Refissa (for acne) in the United States. Medicis Pharmaceutical has Restylane, Perlane, Ziana, Dysport and Solodyn (for acne) in its portfolio, along with another half-dozen or so related and semi-treated prescription-level therapies. Overall, the Medicis IP portfolio is impressive, at least within the dermatological world.

But what exactly is Valeant Pharmaceuticals getting for its $2.6 billion purchase, which it will be financing by issuing new debt? The numbers alone look OK, but not great.

Medicis is on pace to generate $814.3 million in sales this year, and is likely to only turn a profit of $2.46 per share. The top-line figure is about 12% better than 2011’s, and extends what has become a five-year revenue growth streak. That bottom line, though, puts the company about 30% behind last year’s total income for 2012.

Even being generous and assuming 2012 is the statistical anomaly and that 2011’s and 2010’s respective incomes of $126 million and $123 million are the “norm,” Valeant paid about 21 times Medicis’ trailing income.

And to be blunt, Medicis will do well to even bring home more than $100 million in profit this year. Though it’s no one-trick pony, its acne drug Solodyn was a strong seller until a couple of years ago, when Teva Pharmaceutical (NASDAQ:TEVA[3]) unveiled a generic version of the same. More generics have followed. Medicis’ Dysport also is competing with Botox, made by Allergan (NYSE:AGN[4]). But Botox owns 78% of that market, and Allergan isn’t just going to roll over.

Point being, now all of a sudden the 38% premium Valeant is offering doesn’t feel so palatable … unless the company knows something we don’t.

Where’s It All Going?

Contrary to the way things seemed, Valeant Pharmaceuticals couldn’t fairly be categorized as a dermatology player prior to the acquisition of Medicis (even though the market did largely draw that conclusion); more than 75% of Valeant’s sales last year stemmed from non-dermatology products. On the other hand, by bringing Medicis into the fold, Valeant has become the biggest — by sales — prescription dermatology product maker in the world.

And it didn’t claim that top spot the old-fashioned way. Rather, it did it the modern way — via a truckload of buyouts.

Since 2008, Valeant has made 27 acquisitions (including Medicis). Many of them were dermatology-related, bolstering the company’s presence in the skin care market. And yes, you read that right — 27 acquisitions in four-and-a-half years, with more on the way.

The fact that Valeant could successfully manage that many additions to the operation sends one clear message: The folks running VRX know how to integrate companies. Many corporations would have simply collapsed by trying to weave together that many entities, but Valeant thrived on it. Revenue has tripled since 2008, and though income growth hasn’t been tremendous, bear in mind that VRX has been spending money now to make money later.

The company says it expects to save $225 million per year on Medicis Pharmaceutical’s operating costs by bringing it under the Valeant umbrella. If that happens, that will be the most productive Medicis has ever been — by far.

Right Time, Right Place

Veteran investors could understandably be worried about the buying spree Valeant is on. Related business or not, plunking down billions on 27 acquisitions can simply induce liquidity and logistical problems, without even actually boosting the business the way it was supposed to.

Dell (NASDAQ:DELL[5]) comes to mind. To make up for a waning PC business, Dell has been buying businesses left and right since 2007, adding Wyse, Clerity, SonicWall, Quest Software, SecureWorks, Compellent, 3PAR, Perot Systems, Force 10 Networks, Boomi, EqualLogic, Everdream, Allin, Kace and about a dozen other organizations. Yet, Dell’s top line has been stagnant[6], and the bottom line remains unimpressive.

What’s going wrong for Dell’s string of acquisitions in the world of technology isn’t applicable to Valeant, though.

Unlike the tech sector (and consumer technology in particular), dermatology and vanity cosmetics still is a growing arena despite what most would consider a lousy economic environment. Annual sales of dermatological products exceed $12 billion right now, and the figure has been growing every year for quite a while.

See, people might skip the new automobile or forgo the coolest consumer technology, but come hell or high water, they’re going to look good. Proof of the pudding: In 2010, U.S. consumers spent more on cosmetics than they did on foreign cars or television sets, and that was right around the time the prices on big-screen/flatscreen TVs started to plunge.

Valeant is going to have no trouble getting traction with what’s on Medicis’ menu. In fact, given its industry-marketing clout, it might do even better with those products than Medici did.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

  1. VRX:
  2. MRX:
  3. TEVA:
  4. AGN:
  5. DELL:
  6. Dell’s top line has been stagnant:

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