Valeant: High Growth And High Debt

| About: Valeant Pharmaceuticals (VRX)

Valeant Pharmaceuticals (NYSE:VRX) announced the acquisition of Bausch + Lomb Holdings on Monday. The deal is worth $8.7 billion. An investor group led by Warburg Pincus will get $4.5 billion, and $4.2 billion will be used to repay Bausch + Lomb's outstanding debt. The acquisition is the biggest ever for Valeant, and is the latest in the acquisition spree that began when Michael Pearson joined the company as CEO in 2008.

Bausch + Lomb acquisition

Valeant made an announcement on Monday, May 27th, about the $8.7 billion acquisition of Bausch + Lomb. The deal will be accretive immediately and Valeant expects annual cost savings to total $800 million by the end of 2014. Bausch + Lomb expects to have revenues of $3.3 billion and adjusted EBITDA of $720 million in 2013. Assuming the full realization of synergies, the acquisition would have been approximately 40% accretive to Valeant's expected 2013 cash EPS.

The acquisition will be funded by debt and approximately $1.5 to $2 billion of new equity. That will additionally burden the already high debt load of the company. Bausch + Lomb will retain its name and become a division of Valeant. Valeant's existing ophthalmology businesses will be added to the Bausch + Lomb division, and the company estimates about $3.5 billion net revenue in 2013. Valeant intends to capitalize on growing eye healthcare trends, with an aging population, increased rate of diabetes and demand from emerging markets. With this transaction, Valeant aims to be a leader in global eye healthcare, as it already is in dermatology.

This deal comes after extensive media attention on Valeant's potential acquisition of Actavis (ACT). The deal would have been even bigger than Bausch + Lomb, as Actavis was valued around $13 billion at the time the rumors were spreading. The speculation came to an end after Actavis announced that it will buy Warner Chilcott (NASDAQ:WCRX) for $8.5 billion in a stock-for-stock transaction. The transaction will create a leading global specialty pharmaceutical company with approximately $11 billion in combined annual revenue.

Strong growth and high debt

Valeant has delivered substantial revenue growth in recent years, mainly fueled by numerous acquisitions. Revenue grew from $757 million in 2008 to $3.5 billion in 2012. Before the Bausch + Lomb acquisition, the company expected 2013 revenue of $4.4 billion to $4.8 billion, a 30% year-over-year increase at the mid-point of guidance. The company guided cash EPS in the $5.55-$5.85 range, a 30% increase at mid-point. The Bausch + Lomb acquisition would be 40% accretive to Valeant's full year earnings if the deal was made on January 1st.

Valeant's debt will substantially increase with the latest acquisition. It is already over-leveraged and highly vulnerable to interest rate changes. The company has taken advantage of the low interest rate environment. With the potential tapering of QE, Valeant will face challenges and a meaningful increase in interest rates would have a profound negative effect on the bottom line.


With the acquisition of Bausch + Lomb, Valeant is now well positioned in two growing areas: dermatology and ophthalmology. High debt is a burden and presents a real danger for the company if interest rates start to climb in a meaningful way. However, the company's management, led by Michael Pearson, is executing very well, and the acquisitions have so far been very successful, and have produced substantial top and bottom line growth since 2008, and the growth is expected to continue.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.