One of the largest Canadian drug makers, Valeant Pharmaceuticals (NYSE:VRX), announced the acquisition of Bausch + Lomb for $8.7 billion. The company said that the cash deal will help it capitalize on increasing demand for contact lenses and other products because of aging populations, growing demand in emerging markets and increasing rates of diabetes (as research has shown that complications of the complex blood sugar disorder can damage the eyes over time). Investment firm Warburg Pincus, which leads an investment group that owns Bausch + Lomb, will receive $4.5 billion in cash and the remaining $4.2 billion will be used to repay Bausch + Lomb's debt, the company said. The deal will be financed with debt and with around $2 billion in new stock issuance. Valeant Pharmaceuticals said that it expects to achieve at least $800 million in annual cost savings by the end of next year, and the acquisition will immediately add to its profits.
About Bausch + Lomb:
Bausch + Lomb is the world's leading eye health company, making contact lenses, eye drugs and ophthalmic surgical devices and instruments. Globally it develops, manufactures and markets one of the most comprehensive product portfolios in the eye health industry, with its products available in more than 100 countries. Founded in 1853, the company is headquartered in Rochester, NY, and employs more than 11,000 people worldwide. Bausch + Lomb anticipated that it will have revenues of about $3.3 billion at the end of 2013. Bausch + Lomb expects adjusted earnings before interest, taxes, depreciation and amortization of about $720 million.
Historic Stock Performance:
The above chart shows the historic stock price performance of Valeant Pharmaceuticals with respect to its competitors-TEVA Pharmaceuticals (NYSE:TEVA), Mylan Inc. (NASDAQ:MYL) and Actavis Inc. (ACT), since December 2012. You can clearly see that the company's stock price outperformed its competitors with price appreciation of 53.83 percent in the period of six months. The rapid price appreciation in the stock price is a reflection of its series of acquisitions during the period.
Financial strength of any company is very important to understanding the long-term perspective. Before analyzing the company's financial position, it is important to note that the company is currently a growth company. The company is diversifying and growing its business through a series of mergers and acquisitions. That means Valeant Pharmaceuticals tends to have very profitable reinvestment opportunities for its own retained earnings. Thus, it pays no dividends to stockholders, opting instead to plow most or all of its profits back into its expanding business.
The company has diverse sources of revenue not only from its broad drug portfolio, but also from the therapeutic classes and geographic segments it serves. The company focuses on those businesses that have the potential for strong operating margins and solid growth, while providing a natural balance across geographies. As you can clearly see from its acquisition of iNova in December 2011, Valeant Pharmaceuticals has been able to begin operations in five new territories including Malaysia, the Philippines, Singapore, Hong Kong and South Africa, with a distribution business in Thailand, Taiwan and some sub-Saharan Africa markets.
The above graph shows the company's revenues in millions of USD along with its revenue growth. Over a period of four years, the company has been able to generate a CAGR of 44.22 percent and over a period of five years it generated a CAGR of 36.19 percent, respectively. As you can see, a rapid jump in the revenues from year 2010 to 2011is because of their merger with Biovail.
The above chart shows the increase in total assets of the company which occurred in the years 2008 to 2012, as indicated by the linear trend line. The rapid increase in assets clearly shows the company's number of acquisitions over the years, supporting the growth in assets. The total assets of the company projected a CAGR of more than 62 percent during the five-year period (from Y08-Y12) and 72 percent during the four-year period (from Y09-Y12), respectively.
The company's overall performance has proved to be very efficient in terms of management of its financial resources. The company has been able to project aggressive growth over the past few years in its revenues and assets. However, this improvement has not been achieved at the cost of financial risks.
The above chart shows the company's free cash flows over a period of four years. As explained above, in this period the company experienced decent growth in its assets. The growth in assets was supported by a series of acquisitions; however, the operations of the company were robust enough to produce a commendable increase in operating cash flows, resulting in increased free cash flows over the period.
Furthermore, the increase in working capital is a sign that the firm will be able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.
Valeant Pharmaceuticals is a company with huge growth potential. Its strategy to grow through mergers and acquisitions is not only helping it diversify its business risk, but also helping it to capture new markets with a lot of growth potential. Though last year performance of the company was not up to the mark, with its current strong financial positions, the future prospects of the company are very good. So my recommendation for this stock is to buy.
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.