Valeant Pharmaceuticals International, Inc. (VRX) is one of the more unconventional pharmaceutical companies being traded on the stock market. Unlike most companies of its kind, it allocates only a small part of its resources to the research and development of new products to introduce into the market. Instead, it is focused on acquiring smaller companies with successfully marketed products and in selling both over-the-counter and branded generics.
An Acquisition Mindset
The company`s CEO, Michael Pearson, stated that he would rather sell developmental programs that use up a lot of company resources as a cost-cutting measure. He also said that marketed products are more valuable than pipeline products. Pearson announced it during the bid to takeover Cephalon, which was later acquired by Teva Pharmaceuticals (NASDAQ:TEVA).
Valeant has made other similar bids these past years. Its share price, although fairly volatile, is considerably higher now than what it was between 2004 and 2009. Some of its more recent successful acquisitions are Natur Produkt International, a Russian pharmaceutical company; Probiotica Laboratorios, a Brazilian company; and iNova Pharmaceuticals, an Australian company.
Other companies like Merck (MRK) have also made such acquisitions, but the intent is rather different. For instance, Mercks acquisition of Inspire Pharmaceuticals was aimed at strengthening its ophthalmology arm. When it was acquired, Inspire had a growth rate of 15% per year. In contrast, Valeant targets companies with marketable drugs whose research and development programs are overextended. It then sells the high-risk, high-cost product development programs of the acquired company in order to streamline and restructure it into a more financially oriented business.
On the downside, its successes in this endeavor have attracted the attention of competing businesses. Other companies now see what Valeant targets as promising investments as well. There have been competing offers that have resulted in Valeant's failure to acquire some potentially lucrative additions to the company's portfolio.
Many patents have been expiring since the beginning of this decade and more are expected to expire towards its close. A number of these are some of the top-selling drugs. This does not bode well for many pharmaceutical companies that market or produce these products. Many are, in fact, scrambling to cope with this situation.
Seroquel is one such drug. AstraZeneca (AZN) is set to lose significantly. The loss of the drug`s exclusivity will allow generic drug companies to market their own competing versions. This will significantly cut into this popular drug's profitability. AstraZeneca projects that it may lose approximately 13% of its revenues (40% of its pretax profits), equivalent to $4.3 billion.
As a stop-gap measure, some companies like Japan's Takeda Pharmaceuticals (TKPYY.PK), try to cushion the drop in profits by making an agreement with major generic drug makers. The primary purpose of these deals is to delay the release of the generic equivalent into the market and buy time for the company that is losing exclusivity.
Although the patents of some of the drugs it markets are also set to expire, this is not a significant problem for financially oriented Valeant. In fact, it is an opportunity, as the company is also involved in the production of generics. As more drugs lose their exclusivity, this allows the company to get a portion of the market share of products that have proven to be saleable.
Although most news concerning Valeant focuses on the companies it is taking over, the company actually also enjoys an increase in the profitability of its existing crop of products, particularly in the area of dermatology. A good example of this is Zovirax. Last year, 2011, this product garnered a profit increase of about 28%. This has made dermatology another key factor in its increasing profitability.
Further, once streamlined, the companies acquired by Valeant show an average growth of around 10% per year. These companies have already generated income for Valeant during their acquisition. Their continued financial growth generates further income for the company. This is one of the reasons why its profits are more than triple those of 2008.
Share Price Fluctuation
The rapid rise in Valeant's share price is mainly due to two factors: carefully considered acquisitions, and the market of profitable drugs. Its research and development budget continues to be considerably smaller than that of its more conventional competitors. This is very different from the more traditional innovation-based companies, whose share prices rise with news concerning strides in the development of potentially profitable products.
The fluctuation in Valeant's share price is more closely related to the success or failure of either its acquisitions or its acquisition attempts. An example of this is the large drop it experienced in August 2011 when its share price was nearly halved. This happened in the second quarter of 2011 with the release of its financial report. A drop in sales of Legacy Biovail products was noted in comparison to the high levels these same products enjoyed in 2010 prior to the merger between Valeant and Biovail.
On a more positive note, Valeants intention to acquire Eyetech on February 2011 started an uptrend in its share price that continued well into the following month. When it announced that it was only able to get a 19.9% minority stake in the Brazilian ophthalmic company, its share price fell somewhat, as this did not meet the expectations of potential stock buyers.
Valeant has shown that a pharmaceutical company can be successful even if it is not heavily involved in the research and development of new products. Its acquisition-centered strategy has produced a spectacular rise in company profits compared to the years prior to 2010. The fluctuations in its share price correlate to a certain degree with its news releases about successful or unsuccessful acquisition bids. I believe that this company will continue to grow due to the uniqueness of its financial strategy among pharmaceutical companies.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.