Valeant Pharmaceuticals (VRX) just announced that it has entered into an agreement with privately-held equity firm Water Street Healthcare Partners to acquire OraPharma, a US-based specialty oral health company. Valeant will pay around $312 million and may have to make additional milestone payments totaling $114 million. Subject to certain regulatory approvals, the deal is expected to close by the end of the month. The portfolio of OraPharma consists of Arestin (minocycline hydrochloride) which is indicated as an add-on therapy for scaling and root planing (SRP) procedures for the reduction of pocket depth in patients with adult periodontitis. Arestin can also be used for periodontal maintenance programs in connection with good oral hygiene. OraPharma has revenues of approximately $95 million and has the largest specialist pharmaceutical sales force.
Valeant has been on an acquisition binge in its quest for business expansion. Last month, it announced agreements to acquire certain assets from University Medical Pharmaceuticals as well as Swiss Herbal Remedies Limited. In April, Valeant bought US-based, privately-owned specialty pharmaceutical company, Pedinol Pharmacal, Inc. as well as certain branded generic assets from Mexican pharmaceutical company, Atlantis Pharma. In March, Valeant concluded a deal to buy the Russian specialty pharmaceutical company Natur Produk as well as an agreement to acquire certain branded generic assets from an Austrian pharmaceutical company, Gerot Lannach. It also bought a 19.9% stake in a Brazilian biotech company, Pele Nova Biotecnologia S.A. You may recall that Valeant started the year 2012 by buying Brazilian sports nutrition and food supplements company Probiotica Laboratorios Ltd.
Valiant had reported results for the first quarter that were ahead of consensus estimates for both top line and bottom line. Revenues at $856.1 million were ahead of consensus estimates of $796.7 million and 52% higher than the $565 million for the same quarter of the previous year. Earnings per share were $1.14 a share against the consensus of $.96 per share while gross margin at 67.4% was 7.4% lower on a year on year basis. Operating margin at 20.7% was almost 2% lower while net margin at 1.5% dropped by 2.6%. The consensus estimate of revenue for the second quarter is $852 million is an EPS of $1.09 a share.
Valeant has been in such a state of change from the beginning that it would be useful to return to the basics in order to understand the company. It appears to date back to the 1950s when ICN Pharmaceuticals, was found by Milan Panic, who managed the astonishing accomplishment of serving as Prime Minister of Yugoslavia in 1992-1993 while he was still an American citizen. The nucleus of what is now Valeant was formed by the merger of ICN Pharmaceuticals, ICN Biomedicals, SPI Pharmaceuticals and Viratek.
The next major development was in 2010 when Biovail acquired Valeant but kept the Valeant name for the merged operations. Since then, the company has taken over PharmaSwiss S.A., Dermik [the dermatology of unit of Sanofi (SNY), the Ortho Dermatologics unit of Janssen Pharmaceuticals, AB Sanitas, Afexa Life Sciences, iNova, Probiotica, Eyetech, Natur Produkt, Pedinol Pharmacal, and certain assets of Atlantis Pharma and Gerot Lannach while making unsuccessful offers for Cephalonand and Ista Pharmaceuticals (ISTA). Sales have gone from $840 million in 2007 to almost $2.5 billion in 2011 but, sadly, profits have dropped from $1.22 per share to $.49 per share during the same period while dividends have dwindled to zero.
You will notice that the acquisition spree has been focused on products relating to dermatology as well as branded generic drugs for developing markets. In the first quarter of 2012, about half the sales came from dermatology and neurology products in the United States while the other half were primarily sales of branded generic drugs in international markets. I would guess that one of the main reasons for all this acquisition activity lies in the fact that the CEO J. Michael Pearson worked with McKinsey for many years in the field of mergers and acquisitions. It also seems to me that the company is trying to emulate the business model of Johnson & Johnson (JNJ) in trying to combine a high risk high margin pharmaceutical business with a stable high-volume low margin consumer business.
As a result of the Biovail side of the business, Valeant has a number of drugs in the development pipeline. The pipeline for dermatology has five different compounds for the treatment of acne, psoriasis and fungal infection. Valeant also has a partnership with GlaxoSmithKline (GSK) to develop neurology products for the treatment of refractory epilepsy. Its acne drugs compete with a retionoid drug called Differin which is marketed by a partnership between Nestle (OTC:NSRGY) and L'Oreal named Galderma. Its antidepressant,Wellbutrin, has to reckon with fluoxetine, the now cheap generic version of Prozac marketed by Eli Lilly (LLY) though, given the nature of antidepressant drugs, the most direct competitor is probably Effexor from Pfizer (PFE).
Drug portfolio aside, I find it interesting to watch the company's moves into Latin America. The company has made the right initial moves to give it a platform to develop both prescription and OTC medication in this highly promising region. Valiant is also distinguishing itself from its competitors by focusing not just on treatment for illnesses but on the potentially promising health and wellness markets. The company has a huge number of acquisitions to digest, and this is going to be quite a job, but will be very promising if done properly. I recommend taking a position in Valeant today.