Valeant Pharmaceuticals - Acquisition Spree Continues After $2.4 Billion Medicis Pharma Deal

| About: Valeant Pharmaceuticals (VRX)

Valeant Pharmaceuticals (NYSE:VRX) announced on Labor day that it will acquire Medicis Pharmaceutical (MRX), in a deal valuing the firm at $2.6 billion.

The Deal

Valeant Pharmaceuticals announced that it will acquire Medicis Pharmaceuticals, in an attempt to expand in dermatological products.

Medicis owns brands including SOLODYN, RESTYLANE, PERLANE, ZIANA and DYSPORT. Pro forma, net revenue for the dermatology and aesthetics business, for the US is $1.7 billion.

Shareholders in Medicis will receive $44 in cash for each of their share. The offer represents a 39% premium compared to Friday's closing price, and a 31% premium to the average price of the past three months. The deal has already been approved by the board of directors of both companies.

Chairman and CEO Michael Pearson commented on the deal, "The acquisition of Medicis represents a significant next step in our journey to become the leader in dermatology by strengthening Valeant's presence in acne, actinic keratosis, aesthetic injectables and anti-virals, among others."

Valeant has acquired numerous companies in recent years. The last acquisition was that of OraPharma in June. Valeant paid $312 million for the producer of oral health products.

For the full year of 2012, Medicis Pharmaceuticals expects to generate revenues of $800-$834 million. Non-GAAP diluted earnings per share are expected to come in between $2.25 and $2.65 per share. The $2.4 billion offer values Medicis at 2.8-3.0 times annual revenues. Medicis is valued at 17-20 times annual non-GAAP earnings.

Once completed, the acquisition is expected to add to earnings per share. The transaction is subject to regulatory and shareholder approval, and is expected to close in the first half of 2013.

Valuation

Valeant ended its second quarter with $395 million in cash and equivalents. The company operates with short- and long-term debt of $7.5 billion, for a net debt position of $7.1 billion.

For the first six months of 2012, Valeant generated revenues of $1.68 billion. The company net lost $35 million, or $0.11 per diluted share. For the full year, the company anticipates revenues of $3.4-$3.6 billion, excluding the addition of Medicis. The company anticipates cash earnings per share of $4.55-$4.75 for the full year.

Valued at $15.6 billion, the market values the firm at 4.5 times annual revenues and 11 times cash adjusted earnings.

The valuation of Valeant compares to a revenue multiple of 4.9 times for Allergan (AGN) and 2.1 times for TEVA Pharmaceuticals (TEVA).

Investment Thesis

Year to date, shares of Valeant have returned about 10%. Shares rose to $56 in April, but fell to lows of $45 in June and July. In recent weeks, shares recovered to $51 at the moment.

Over the past five years, shares of Valeant have more than tripled, from lows of $12 in 2008. Shares peaked at $65 after it paid a special dividend in 2010. Revenues have grown significantly as well. Revenues rose from $757 million in 2008, to an expected $3.5 billion in 2012. Profitability remains an issue, due to heavy restructuring charges related to past acquisitions. The number of diluted shares almost doubled to little over 300 million shares outstanding.

The acquisition of Medicis adds roughly $800 million in annual revenues to around $4.3 billion on a pro-forma basis. The company acquired over 50 companies in recent years, resulting in structurally high restructuring charges. As a result, the gap between cash-earnings and GAAP earnings, is very large. However, recently, Valeant stated that it expects a narrowing between earnings and adjusted earning cash flows.

Investors applaud Valeant's acquisition strategy which resulted in significant revenue growth in recent years. Investors look through the difference in GAAP earnings and adjusted cash flows, and are confident in Valeant's future under the command of CEO J. Michael Pearson.

Given the difficulties in valuing pharmaceutical companies, and the significant difference between cash-adjusted and GAAP earnings, I remain on the sidelines. I cannot make an accurate valuation to base any investment decision on.

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.