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Investing In A Canadian Pharmaceuticals Company

|Includes: ABT, AGN, AMGN, AZN, Bausch Health Companies Inc. (BHC), BIIB, BMY, GILD, GSK, JNJ, MYL, NVS, PFE, RHHBY, SNY, TEVA, TMO

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Looking for a healthcare play with strong consumer products growth and an expanding pharmaceutical pipeline? Then set your sights on Canada's Valeant Pharmaceuticals (VRX), whose recently completed acquisition of Bausch & Lomb makes it the biggest player in ophthalmology and general eyecare products.

Valeant is a specialty pharmaceutical company with many hundreds of products across dermatology, dentistry, neurology, and ophthalmology. Its early and late-stage drug candidates have unique formulations and mechanisms of action including retigabine for the treatment of epilepsy and pain, taribavirin of the treatment of chronic hepatitis C, and several dermatology candidates for the treatment of rosacea, acne, and dermatological fungus.

It's Not Organic, But Investors Still Love the Growth

The company has been primarily built through a series of mergers and acquisitions over the years. It operates in two primary geographical segments, Developed Markets and Emerging Markets. Developed Markets includes U.S. pharma/OTC in dermatology, aesthetics, dentistry, podiatry, ophthalmology, neurology/other, and Canada/Australia/NZ. Emerging Markets includes branded generics/OTC in Central/Eastern Europe, Latin America, SE Asia/Africa.

This growth strategy is producing over 50% sales growth and 40% EPS growth, while trading under 13X next year's $8.66 consensus. And that's why the stock keeps steadily climbing since May. It's that kind of stable, global growth that some investors can't get enough of.

In July, my colleague Nick Kalivas also chose VRX as his Bull of the Day. Here's how he highlighted their acquisition strategy...

Valeant's aggressive growth strategy and cost savings look attractive. Valeant has produced vibrant revenue growth in recent years helped by an aggressive acquisition strategy. Valeant made 11 acquisitions in 2011 and another 12 in 2012. These actions helped to propel 108% revenue growth in 2011 and another 44% in 2012. In Late May, Valeant announced the purchase of Bausch and Lomb. The deal is expected to generate $800 mln in cost savings, an internal rate of return in excess of 20%, and be accretive to earnings. In a recent company presentation, Valeant highlighted an aging population, increased incidence of diabetes, and rising wealth in emerging nations as factors which will support growth in ophthalmology.

Goldman Sachs Raises the Bar

While many Wall Street firms rate VRX a strong buy, a notable upgrade came recently when GS resumed coverage of Valeant with a $130 price target. offered this quote from the analyst research report on September 17.

"VRX has been a very successful consolidator of assets over the last several years, while focusing on niche specialty areas, looking for opportunities to achieve significant cost and tax synergies, and remaining disciplined on price. We believe investors have not fully recognized the incremental value from its recent strategic acquisitions of Bausch & Lomb (B&L) and Medicis, and our feedback from physicians helps support that. We also believe there is still more runway for VRX to continue to find ways to create value for shareholders with its existing portfolio through additional cost containment and rationalization efforts and new product opportunities, as well as by adding to its portfolio as it continues to be both flexible and aggressive with respect to future M&A."

My Little Canadian "JNJ"

I have owned VRX since July for my Follow The Money (FTM) portfolio, where we track institutional buying in stocks with a strong Zacks Rank. I actually traded this name a few times in 2012 between $45 and $55, but when the stock popped from $75 to $95 on the B&L buyout in May, I took quick notice of how institutions really wanted to own VRX and how analysts were ramping up earnings estimates. Neither of those trends has changed.

As I learned more about the Valeant's aggressive growth strategy, I began calling it my "little JNJ" as it seemed to have that giant pharma/consumer products feel to it. I looked for a good entry and I'm glad I pulled the trigger at $90.

Even though a $35 billion market cap is not generally where I like to put money for FTM, I can't argue with the growth strategy and the institutional "whales" who want to own it. Here's what one of my favorite big shareholders, Wally Weitz, had to say in his Q2 letter to shareholders...

"What follows is a quick spin through the ten largest holdings among our family of funds. All of these companies will be familiar to long-time shareholders. I will not belabor the case for each, but the point is that we think that each will earn good returns for us from today's prices and we would be very happy to buy more of each if their prices decline."

First on Wally's list was VRX...

"Valeant Pharmaceuticals continues to make acquisitions (most recently agreeing to purchase Bausch and Lomb), wring cost savings from the combined operations, and grow earnings per share. The outlook for Valeant's well-diversified portfolio of 1,100 products is relatively predictable. The company has a robust pipeline of acquisition candidates and we expect Valeant to build on its dermatology and eye care franchises over the next few years."

Now that Goldman is on board, and the earnings momentum is still strong, my bet is that we will see VRX above $120 by the first quarter of 2014.

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