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Coverage Initiation: Valeant Pharmaceuticals International
Valeant Pharmaceuticals International (VRX) is a multinational specialty pharmaceutical company that develops, manufactures, and markets a broad range of products primarily in the areas of neurology, dermatology, and branded generics. The company was created in September, 2010 when Canadian-drugmaker Biovail Corporation merged with California-based Valeant Pharmaceuticals. Although Biovail shareholders were the majority owner upon closing (50.5%), the combined management decided to retain the Valeant nameplate, and ticker (VRX). Meanwhile, Biovail’s corporate structure and Canadian headquarters remained in place. The new entity now boasts a considerably larger presence in North America, along with operations in eight other countries.
From a product standpoint, the union brought together Biovail’s antidepressant and pain relief drugs (Wellbutrin XL and Ultram ER) and Valeant’s chronic illness treatments and its generic pipeline. Overlap was relatively limited between the two companies, and the new Valeant ought to benefit from a broader, more diversified portfolio moving forward. In fact, the company now offers over 400 products, none of which accounts for more than 10% of total sales. The new Valeant is also pretty well diversified geographically speaking, with Specialty Pharmaceuticals businesses in the United States, Canada, Australia, and New Zealand and Branded Generic businesses in Central Europe and Latin America. The new operating structure will be broken into five segments, U.S. Neurology, U.S. Dermatology, Canada/Australia, Branded Generics Europe, and Branded Generics Latin America.
Since the deal’s completion, integration appears to be progressing nicely and management hopes to complete the process by mid-2011. In fact, things are running so smoothly that management recently increased its synergy targets to over $250 million in anticipated cost savings in 2011, and $300 million in 2012, much of which derives from effective cost cutting, facility closures, and workforce restructuring. Although the company encountered a few merger-related speed bumps in the months following the transaction, many of these issues have since been resolved and the underlying performance of its key operating segments has remained relatively strong. For full-year 2011, we look for the company to focus mainly on the areas of dermatology and neurology, as well as emerging markets. Potential launches of new products, Exogabine and Retigabine, will also remain key priorities as the company hopes to make significant progress on the regulatory front this year.
Overall, we are encouraged by the long-term prospects of the Biovail/Valeant union. The combined entity ought to benefit considerably from an improved corporate structure, a broader product portfolio and stronger cash flow generation. Moreover, neither company possessed significant patent exposure before the merger, so we don’t foresee patent expirations having a material impact on the top line in the near term. In our view, this limited exposure makes Valeant a safer play during a time of volatility within the drug industry (several companies will be heavily affected by patent expirations in the coming years and are expected to lose billions of dollars as a result). All told, investors seeking to add some pharmaceutical exposure to their portfolios may want to consider taking a position in VRX.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.