Paulson & Co. and Valeant Pharmaceuticals
John Paulson’s Paulson & Co. started new positions in Verizon Communications Inc. (VZ), CBS Corp. (CBS), and Valeant Pharmaceuticals (VRX) and upped its positions in Cobalt International Energy (CIE) and American Airlines Group (AAL). Notable position decreases were Family Dollar Stores (FDO) and Freeport-McMoRan Copper (FCX).
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Paulson opened a new position in Valeant Pharmaceuticals (VRX) last quarter. The position accounts for 0.65% of Paulson’s $20 billion 1Q 2014 portfolio.
The Quebec-based Valeant Pharmaceuticals is a multinational, specialty pharmaceutical and medical device company that develops, manufactures, and markets a broad range of branded, generic, and branded generic pharmaceuticals, over-the-counter (or OTC) products, and medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment, and aesthetics devices). Its strategy is to focus the business on core geographies and therapeutic classes that offer attractive growth opportunities while maintaining its lower selling, general, and administrative cost model and decentralized operating structure. It has an established portfolio of durable products with a focus on niche therapeutic areas such as eye health, dermatology and podiatry, aesthetics, and dentistry, including life-cycle management programs. These areas have limited patent risk and have a potential for strong operating margins and solid growth.
Valeant believes its growth is further augmented through its lower-risk research and development model, which allows it to advance certain development programs to drive future commercial growth while minimizing research and development expenses. The company has expanded its portfolio offering and geographic footprint via numerous acquisitions such as Bausch & Lomb last year and PreCision Dermatology in January. Since 2008, under CEO Mike Pearson, Valeant has made around 100 acquisitions and deals related to licensing valued at $19-billion. It has also deployed cash through debt repayments and repurchases, as well as share buybacks, thereby enhancing shareholder value.
The company recently teamed up with activist investor Bill Ackman of Pershing Square and on April 22 offered a merger proposal to the board of Botox maker Allergan. In response, Allergan adopted a poison pill plan. It rejected the April 22 takeover proposal from Valeant, noting that the proposal substantially undervalued the company, and added that the proposal created significant risks and uncertainties for Allergan’s stockholders. Allergan believes Valeant’s business model isn’t sustainable. The company also announced that, given the strength in its business, it expects to increase earnings per share by 20% to 25% and continue to generate double-digit revenue growth in 2015. Plus, it expects to produce double-digit sales growth and produce earnings per share compounded annual growth of 20% over the next five years.
News reports have speculated that Allergan is talking to Sanofi SA and Johnson & Johnson (J&J) for rival bids, and that it’s looking to acquire Shire PLC to fend off the Valeant bid. Allergan’s shares are up 13% since the bid was announced. Valeant responded to Allergan shareholders last week in a letter, announcing its intention to raise its offer for Allergan. Valeant added that it will provide further details in a May 28 webcast where it will explain why its proposal is superior to Allergan’s “go at it alone” strategy.
Pershing Square, Allergan’s largest shareholder, has called for a non-binding referendum among Allergan shareholders to provide support for the company to engage in a meaningful dialog with Valeant Pharmaceuticals International Inc. Allergan slammed this move, stating that the planned referendum is “a self-serving exercise” in which Pershing Square and Valeant are “dictating their own process.”
In a letter to Allergan on May 5 filed with the SEC, Pershing Square cited J.P. Morgan’s April 28 equity research report and said that “using J.P. Morgan’s forecast of the per-share value of the combined company. J.P. Morgan assumes that the combined company would trade at 14 times J.P. Morgan’s estimate of 2016 cash EPS, which implies that the combined company is worth $192 per share, and that the Valeant transaction proposal is worth $208 per share. This value, $208 per share, is a 78% premium to Allergan’s $116 unaffected stock price, and a 61% premium to the average analyst price target on April 10th.”
The letter added that Pershing Square was skeptical of Allergan seeking a “tax-inversion” deal and will oppose a “transaction with another company which did not offer superior shareholder value to the Valeant transaction.”
For 1Q 2014, Valeant posted a narrower loss of $22.6 million, or $0.07 a share, compared with a loss of $27.5 million, or $0.09 a share, a year earlier. On a cash EPS basis, adjusted income was $600 million or $1.76 per diluted share, an increase of 35% over the prior year. Valeant’s total revenues, which slightly missed Street estimates, were $1.9 billion, up 77% compared to the first quarter of 2013. GAAP cash flow from operations was $484 million in the first quarter of 2014, an increase of 90% over the first quarter of 2013, and adjusted cash flow from operations was $636 million, an increase of 84% over the prior year. This increase in adjusted cash flow from operations was driven by growth across all its businesses.
Valeant has seen criticism on its lower spending on R&D and innovation. Research and Development expenses were $61 million in the first quarter of 2014, or approximately 3% of revenue. Valeant said R&D expenses were lower than expected due to the acceleration of integration efforts that included the consolidation of the eye health and dermatology research groups that reduced fixed costs, without terminating any ongoing clinical programs.
Activist investor Jeffrey Ubben’s Valueact Capital, which also owns a stake in Valeant valued at around $2.5 billion, is reported to be cutting down its stake in the specialty pharmaceutical company.
Moody’s last year noted that Valeant’s Ba3 Corporate Family Rating reflects its high pro forma leverage in excess of 4.5x, as well as the risks associated with an aggressive acquisition strategy, including integration risks and rapid capital structure changes. A release said Moody’s recently revised the company’s rating from “negative” to “developing,” which represents the potential for an improving credit profile if Valeant acquires Allergan, based on significantly improved scale, leadership positions in eyecare and dermatology, significant cash flow, and potentially a reduction in Valeant’s debt-to-EBITDA.