By Robert Cyran
Valeant’s M&A machine may soon overheat. Some of the brain trust behind its hyper-acquisition strategy is leaving the board just as the pharmaceutical company embarks on its biggest deal. Buying Allergan would swell Valeant to about $75 billion in market value with a gargantuan debt load. Finding meaningful targets will be much harder.
Fred Hassan, the former Schering-Plough boss and current private equity honcho, and Mason Morfit, of activist hedge fund ValueAct Capital, are leaving the board along with Lloyd Segal from Persistence Capital. Valeant says its size and scope now creates conflicts with their day jobs. Morfit, in particular, was instrumental in picking Michael Pearson to be chief executive and setting the company on its takeover trail.
Note: Thomson Reuters values include net debt of the target company.
Valeant’s growth presents other, perhaps bigger, problems. In 2008, its market capitalization was about $1 billion. That meant buying a firm like Dow Pharmaceutical Sciences for $285 million – many of similar size still exist in the sector – was a big deal back then. Today, it would barely register.
Bill Ackman, Valeant’s hedge fund partner in the Allergan transaction, points out that there are 58 drug or device companies worth more than $10 billion apiece, for a sum of $3.2 trillion. Most of them would make poor targets, though.
The strategy at Valeant is to slash research and development. That works at places where drugs are difficult to make, sales are too small to interest rivals or there’s brand loyalty. Most of the companies on Ackman’s list – and all the ones worth over $50 billion – invest heavily in R&D or eventually face shriveling sales.
At Valeant, sales of existing products increased just 2 percent last year. It reckons there’s growth for Allergan in emerging markets, but that may be harder in practice than in theory. And if revenue starts to decline, Valeant could find the expected $30 billion of net debt post-Allergan to be rather imposing.
Together, the two companies reported less than $4 billion of EBITDA last year. Even after the promised $2.7 billion of savings from the merger, it would leave the combined company with debt of eight times EBITDA. That’s on the extreme end for leverage at a pharmaceutical group. For Allergan shareholders being offered Valeant stock, it’s a good reason to inspect the deal apparatus closely.
Published on April 24, 2014