Valeant buys clout with skincare lines

Montreal drug maker Valeant is exploding after a series of acquisitions, but so too is its debt load.


Valeant Pharmaceuticals International Inc. CEO Michael Pearson is seen in one of the company’s laboratories Tuesday, April 3, 2012 in Laval. THE CANADIAN PRESS/Ryan Remiorz

Canada’s largest publicly traded drug company is about to get a whole lot bigger, thanks to zit cream and aging faces. Montreal-based Valeant Pharmaceuticals International announced on Sept. 4 its intention to acquire skincare firm Medicis Pharmaceuticals of Scottsdale, Ariz., for US$2.6 billion, immediately expanding its business into the lucrative cosmetic dermatology market.

Valeant CEO Mike Pearson said in a conference call that Medicis will strengthen the company’s place in medical dermatology and bring it to critical mass in aesthetics, a $12-billion market that doesn’t depend on government health-plan reimbursement and previously did not have a significant ‘big pharma’ presence. “Medicis’ product portfolio is highly complementary to ours,” said Pearson, citing Medicis’ oral acne product, Solodyn, and wrinkle-reducing “injectables” such as Restylane, Perlane and Dysport. “In addition, Medicis has a number of attractive and complementary development opportunities in its late stage R&D pipeline.”

The profitability of this growing market, combined with the ability to save costs on administration, distribution, sales and marketing redundancies that Pearson estimated to be worth more than $225 million a year, put a smile on investors’ faces. Shares hit their highest price in nine years.

Corey Davis, an analyst with investment firm Jefferies & Co., estimates shares will rise to $1.44 in 2014 (about a 60¢ jump from the current price) after the combined company has a full year of operations under its belt. He says it was a shrewd strategic move for the firm once known as Biovail to stake its claim as a leader in the dermatology industry. “Six years ago there was something like 20 dermatology companies, now there’s maybe three or four,” he says. “It’s been a quickly consolidating sector, so if you want to be a major player, Medicis was the one to have….It was one of the last great derm assets out there that they really needed to cement their leadership position. Now Valeant is by far the single biggest, broadest and baddest derm company out there.”

The one negative side effect appears to be Valeant’s debt load. The company has completed more than 10 acquisitions over the past year, including assets in Mexico, Russia and Brazil, as well as the Edmonton-based maker of Cold-FX, Afexa Life Sciences. The Medicis deal, financed through debt, has bumped the company’s debt level to more than $7 billion, or a 4.2 debt ratio, forcing Moody’s to put Valeant’s debt—already in junk bond territory—under review for a downgrade. But Davis says it’s not cause for major concern. “The debt load is always something that you look at, but their cash flow is so phenomenal, I’m not all that worried about it.”

As the pool of industry players ripe for acquisition dwindles, Valeant’s strategy ahead appears to focus more on in-house product development, with additional smaller acquisitions where possible. Pearson has said the company has no intention of joining competitors like Novartis in manufacturing generic drugs. Medicis spends upwards of $70 million a year on R&D, as does Valeant, and Pearson is optimistic on its earning potential, telling analysts, “You can’t count on it until it gets approved. But to the extent that the R&D portfolio is productive, that will be the upside on this deal.”

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