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Exclusive: Valeant to drop deal-making in near term to cut debt, boost stock

Glenn Greenberg,   Brave Warrior Advisors
Valeant Pharmaceuticals International Inc is abandoning its growth-by-acquisitions strategy for the time being to try to reduce debt, boost its stock price and one day return to its traditional deal-making in a stronger position, people familiar with the matter told Reuters.

After spending $19 billion on 40 acquisitions since 2008, the Canadian drugmaker is regrouping after failing last month to acquire Botox-maker Allergan Inc , they said.

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The new strategy, targeted for the next two to three quarters, may surprise some investors accustomed to Valeant’s usual way of doing business. Speculation about Valeant’s next takeover target has driven up shares in generic drugmaker Mylan Inc , medical device maker Cooper Companies and Teva Pharmaceutical Industries Ltd .

Valeant does not rule out pursuing deals where appropriate, but it is focused on its ability to pay down debt or buy back shares, said spokeswoman Laurie Little.

“The silver lining that has come out of the Allergan situation is that we have already reported one relatively clean quarter, ” said Little. “By delivering several more clean quarters over the next several months, we will clearly show the strength of our base business.”

By clean quarter, Little was referring to the absence of one-time acquisition costs that frequently appear on Valeant’s balance sheet.

Valeant has more than $16.3 billion of debt as of September 30 and is rated Ba3 by Moody’s, the third level of junk status. Improving its credit rating will help it pay for acquisitions down the road, the sources said. In fending off Valeant’s cash and stock bid, Allergan repeatedly questioned the financial strength of its unwanted suitor. In the end, it agreed to a $66 billion buyout by generics maker Actavis Plc.

Valeant said last month it would spend up to $2 billion buying back senior notes, shares and other securities.

Over the next two to three quarters, Valeant also aims to sell more of its new products, which includes toenail fungus drug Jublia, athlete’s foot product Luzu, acne treatment Onexton and a new line of Bausch and Lomb Ultra contact lenses.

Valeant has little choice but to put big acquisitions on hold because they have little cash and their stock is “poor currency” after losing Allergan, said Vicki Bryan, analyst at Gimme Credit, an independent research service on corporate bonds. Valeant’s pipeline of new products isn’t as strong as other companies’, and if it spends more on research and marketing, profit margins may narrow, Bryan said.

“Reactive (strategy) is way more expensive than proactive, ” she said.

Glenn Greenberg, managing director of Brave Warrior Advisors, a Valeant shareholder, said Jublia and B&L Ultra together have estimated sales of $1 billion and could contribute profits of $2.50 a share.

Valeant’s strategy persuaded San Francisco-based hedge fund ValueAct Capital to return to Valeant’s board in September after a hiatus of several months. ValueAct CEO Jeff Ubben told Reuters that Valeant’s “stand-alone business plan is exciting, and is the main reason we rejoined the board.”

Valeant has “been built around quality assets that can grow organically, and a decentralized management style that empowers performance to deliver high levels of profitability, ” he said. ValueAct owned 5.7 percent of Valeant as of Sept. 30.

In August, at the height of Valeant’s pursuit of Allergan, Ubben questioned whether the Canadian drugmaker could afford a protracted takeover battle.

The loss of Allergan after a seven-month pursuit was a setback for Chief Executive Mike Pearson, who aims to make Valeant one of the world’s top five pharmaceutical companies by the end of 2016. Valeant lost bids for drugmaker Cephalon and ophthalmology drugmaker Ista Pharmaceuticals in recent years.

Sources close to Valeant say that the company has been disciplined by not overpaying for acquisitions. Still, some investors who had watched Valeant’s market valuation rise from $1 billion in 2008 to more than $48 billion today said much of the company’s mystique faded during the protracted takeover battle with Allergan.

Now, Valeant “needs to show that this is a sound business and that their fundamentals are strong, ” said Alex Arfaei, an analyst at BMO Capital. “If you go from one hostile deal to another, you are creating the impression that you’re desperate. Valeant certainly has some strong signs of growth and is anything but desperate.”



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