CEPH Cephalon (MM)

Valeant Pharmaceuticals International (VRX) recently announced that it has completed the acquisition of Kaunas, Lithuania-based specialty pharmaceuticals company, AB Sanitas, for approximately EUR 314 million in cash. Sanitas has a broad branded generics portfolio, marketed across Central and Eastern Europe, primarily in Poland, Russia and Lithuania. Sanitas’ 390 products, comprising mostly dermatology, ophthalmology and hospital injectables, will boost Valeant Pharma’s European branded generic portfolio. Approximately 80% of Sanitas’ products are non-reimbursable and thus not exposed to pricing pressures imposed by governments.

In a similar move, in March 2011, Valeant acquired privately owned, Swiss branded generics and OTC pharmaceutical company PharmaSwiss S.A. for EUR 350 million. This deal was also directed towards expanding Valeant’s European branded generics business. The PharmaSwiss acquisition is expected to strengthen the company’s presence in the EU. PharmaSwiss operates in 19 countries throughout Central and Eastern Europe, including Poland, Hungary, the Czech Republic and Serbia.

Further, in July 2011, Valeant Pharma announced acquisitions that would entrench its already strong presence in the dermatology market in the US. Valeant Pharma intends to acquire the assets of Ortho Dermatologics, a dermatology unit of pharma giant Johnson & Johnson (JNJ), for $345 million in cash. The transaction is expected to close by year end. Valeant Pharma also announced that it intends to acquire Dermik, a dermatology unit of Sanofi Aventis (SNY), in the US and Canada. The purchase consideration is approximately $425 million for all Dermik assets.

The products of both these divisions will synergize well with Valeant’s dermatology products like Zorivax cream and ointment (herpes), Acanya and Atralin (acne) among others. We believe these acquisitions satisfy Valeant’s aim to become a leading player in the skincare market.

In June 2011, Valeant Pharma also acquired rights for Canada, US and Mexico for Elidel cream and Xerese cream from an international specialty pharmaceutical company, Meda. Valeant and Meda have also entered into a development agreement for life cycle management of both Elidel and Xerese.

Our Recommendation

We have a Neutral recommendation on Valeant Pharmaceuticals. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

Valeant Pharma in its current form emerged from the merger of Biovail and Valeant in September 2010.  Overall, we believe the combined Biovail/Valeant entity is a unique company as it offers global reach, a diversified revenue base, a favorable tax structure and limited patent exposure.

Moreover, accretive acquisitions add to the company’s investment thesis. However, the company’s failure to clinch the Cephalon, Inc. (CEPH) deal was a disappointment. We therefore prefer to remain on the sidelines.

 
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