Valeant Pharmaceuticals's Earnings Take a Back Seat To Allergan News

Valeant's miss on sales is likely to go almost unnoticed in its pursuit of Allergan

May 11, 2014 at 8:30AM

Canadian health care magpie Valeant (NYSE:VRX) certainly knows how to stay in the spotlight. Investors simply aren't all that interested in quarterly earnings at a time when the company is actively trying to ratchet up the pressure on Allergan (NYSE:AGN) to accept the company's acquisition offer. Valeant continues to look undervalued as it is likely still in the early to-middle years of a debt-fueled grab for scale. However, as the pushback from Allergan shows, not all of the targets Valeant may choose will welcome the company's efforts at empire-building.

Sluggish sales, healthy margins in the first quarter
Valeant reported first quarter earnings on Thursday that saw revenue grow 77%, but miss the average analyst estimates by around 4%. The shortfall appeared to fall pretty evenly across the business, where management reported a "same store" organic growth rate of 1% and a pro forma organic growth rate of 4%. Importantly, the huge Bausch + Lomb business that Valeant acquired in 2013 showed 11% organic revenue growth and 9% growth in the U.S.

What Valeant missed on the top line, it more than recovered through cost control. Gross margin fell more than three points from last year, but surpassed expectations by almost two points. Operating income rose 53%, just barely missing expectations as the operating margin came in a point and a half stronger than the sell-side expected.

Rallying the base to pressure Allergan
Judging by management's comments on the call, they have no intention of giving up their pursuit of Allergan, nor bidding against themselves. Valeant management believes that they have made a compelling offer and, while Allergan's board may not agree, Valeant is looking to address Allergan's shareholders more directly. The exact roadmap is still unclear, but the gist of Valeant's message is that they'll try to marshal Allergan's own shareholders into forcing a referendum or special meeting to consider Valeant's offer.

Allergan is an important asset for Valeant. With its strong position in aesthetics, dermatology, and ophthalmology, there are few assets that offer more strategic synergy. Even allowing that regulators would likely force some product divestitures, Valeant would emerge as a stronger player than Johnson & Johnson in the overall aesthetics market, extend its lead in dermatology, and fill in the sizable gap in its ophthalmology business created by the lack of glaucoma products (glaucoma is about one-third of the ophthalmology drug market).

Tying together $7 billion in Allergan sales with nearly $3 billion in cost synergies and the leverage of a much lower tax rate would make this an exceptionally value-additive deal for Valeant. With that, it's also worth remembering that Valeant is not a crazy bidder. Management has done enough deals to appreciate the sort of synergies it can reasonably expect and the company has shown price discipline in the past (letting Bausch + Lomb outbid for ISTA Pharmaceuticals, for instance).

Is Congress looking to close the door?
There have been increasing rumblings in Washington, D.C. regarding "doing something" about closing the door on future tax inversion deals. The current proposals would make it much harder for an American company to acquire a foreign company and redomicile in a lower-tax region, but current proposals wouldn't seem to have any meaningful impact on companies like Valeant, Actavis, and Endo Health that have already made such moves. Even so, it is not unimaginable to think that the U.S. government may look to alter the rules and force a tighter link between the profits a company earns in the U.S. and the taxes they pay.

The Bottom Line
Should Allergan rebuff Valeant (either by executing a deal of its own or finding another buyer), I believe there are other attractive fish in the sea, including Galderma. Valeant's core growth-by-acquisition model does carry above-average risks from execution/integration, higher rates, and below-normal R&D spending, but Valeant is already well on its way to proving that it can effectively and profitably acquire and market the fruits of other companies' R&D spending.

Invest in the next wave of health care innovation
The Economist compares this disruptive invention to the steam engine and the printing press. Business Insider says it's "the next trillion dollar industry." And the technology behind is poised to set off one of the most remarkable health care revolutions in decades. The Motley Fool's exclusive research presentation dives into this technology's true potential, and its ability to make life-changing medical solutions never thought possible. To learn how you can invest in this unbelievable new technology, click here now to see our free report.

Stephen D. Simpson, CFA has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson and Valeant Pharmaceuticals. The Motley Fool owns shares of Johnson & Johnson and Valeant Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information