A Valeant recovery

MISSISSAUGA, Ontario—It wasn't that long ago, in April, thatValeant Pharmaceuticals International Inc. was engaged in a $5.7 billionhostile takeover attempt of Cephalon Inc. Then on May 2, it congratulated TevaPharmaceutical Industries Ltd. for winning Cephalon instead, followed just a littleover three weeks later by the announcement that it had entered into anagreement to acquire AB Sanitas for roughly $446 million.

That Valeant found a new acquisition target quickly is oflittle surprise, given that J. Michael Pearson, chairman and CEO of Valeant,has clearly stated his company's goal of growing by mergers and acquisitions,and said when Cephalon was rebuffing its overtures that "we will be happy tomove on to other opportunities" if the takeover attempt failed.

Also, in the news release congratulating Teva and Cephalonon their deal, Pearson said: "As Cephalon stockholders ourselves with over amillion shares owned, we will benefit from this transaction withoutparticipating further in the process. We will remain disciplined on our M&Astrategy and will look to deploy our freed-up capital on other opportunities tocreate value for our shareholders."

Deploy that capital it did, and Valeant spent far less thanthe several billion it had earmarked for Cephalon. But what is interesting aboutthat Sanitas purchase price is that it falls pretty much in the middle of the$300 million to $500 million range that Pearson told Bloomberg in May was his company's "sweet spot." He had alsotold the publication that Valeant had "many irons in the fire around the world"and, presumably, Sanitas was one of them.

What Valeant gains for this "sweet spot" price is a publiclytraded specialty pharmaceuticals company based in Kaunas, Lithuania, thatboasts a broad branded generics product portfolio of just under 400 products innine countries throughout Central Europe and Eastern Europe, primarily Poland,Russia and Lithuania.

According to Valeant, Sanitas has in-house developmentcapabilities in dermatology, ophthalmology and hospital injectables and "a robustpipeline of internally developed and acquired dossiers." Annual revenues forSanitas are expected to be more than $145 million in 2011, "with an approximaterevenue growth rate in the low double digits over the coming years."

"The acquisition of Sanitas should provide Valeant with anexciting opportunity to expand our European branded generics product portfoliowith dermatology and hospital injectable compounds that have a strong trackrecord of growth and profitability," Pearson says. "With 80 percent of theSanitas portfolio consisting of non-reimbursed products with limited exposureto government pricing pressures, Valeant will be in a key position to continueour expansion into Central and Eastern Europe."

The major shareholders of Sanitas have agreed to sellValeant 87.2 percent of the outstanding shares of Sanitas, with at least 82.6percent of the outstanding shares required to be delivered at closing. Afterthe acquiring this controlling block of shares, Valeant plans to initiate amandatory tender offer to purchase the remaining minority interest.

Subject to customary closing conditions, including variousmerger clearances—and assuming there is no material adverse change between nowand then—the majority stake purchase is expected to close in the third quarterof 2011 and the mandatory tender offer is expected to close in the fourthquarter of 2011. Valeant expects the transaction will be immediately accretive.

Valeant develops, manufactures and markets a broad range ofpharmaceutical products, but primarily in the areas of neurology, dermatologyand branded generics.