CEPH Cephalon (MM)

Canadian drug maker Valeant Pharmaceuticals International, Inc. (VRX) announced that it has entered into yet another deal, this time to expand the Canadian over-the-counter (OTC) business. Valeant Pharma has entered into an agreement to acquire another Canadian company Afexa Life Sciences Inc. for a cash consideration of 76 million Canadian dollars.

Afexa markets several consumer brands, the most important of which are Cold-FX and Coldsore FX. Cold-FX is a leading OTC cold and flu medicine which will synergize well with Valeant’s products, dermaglow and CeraVe, in the Canadian OTC franchise.

Afexa shareholders will receive 0.71 Canadian dollars in cash per common share, representing a premium of approximately 30% to Afexa's 30-day average closing price on the Toronto Stock Exchange (TSX). The agreement has been approved by the board of directors of Afexa and the board has recommended shareholders to tender their common shares.

Of late, Valeant Pharma has been on a buying spree. In mid-August 2011, Valeant Pharma completed the acquisition of Lithuania-based specialty pharmaceuticals company Kaunas, which is expected to boost Valeant Pharma’s European branded generic portfolio.

In July 2011, Valeant Pharma announced a couple of 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.

Further, in March 2011, Valeant acquired privately owned, Swiss branded generics and OTC pharmaceutical company PharmaSwiss S.A. for 350 million euros. This deal was also directed towards expanding Valeant’s European branded generics business.

Our Recommendation

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

Valeant 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. Despite the string of recent purchases, the company is however not being able to clinch the big deals. The inability to acquire Cephalon (CEPH) was a disappointment. We presently prefer to remain on the sidelines.

 
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