Why Bill Ackman Believes Valeant Pharmaceuticals Intl Inc (VRX) Can Continue to Deliver Value


At a recent annual conference of Sohn Investment, hedge fund manager, Bill Ackman, took the opportunity to explain why Valeant Pharmaceuticals Intl Inc (TSE:VRX)(NYSE:VRX) still holds promise of delivering strong growth. It was a well-known fact that Valeant has been growing rapidly through acquisitions and merger over the last seven years. The company has a decentralized disciplined strategy it applies to acquisitions to deliver significant shareholder value.

Shareholder Value Created

Perishing Square Capital Management L.P. fund manager has his own reasons to come to a conclusion as to why Valeant Pharmaceuticals Intl Inc (NYSE:VRX) could continue to deliver impressive value going forward. He termed Valeant as an under-appreciated platform. One of the primary reasons for Ackman to come in support of Valeant was that its platform of tactics. He believes that it has created value for shareholders of the company over the years and will continue to do so.

According to Ackman, after Mike Pearson became the CEO of Valeant Pharmaceuticals Intl Inc (NYSE:VRX), an investment in the company’s stock has given an appreciation of 45X its initial value during the seven-year span. This included dividend reinvestment too. Between February 2008 and May 1 in the current year, the pharmaceutical company has delivered a whopping 4,502% return.

Growth through Acquisitions

As far as Valeant Pharmaceuticals were concerned, the company focused on acquiring more and more companies rather than investing in its research and development expenses. This included the acquisition of Biovail, Medicis, Bausch & Lomb, and Salix Pharmaceuticals, Ltd. (NASDAQ:SLXP). The last $15.8 billion acquisition was announced in the first quarter of the current year.

Perishing Square’s Ackman sees management investing the majority of its free cash flow in to value accretive acquisitions to create value for its shareholders. He appeared to like the company’s tactics. His backing of the company’s bid to buy Allergan, Inc. (NYSE:AGN) was well known though Allergan spurned the offer of Valeant Pharmaceuticals Intl Inc (NYSE:VRX).

According to Ackman, the company’s acquisition strategy was to acquire properties with bloated cost structures, as well as, ‘unproductive spending’ towards R&D. Valeant would then cut the fat and focus on only the most promising R&D. Ackman supports the company’s plan of small and bolt-on acquisitions of products that easily integrates Valeant’s efficient and global distribution infrastructure. He likes the effective acquisition, as well as, the integration process of Valeant since Mike Pearson was personally engaged in evaluation or negotiation or execution of the deals.

Track Record

Perishing Square pointed out that Valeant Pharmaceuticals Intl Inc (NYSE:VRX) could earn 20% unleveraged return from the $20 billion or more it invested in acquisitions and mergers after 2008. This included tax gains resulted from the transactions. The fund manager believes that the company has conservative underwriting of providing attractive returns. According to Ackman, the company was targeting 20% plus unlevered IRR with six-year payback target.

The hedge fund firm said that implementation of the company’s decentralized management model at acquired companies was another feature. The investment firm said that Valeant was able to accelerate revenue uptick in all of its seven platform acquisitions in the past.

Moving ahead towards rapid integration with synergies, Ackman said that Valeant Pharmaceuticals Intl Inc (NYSE:VRX) was either able to meet or exceed the synergy budget on every announced acquisitions. Most importantly, Ackman said that 80% of the synergies were achieved in the first year itself. It is because of these reasons that he backed Valeant fully in its bid to acquire Allergan.

Platform Evaluation

Perishing Square has several factors to evaluate the platform value of Valeant Pharmaceuticals Intl Inc (NYSE:VRX). Accordingly, it accorded high platform value for operational efficiencies compared to its peers. Similarly, Ackman has accorded high platform value for Valeant’s integration track record.

As far as revenue synergy potential, access to and cost of capital, and transaction execution capabilities, Ackman has given three out of four ratings. However, he has given two out of four rating for its competitiveness of acquisition market, showing he may have concern that Valeant will continue to find appropriate deals.

Analysts’ Views

Recently, in April, JPMorgan Chase & Co. (NYSE:JPM) analyst said that in the near-term, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) appeared to be focused on tuck-in deals. The brokerage indicated that it would not be surprised if Valeant was interested in big M&A over time. The investment advisor believes that the company’s EPS could be close to $20 in 2017 based on the continued cash flow deployment apart from leveraging its balance sheet.

Another investment advisor, Goldman Sachs Group Inc (NYSE:GS) said last month that it price target was based on a DCF, which included a bolt-on sensitivity as a result of high DCF with SLXP that offset more than a slightly more conventional bolt-on analysis.

Valuation

The most significant part of Ackman’s argument was the valuation of Valeant Pharmaceuticals Intl Inc (NYSE:VRX). He said that the management’s $7.5 billion plus EBITDA outlook for 2016 implied adjusted EPS of $16 for the same period. Valuing at 16x forward earnings, this implied the stock to be valued by $250 or more before the end of the current year. This meant a 10%+ returns from May 1 share price.

Perishing Square believes that the pharmaceutical company would be able to earn EPS of $28 – $39 EPS by the year 2020 if the management continues its capital allocation tactics that has been hallmark of its success historically.

Conclusion

Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has earned itself as the most expensive stock among the S&P 500 stock. This was because of the aggressiveness pursued by Valeant. Till now, it has been mostly successful. However, some of the analysts’ accept that there exist some risks; but no one is willing to come out because of past success. Ackman believes that Valeant has all the potential take its line of growth further thus allowing shareholders to get higher return for their investments.


Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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