A Closer Look at the Biovail - Valeant Merger

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The proposed $3.2bn merger between Canadian Biovail ( BVF ) and Valeant Pharmaceuticals International ( VRX ) of the U.S. should not only create a bigger, more efficient specialty pharma group, but hopefully indelibly draw a line under the fairly torrid histories of the two companies ( Is Biovail a "broken company ", June 4, 2008 ).

The transaction between the two companies looks ostensibly about building much needed scale (see table), and exploiting areas of strengths that they both have developed over the last two years as they have embarked on turnaround strategies that have seen each either in-license new products or buy other companies to move their pipelines on.

As part of the deal announced Monday, that will see Biovail become Valeant, Valeant shareholders are set to receive 1.78 Biovail shares for every Valeant share they own as well as a special one-time cash dividend of $16.77 per share.


The tax advantage

The final structure of the transaction will see Biovail shareholders own 50.5% of the company with Valeant shareholders left with the remaining 49.5%, indicating that this really is a reverse merger.

The two companies appear to have chosen this route as a way of making both the transaction and the ongoing operations of the company more tax efficient, given that the corporate tax rate in Canada is between 10-15% compared with the 35% Valeant was expected to pay this year. It is a move that has been applauded by analysts.

The cost of the transaction is largely being shouldered by three banks, Goldman Sachs, Morgan Stanley and Jefferies, indicating that the window for financing transactions still remains open at least for now, despite fears of second global economic slowdown.

Moving up

In terms of where the combination of the two companies will leave the new Valeant, according to EvaluatePharma data it will certainly move the company up the rankings of specialty pharma companies (see table below).

Individually, Biovail was expected to have sales of $1.03bn by 2016 and Valeant $833m. Although the compound annual growth rate (( CAGR )) of the new company appears to slow to 8% against Biovail's predicted 13% as a single entity, it should be remembered that these forecasts are based on expectations around Biovail's largely risky pipeline candidates.

Valeant on the other hand appears to benefit more from the tie up with its previous CAGR only forecast for 4% in the period through 2016, reflecting its largely generic pipeline.

The expected slow growth for Valeant could be due to concerns about epilepsy drug ezogabine, formerly known as retigabane, not only getting a timely approval in the US, but also its ability carving out decent sales in the overcrowded market if it does ( Event - Valeant's recent efforts reduce dependence on retigabine , June 10, 2010 ).

As such the companies' combination does appear to make sense as Biovail is bringing a much more interesting pipeline to the party to complement Valeant's smaller, but cash generative specialty products. At present the biggest growth driver over the next six years at the sluggish looking Valeant is the group's antiemetic product Cesamet, according to forecasts from EvaluatePharma .

Growth strategy

Biovail's pipeline is largely a result of the company's new CNS focus, embarked upon after its drug for major depressive disorder, Wellbutrin XL, lost patent protection in December 2006.

This resulted in a flurry of in-licensing deals with a variety of companies including Alexza Pharmaceuticals ( ALXA ), Cortex Pharmaceuticals ( COR ) and Santhera Pharmaceuticals ( SPHDF.PK ) and the purchase of Prestwick Pharmaceuticals in 2008 for $100m.

The most advanced product from these purchases is Staccato loxapine ( AZ-004 ), which has been filed for agitation in schizophrenia and biopolar disorder. A decision by the FDA is expected by October 11 and if positive could result in sales of $164m by 2016, analysts believe.

Merger of equals?

But some have questioned the fact that because Biovail appears to be pulling more of the levers for future growth, did shareholders get adequate compensation for their shares which went for a 15% premium.

However, these grumbles might be set aside given that the transaction gives the combined company a greater geographical reach, a largely complementary product portfolio of CNS and dermatology products, and good cost savings, albeit at the price of 15-20% of the workforce who will lose their jobs.

Perhaps more importantly it gives the new entity two leaders who have helped to drive impressive growth in their respective companies over the last two years. Investors will be hoping that Valeant chief executive Michael Pearson and Biovail's Bill Wells, who steps up to be chairman, will continue to drive as much shareholder value.

Global Speciality Pharmaceutical Companies
Rank Prescription sales ($m)
2009 2016 CAGR
1 Allergan ( AGN ) 3,592 5,589 7%
2 UCB 3,385 5,052 6%
3 Shire 2,694 4,985 9%
4 Fresenius ( FMS ) 2,457 3,881 7%
5 Forest Laboratories ( FRX ) 3,904 3,416 (2%)
6 Watson Pharmaceuticals ( WPI ) 1,980 2,919 6%
7 Hospira ( HSP ) 2,073 2,848 5%
8 Warner Chilcott ( WCRX ) 1,395 2,174 7%
9 Actelion ( ALIOF.PK ) 1,568 2,086 4%
10 Galderma 1,364 1,926 5%
11 New Valeant 1,077 1,864 8%
12 Meda 1,572 1,841 2%
13 King Pharmaceuticals 1,113 1,833 7%
14 Leo Pharma 1,138 1,822 7%
15 Ferring Pharmaceuticals 1,324 1,814 5%

See also Fidelity National Information Services Tender Offer: Special Situations Investing on seekingalpha.com



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks


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