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Mulong Sui
Valeant PharmaceuticalsA Bargain in a Lifetime
Confidential 1
Agenda
₳ Valeant Overview
₳ Company History
₳ Historical Trading Performance
₳ Key Financial Metrics
₳ Deal Rationale
₳ Precedents and Comparables
₳ Discounted Cash Flow Analysis
₳ Valuation Summary
₳ Potential Acquirers
₳ Conclusion
₳ Appendix
Confidential 2
Valeant Overview
Confidential 3
Valeant Pharmaceuticals International, Inc. is a multinational, specialty pharmaceutical and medical device company that develops, manufactures and markets branded, generic and branded generic pharmaceuticals, over-the-counter products and medical, which are marketed directly or indirectly in more than 100 countries.
Symbol: NYSE: VRX TSX: VRX
HQ: Laval, Quebec, Canada
Employees: 21,500 (2016)
Recent Corporate Performance
$4,923.00
$5,523.00
$4,792.00 $4,882.00
$4,342.00
$0.00
$1,000.00
$2,000.00
$3,000.00
$4,000.00
$5,000.00
$6,000.00
$0.00
$50.00
$100.00
$150.00
$200.00
$250.00
H1 2015 H2 2015 H1 2016 H2 2016 H1 2017
Revenue ($ MM USD) Share Price
Operation Summary
Product Mix
Source: Valeant Pharmaceuticals International Inc.’s SEC filing
Valu
ati
on
Enterprise Value $32465mm
Equity Value $6029mm
EV/EBITDA 8.05x
Bausch + Lomb/Intl
Branded Rx
U.S. Diversified Products
Pharmaceutical products, OTC products and medical device products in the area of eye health
Accounted for 55.6% of revenue with an organic growth rate of 6%
Pharmaceutical products related to the Salix and the Dermatological product; Accounted for 28.5% of the revenue, its top product, Salix, achieved an 16% organic growth rate during last
quarter
Number of Rx is on a steady increase
Two Thirds of the decline originated from LOE, however, is still contributing strong cash flow
Acquireded generics company PharmaSwiss; AB Sanitas; Dermik, dermatology unit of Sanofi; Ortho Dermatologics division of Janssen Pharmaceuticals; Afexa Life; and iNova
Company History
Confidential 4
Corporate Timeline
20162001 2003 2005 2008 2010 2011 2012 2013 2014 2015
Revenue:2.46 B$ 3.48 B$ 5.77 B$ 8.26 B$ 10.45 B$ 9.67 B$1.18 B$
Valeant and Biovail merged, with the new company
retaining the Valeant name.• ICN, predecessor of
Valent was founded
and listed on NYSE
• Biovali, the other
predecessor was
included in TSX 35.
• Valeant was formed when
ICN changes its name
• Under the ticker VRX,
Valeant began trading on
the NYSE
• Mike Pearson named Chairman
and CEO and started Valeant’s
acquiring streak
Acquieded Bausch + Lomb
Completed the acquisition of substantially all the assets of Dendreon Corporation and the acquisition of Salix Pharmaceuticals
• Joseph C. Papa named Chief
Executive Officer and Chairman
of the Board
• Valeant changed it’s strategy
and started divesting none-core
assets
COMMENTARY
Valeant has maintained a high growth rate since its merger with Biovail
The 54% CAGR over the five year period between 2010-2015 was driven by both M&A and selling price of products
The market reacted negatively with VRX’s prolonged strategy of raising debt capital and acquiring competitors; however, this situation exacerbated with the newly
named CEO J.Papa decided to divest non-core assets and pay down debt
Source: Valeant Pharmaceuticals International Inc.’s SEC filing
VRX Stock Performance
Confidential 5
July 28th, 2013 to July 19th, 2015 Price $USD
COMMENTARY
As the beneficiary of the Federal Reserve’s QE, Valeant was able to raise debt capital for acquisition at a relatively low cost
Valeant developed the business model of buy-and-raise, by acquiring competitors with patent products, Valeant bypassed the approval process by FDA; by keep on
raising drug prices, Valeant was able to increase its revenue exponentially.
Valeant used stock exchange for acquisition, the increasing stock price served as fuels for future acquisitions
8/6 Completed Purchase of
Bausch&Lomb
10/28 Reached Settlement of
$142.5M Payable to Anacor
12/16 Agreed to Acquire Solta
Medica for $235.8M
2/3 Agreed to Acquire
Precision Dermatology for at
Leat $475M
4/22 Teamed up with Bill
Ackman in an attempt to Buy
Allergan fo $47B
5/12 Allergan Rejected
Valeant Offer
5/28 Sold Dermatology
Product Rights to Nestle for
$1.4B
1/30 Agreed to purchase
Dendreon’s Provenge for
$296M2/22 Agreed to Buy Salix for
$14.5B EV
3/9 Commenced a Private ebt
Offering of $9.6B
7/17 Acquired Amoun Pharma
for $800M
3/17 Priced Public Offering of
7.2M shares at $199/Share
3/16 Upped bid for Salix to
$15.8B EV
11/17 Gave up on Acquiring
for AGN after Actavis’ offer of
$73.7B
10/7 Upped the Bid for AGN
to $64.3B
5/30 Upped the Bid for AGN
to $58.5B
5/28 Upped the Bid for AGN
to $53.5B
Source: Valeant Pharmaceuticals International Inc.’s SEC filing; Xueqiu Finance; Reuters; Bloomberg
VRX Stock Performance
Confidential 6
9/21 Hilary Clinton Tweet
9/28 Clinton Published Report about Valeant
10/21 Clinton Called
Valeant “Enron”
10/22 Revelations
about Philidor
12/28 CEO Mike Pearson Went on
Medical Leave 2/4 Congressional Hearing
on Drug Pricing
10/30 Valeant Cutter
Ties with Philidor
2/29 Pearson Back
from Leave
3/15 Valeant Cuted
Revenue Forecast4/25 J.Papa Named
CEO
3/21 Bill Ackman
Named to Board
1/10 Sold Dendredon
4/27 Senate Hearing
on Drug Prices
5/17 Considered
Selling Assets
6/7 Earnings Whiff
August Possible
Criminal Investigation
November Philidor CEO
Charged with Fraud2/28 Q4 Earnings, Lowered
Revenue Forecast further
3/13 Bill Ackman Exited
5/9 Q1 Earnings, Divesture
was making progress
6/21 Trump’s Draft Order
on Drug Prices
August 15th, 2015 to July 16th, 2017 Price $USD
COMMENTARY
Valeant’s stock price declined by 96.85% from all time high at $263.81 on Aug 5th, 2015 to $8.31 on Apr 23th despite no significant changes to its fundamentals
The catalyst for VRX’s stock price plummet was political pressure against its business model, acquire and raise prices.
The falling price triggered a series of self fulfilling prophecies, as Valeant used stock exchange to make acquisitions and maintain growth. The disappearance of
growth prospect then triggered ratings downgrade, further exacerbated Valeant’s prospect.
Source: Valeant Pharmaceuticals International Inc.’s SEC filing; Xueqiu Finance; Reuters; Bloomberg
Key Financial Metrics
Confidential 7
Revenue & Net Asset1 Turnover 5 Year EBITDA&FCF3 Change
Net Asset & Adjusted ROA1 Historical Leverage and Cost of Debt
$0M
$1,000M
$2,000M
$3,000M
$4,000M
$5,000M
$6,000M
2013 2014 2015 2016 2017E
EBITDA FCF
Source: Valeant Pharmaceuticals International Inc.’s SEC filing; Guru Focus; Market Watch
2: Adjusted ROA is calculated as (EBITDA-Capital Expenditure)/(Total Asset-Cash), in order to reflect the M&A situation
3: FCF is calculated as Cash Flow from Operation – Capital Expenditure
0.00%
100.00%
200.00%
300.00%
400.00%
500.00%
600.00%
700.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
2013 2014 2015 2016 2017H1
Cost of Debt US FED FUNDS RATE Leverage Ratio
27370 25977
48363
4298839708
7.88%
13.12%
10.47%
9.34%8.36%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
0
10000
20000
30000
40000
50000
60000
2013 2014 2015 2016 2017H1
Net Asset Adjusted ROA
$5,770M
$8,260M
$10,450M$9,670M
$4,342M
0.210814761
0.317973592
0.216074272 0.224946497 0.218696484
$0M
$2,000M
$4,000M
$6,000M
$8,000M
$10,000M
$12,000M
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
2013 2014 2015 2016 2017H1
Revenue Net Asset Turnover
2: Net Asset is calculated as Total Asset - Cash
Strategic Rationale
Confidential 8
Why Valeant Should Sell
Financial Summary
Industry Trends
Strategic Rationale
Pharma companies are increasingly using M&A as part of their R&D strategy, the sector delivered 244 deals worth
US$98.2 billion during H1 2017, second highest in industry
The intensifying competition from generic drugs, pricing power of insurance companies, the increasing costs of
R&D and gaining FDA approval, and the growing risks of commercial failure have made Pharma M&A a necessity
“Portfolio Deals” are dominating the industry as more and more companies realize only a strong position in the
relevant market will secure the future; Valeant has a vast diversified portfolio which could be a perfect target
Valeant’s troubles stem from its self fulfilling business model deficiency; when the company’s growth prospect
lowers, its valuation falls back to the “value stock” level, which weakens its ability to make stock acquisitions
With fewer acquisitions in place, Valeant’s stock price will fall even lower, which hinders its M&A activity further and
causes leverage to increase
Increased leverage will downgrade the company’s ratings, increase cost of debt and suppress stock price; when
covenants to the bonds are triggered, the company can no longer make major capital expenditures
Similarly, being acquired by a prominent pharmaceutical company, such as Gilead Sciences or Amgen, would allow
Valeant to pay down its debt and start growing again.
In addition, in terms of sales channels sharing, and the potential marketing enhancement to Valeant’s Addyi by
Amgen’s Viagra, there can be tremendous synergies to be achieved.
Valeant has been trading at a way lower multiple than market average
Valeant’s topline and EBITDA margin has been declining
Despite the poor stock performance, Valeant managed to stop the bleeding; Adjusted ROA and FCF have been
stabilized, and leverage ratio begins to drop
Analysis into Valeant’s share price vs its EBITDA and segmented growth has indicated that the company has
become undervalued as of FYE 2017 and has not yet recovered
Company TickerShare
Price
Shares
OutstandingEquity Value
Enterprise
Value
LTM
Revenue
2017E
Revenue
LTM
EBITDA
2017E
EBITDA
LTM
EBITDA
Margin
Total
Debt
/EBITD
A
LTM EPS 2017E EPSLeverage
Ratio
LT EPS
Growth
Pfizer PFE 33.65$ 5,947mm $200,117mm $230,181mm 4.40x 4.37x 13.21x 10.59x 33.3% 2.51x 24.04x 13.14x 22% 5.4%
Amgen AMGN 172.23$ 730mm $125,671mm $125,671mm 5.45x 5.50x 10.00x 9.33x 54.5% 2.63x 15.57x 13.80x 26% 6.3%
Mean 4.92x 4.94x 11.60x 9.96x 43.9% 2.57x 19.80x 13.47x 24% 5.8%
Tier 2: Pharmaceutical Companies Within Similar EV Range
Regeneron Pharmaceutical REGN 491.14$ 107mm $52,626mm $54,057mm 10.32x 9.39x 29.44x 25.23x 35.1% 0.38x 44.81x 35.56x 1% 21.5%
Alexion Pharmaceutical ALXN 121.67$ 223mm $27,155mm $29,058mm 8.52x 8.23x 25.01x 17.93x 34.1% 2.80x 52.22x 25.51x 12% 20.8%
Jazz Pharmaceuticals JAZZ 155.50$ 60mm $9,339mm $10,712mm 6.95x 6.53x 14.87x 29.82x 46.7% 2.32x 23.74x 16.40x 18% 17.1%
Mylan MYL 38.82$ 536mm $20,818mm $35,038mm 2.92x 2.92x 13.36x 23.24x 21.8% 5.74x 31.31x 8.48x 72% 8.1%
Mean 7.18x 6.77x 20.67x 24.05x 0.34x 2.81x 38.02x 21.49x 0.26x 0.17x
Median 7.73x 7.38x 19.94x 24.23x 0.35x 2.56x 38.06x 20.96x 0.15x 0.19x
Overall
Mean 6.43x 6.16x 17.65x 19.36x 0.38x 2.73x 31.95x 18.82x 0.25x 0.13x
Median 6.20x 6.02x 14.11x 20.59x 0.35x 2.57x 27.67x 15.10x 0.20x 0.13x
75th Percentile 8.13x 7.81x 22.48x 24.73x 43.8% 2.75x 41.44x 23.23x 25% 19.9%
25th Percentile 4.66x 4.65x 13.24x 12.43x 33.5% 2.37x 23.81x 13.31x 13% 6.7%
Valeant VRX 17.30$ 349mm $6,029mm $32,465mm 13.55x 9.28x 13.55x 9.28x 25.98% 9.67x -5.27x 4.64x 384% 9.6%
Enterprise Value / Price/
Tier 1: World Leading Pharmaceutical Companies
Financial Analysis
Confidential 9
Public Comparable Analysis
Valeant’s LTM valuation is close to that of Tier1 comparables, and is at substantial discount to companies of similar enterprise value
EV/Revenue, EBITDA Margin, and LT EPS Growth is lower than comparable companies, which are the main focus of current management
Despite the lower margin and slower growth rate, Valeant currently looks like a bargain in comparison to much of its competitors given its lowest EV/EBITDA Ratio
COMMENTARY
Source: 4-Trader; Reuters; Gurufocus; Y-Chart; Google Finance; NASDAQ.com
Date
AnnouncedAcquirer Target
Equity
Value
Enterprise
Value
LTM
Revenue
LTM
EBITDA
LTM EBITDA
Margin
LTM
Revenue
LTM
EBITDAPremium
2015/3/17 Actavis Allergan $70,500M $114,441M $14,641M $1,299M 9% 7.82x 11.28x 10%
2015/5/26 AbbVie Pharmacyclics $21,000M $20,115M $816M $113M 14% 24.65x 7.22x 13%
2015/9/3 Pfizer Hospira $17,000M $17,172M $4,636M $868M 19% 3.70x 5.34x 39%
2015/4/1 Valeant Salix $10,900M $13,212M $1,134M -$266M -23% 11.66x -4.26x 15%
2015/1/21 Merck & Co. Cubist $8,400M $8,557M $1,165M $216M 19% 7.35x 5.38x 35%
2015/2/21 Shire NPS Pharmaceuticals $5,200M $5,126M $224M $9M 4% 22.88x 24.56x 51%
2015/1/29 Endo Auxilium $2,600M $3,120M $407M $244M 60% 7.67x 1.67x 55%
2015/5/7 Horizon Hyperion Therapeutics $1,100M $1,029M $125M $8M 6% 8.22x 16.24x 8%
2016/1/3 Shire Baxalta $32,000M $31,391M $6,335M $1,360M 21% 4.96x 4.66x 38%
2016/9/28 Pfizer Medivation $14,000M $13,690M $1,027M -$254M -25% 13.33x -4.05x 118%
2016/9/2 Galenica Relypsa $1,530M $1,431M $36M -$227M -628% 39.58x -0.16x 59%
Mean -48% 13.80x 6.17x 40%
Median 9% 8.22x 5.34x 38%
min -628% 3.70x -4.26x 0.08x
75th Percentile 19% 18.10x 9.25x 53%
25th Percentile -10% 7.51x 0.76x 14%
max 60% 39.58x 24.56x 1.18x
Valeant $6,029M $32,465M $9,225M $2,396M 26% 3.52x 3.85x
Enterprise Value /
Financial Analysis
Confidential 10
Precedent Transactions Analysis
Revenue projections are adjusted for the divestiture effect of iNova and Obagi
The projected revenue growth rate is based on Valeant’s 2017 Q2 product portfolio and organic growth rate, and is assumed to be in steady decline; should Valeant
achieve its management’s expected growth prospect, then its current valuation implies to be a substantial discount to its future value
COMMENTARY
Source: Valeant Pharmaceuticals International Inc.’s SEC filing; Xueqiu.com; HBM Partners
2,012$ 2,013$ 2,014$ 2,015$ 2,016$ 2017H1 2017Q3 2017Q4 2018E 2019E 2020E 2021E 2022E
Revenue $3,480M $5,770M $8,206M $10,447M $9,674M $4,342M $2,099M $2,099M $8,313M $8,230M $8,148M $8,066M $7,986M
COGS $970M $1,905M $2,255M $2,665M $2,651M $1,242M $594M $594M $2,354M $2,330M $2,307M $2,284M $2,261M
Gross Profit $2,510M $3,865M $5,951M $7,782M $7,023M $3,100M $1,505M $1,505M $5,959M $5,900M $5,841M $5,782M $5,725M
Gross Profit Margin 72% 67% 73% 74% 73% 71% 72% 72% 72% 72% 72% 72% 72%
R&D $79M $157M $246M $334M $421M $190M $92M $92M $364M $360M $357M $353M $349M
SG&A $756M $1,305M $2,026M $2,700M $2,810M $1,320M $638M $638M $2,527M $2,502M $2,477M $2,452M $2,428M
Operating Income $1,675M $2,403M $3,679M $4,748M $3,792M $1,590M $775M $775M $3,068M $3,038M $3,008M $2,977M $2,948M
Operating Margin 48% 42% 45% 45% 39% 37% 37% 37% 37% 37% 37% 37% 37%
Restructing Cost $267M $462M $382M $362M $132M $36M $17M $17M $69M $68M $68M $67M $66M
Other Revenue (Cost) $137M $287M -$269M $256M $73M -$259M $38M $38M $38M $38M $38M $38M $38M
Sustainable Income $1,545M $2,228M $3,029M $4,642M $3,733M $1,295M $795M $795M $3,037M $3,007M $2,978M $2,948M $2,919M
Change in NWC $433M $419M $89M -$1,268M $1,274M $59M $47M $63M $55M -$17M -$17M -$17M -$16M
CAPEX -$181M -$185M -$471M -$303M -$291M -$216M -$88M -$88M -$347M -$343M -$340M -$336M -$333M
FCFF $930M $1,624M $2,469M $5,607M $2,168M $1,020M $660M $644M $2,635M $2,681M $2,654M $2,628M $2,602M
Discount Factor 0.9838 0.9678 0.9366 0.8773 0.8217 0.7697 0.7209
Discounted Cash Flow $649M $624M $2,468M $2,352M $2,181M $2,023M $1,876M
Terminal Value $23,919M
Net Debt $26,436M
Equity Value $8,014M
Shares Outstanding 349$
Intrinsic Value 23$
Financial Analysis
Confidential 11
Free Cash Flows
Revenue projections are adjusted for the divestiture effect of iNova and Obagi
The projected revenue growth rate is based on Valeant’s 2017 Q2 product portfolio and organic growth rate, and is assumed to be in steady decline; should Valeant
achieve its management’s expected growth prospect, then its current valuation implies to be a substantial discount to its future value
COMMENTARY
Source: Valeant Pharmaceuticals International Inc.’s SEC filing; Valeant Pharmaceuticals International Inc.’s Q2 2017 Webcast; Reuters; Gurufocus
Discounted Cash Flow Analysis
Financial Analysis
Confidential 12
WACC Calculation Implied Share Price
Sensitivity Gordon Growth Method
Te
rmin
al G
row
th R
ate
Gro
ss
Pro
fit
Ma
rgin
Sensitivity Gross Profit Margin
A Gordon growth at even a modest growth rate results in a much higher share price than
at current trading multiples
Valuation is extremely sensitive to WACC usedSource: Valeant Pharmaceuticals International Inc.’s SEC filing; Valeant Pharmaceuticals International Inc.’s Q2 2017 Webcast; Yahoo Finance; Gurufocus
23$ 5% 6% 6.76% 7.52% 8.52%
2.0% 132.7$ 84.9$ 61.8$ 45.3$ 29.3$
0.5% 75.9$ 51.3$ 37.8$ 27.3$ 16.5$
-1.0% 47.6$ 32.2$ 23.1$ 15.7$ 7.7$
-2.5% 30.5$ 19.7$ 13.1$ 7.5$ 1.3$
-4.0% 19.2$ 11.1$ 5.9$ 1.5$ 3.6-$
WACC
23$ 5% 6% 6.76% 7.52% 8.52%
78% 69.0$ 50.6$ 39.8$ 30.9$ 21.4$
75% 58.8$ 41.8$ 31.8$ 23.7$ 14.9$
72% 47.6$ 32.2$ 23.1$ 15.7$ 7.7$
69% 38.4$ 24.3$ 15.9$ 9.2$ 1.8$
66% 28.2$ 15.5$ 8.0$ 1.9$ 4.7-$
WACC
IMPLIED VRX SHARE PRICE
Weighted Average Cost of Debt 6.40% Share Price(June 30th, 2017) 17.3$ EV/EBITDA Exit Multiple 8.97129X
Tax Rate 17.00% Shares Outstanding (mm) 349$
After Tax Cost of Debt 5.31% Market Capitalization (MM) 6,029$
Debt Outstanding (MM) 28,461$ Implied Enterprise Value (MM) 36,091$
Total Capitalization (MM) 34,490$ Less Debt (MM) 28,461$
Risk Free Rate 2.12% Add Excess Cash (MM) 2,025$
Equity Risk Premium 6% Debt/Total Capitalization 83% Equity Value 9,655$
Industry Premium 2.10% Equity/Total Capitalization 17%
Company Premium 3.40% Shares Outstanding (MM) 349$
Cost of Equity 13.62% WACC 6.7643% Implied Price Per Share 23$
Cost of Debt
Cost of Equity
Capital Structure Exit Multiple Method
Financial Analysis
Confidential 13
$- $10.00 $20.00 $30.00 $40.00 $50.00 $60.00 $70.00 $80.00 $90.00 $100.00 $110.00 $120.00 $130.00
Discounted Cash Flow Analysis
EV/LTM EBITDA
EV/LTM Revenue
2017E P/E
EV/2017E EBITDA
EV/LTM EBITDA
EV/2017E Revenue
EV/LTM Revenue
Based on the analysis, Valeant’s 9/5 stock appears to trade at significant discount by all three
valuation methodologies, and current stock price represents a even bargain at $13.10
Valeant’s current stock is trading close to the 25thPercentile of DCF model, and significantly
below the lower bound of its comps when factoring in future growth
Public Company Comparables:
Precedent Transactions ComparableS::
VRX $13.1 (9/5) VRX with 30%~50% Premiums ($17.10-$19.65)
Valuation Summary –Football Field
Strategic Buyers
Confidential 14
Strategic Rationale
Potential Acquirers
Gilead Sciences Pfizer
Strategic Rationale
Symbol: NYSE: GILD
HQ: Foster City, California, US
Employees: 7,900 (2015)
Valu
ati
on
Enterprise Value $114985mm
Equity Value $110337mm
EV/EBITDA 6.34x
Symbol: NYSE: PFE
HQ: New York City, New York,US
Employees: 96,500 (2016)
Valu
ati
on
Enterprise Value $231693mm
Equity Value $210013mm
EV/EBITDA 13.29x
Gilead Sciences, Inc. is a research-based biopharmaceutical
company focused on the discovery, development, and
commercialization of innovative medicines.
Pfizer is one of the world's premier biopharmaceutical
companies, develops and produces medicines and vaccines for
a wide range of medical disciplines
GILD’s portfolio is highly focused on anti-virus, with top 6 products account for 80% of
the revenue, VRX has a large diversified portfolio
Harvoni and Sovaldi, its top 2 products, which account for 35% of GILD’s revenue, are
losing market share rapidly, GILD needs to make a move
This acquisition will help Gilead gain a solid footing in the realm of dermatology, eye
care, gastrointestinal, consumer products and diversified segment
GILD has $31B cash on hand, which enables it to acquire VRX while not weaken its
own balance
Huge synergy potential by sharing Sales Channels
VRX’s SG&A/Revenue is high among pharmaceutical companies, and Pfizer has one of
the best marketing channels in the world
20% of PFE’s revenue come from generic drugs, and this is much overlap between
PFE’s generic portfolio and VRX’s
By acquiring VRX, PFE will be able to reduce it’s effective tax rate significantly
PFE’s corporate rating makes it possible to raise debt capital at a pre-tax rate of 3%,
which enables it to strengthen the after-merger balance sheet
Source: Company Website; Company SEC Filings; Fortune Magazine; WSJ; Harvard Business Review
Financial Buyers
Confidential 15
Strategic Rationale
Pershing Square Capital Management Paulson & Co.
Strategic Rationale
Symbol: N/A
HQ: New York City, York City, US
Employees: 64 (approximately)
Valu
ati
on
Enterprise Value N/A
Equity Value N/A
AUM $10980mm Valu
ati
on
Enterprise Value N/A
Equity Value N/A
AUM $18000mm
Symbol: N/A
HQ: New York City, York City, US
Employees: 120 (approximately)
Pershing Square Capital Management is an American hedge
fund management company founded and run by Bill Ackman,
and Bill Ackman is famous for being an “activist”
Paulson & Co. Inc. is an American investment management firm,
established John Paulson and specializes in global merger,
event arbitrage and credit strategies
Pershing’s activist style can bring long-needed growth after Valeant has strengthened its
balance sheet
Pershing once was the largest shareholder, and Ackman served in the board of
directors, they have a close relationship with the management
Valeant’s management has managed to pay down close to $5B debt and stabilized the
declining revenue, the fundamentals are improving
At a current less than 8x TTM EV/EBITDA, the company is trading at less than
liquidation price, which makes it a good subject for LBO and liquidation
Paulson & Co. is Valeant’s largest shareholder, which makes it easier to acquire
Valeant at a lower premium
Paulson himself servers in the board of directors, which makes it easier for him to
launch strategic moves
Valeant’s management has managed to pay down close to $5B debt and stabilized the
declining revenue, the fundamentals are improving
At a current less than 8x TTM EV/EBITDA, the company is trading at less than
liquidation price, which makes it a good subject for LBO and liquidation
Potential Acquirers
Source: Company Website; Fortune Magazine; WSJ; Harvard Business Review
KEY TAKEAWAYS
Summary
Confidential 16
OUR OPINION
Valeant’s current issues stem from its declining topline and EBITDA margins
I. The fundamental driver of revenue decline and EBITDA margin erosion is due to LOE (Lost of Exclusivity), which is the result of its old business model
II. Divest non-core assets and pay down debt to meet the covenants and re-start acquisition promising targets with pipelines
III. An acquisition or merger with another R&D oriented firm is an efficient method to resolve its most pressing issues
Valeant appears to be substantially undervalued according to all three valuation methodologies
I. Valeant’s stock is currently trading at a substantial discount to even the 25th percentile lower bound of its comp set
II. An acquisition of Valeant at an aggressive 32% premium over its $13.1 trading price would still be substantially cheaper than the multiples that recent bio-
pharmaceutical acquisitions were purchased at
III. Both the terminal multiple and Gordon Growth DCF imply an intrinsic share price substantially above its current market price
Valeant would be an attractive target for both financial buyers and strategic buyers
I. Valent’s operational issues would also give both Strategic and Financial buyers the opportunity to unlock significant value through either cost cutting measures or
through realization of potential revenue and cost synergies
Valeant should immediately signal interest in selling a controlling stake and begin fielding friendly bids from interested buyers
I. Management should prioritize Strategic buyers, and should fight to retain a large stake within the firm to capture the benefits of projected future growth
Valeant should focus on bids from companies with strong pipeline, sales channel and cash stack
I. Firms such as Gilead, with more than 30$B in cash, and Pfizer, with its broad distribution network would best help Valeant get rid of its operating troubles
Closing Thoughts
Appendix
Confidential 17
Key DCF Assumptions and Rationales
DCF Assumptions Assumption Rationales
Long-Term Revenue Grow Rate is -1%, there will be an
additional annual fall of 200m1
COGS/Revenue ratio stays 5-year average
SG&A/Revenue ratio stays the same as H1 2017 number2
R&D/Revenue ratio stays the same as H1 2017 number3
Restructuring Cost/Revenue ratio stays the same as H1 2017
number4
Other Income (Expense) stays the same as 5-year average
CapEx/Revenue ratio stays 5-year average
Net Working Capital/Revenue ratio stays 5-year average
Risk free rate is the same as 10-year-treasury-note rate5
Equity Market Premium is 6%6
Equity Industry Premium is 2.1%7
Equity Company premium is 3.4%8
Capital Structure stays the same as H1 20179
Market value of debt is the same as book value of debt10
Share price is trading at $17.3 and number of share
outstanding is 348.51 million11
1. This is to reflect the current product composition and their
latest organic growth rate; the additional fall reflects the net
effect of the divestiture of iNova and Obagi
2. There is an upward trend as Valeant has been trying to boost
topline
3. There is an upward trend as Valeant is swithing to an R&D
oriented company
4. Because of debt covenants, Valeant can’t make major
restructures in the near future
5. The 30-year-treasury-bond far exceeds most investors’
investing plan
6. We choose to use historical premium over bonds despite the
recent bull market
7. We use the CAPM for IBB, a basket of Bio-Pharma stocks to
calculate the industry premium
8. We used the difference Valeant debt’s coupon rate and
comps’ cost of debt
9. Valeant determines to lower its leverage ratio, however, the
progress is hard to predict
10. Most recent coupon rate is close to the implied cost of debt
11. We used Q2 financial statement, to make things consistant
Appendix
Confidential 18
Valuation Chart
Valuation Valeant
- - - - - - - - - - -
25th 75th Applicable 25th 75th
Min Percentile Median Percentile Max Valeant Minimum Percentile Median Percentile Maximum
Methordology Name Multiple Multiple Multiple Multiple Multiple Figure Multiple Multiple Multiple Multiple Multiple
Public
LTM EV/Revenue 2.92x 4.66x 6.20x 8.13x 10.32x 9,225.00$ 1.15$ 39.44$ 73.29$ 115.56$ 163.86$
2017E EV/Revenue 2.92x 4.65x 6.02x 7.81x 9.39x 8,675.00$ 2.59-$ 33.20$ 61.37$ 98.32$ 131.00$
LTM EV/EBITDA 10.00x 13.24x 14.11x 22.48x 29.44x 2,396.00$ 5.91-$ 12.61$ 17.57$ 65.30$ 105.03$
2017E EV/EBITDA 9.33x 12.43x 20.59x 24.73x 29.82x 3,499.00$ 14.76$ 40.58$ 108.59$ 143.12$ 185.51$
2017E P/E 8.48x 13.31x 15.10x 23.23x 35.56x 3.73$ 31.62$ 49.64$ 56.33$ 86.65$ 132.65$
Precedent
LTM EV/Revenue 3.70x 7.51x 8.22x 18.10x 39.58x 9,225.00$ 18.43$ 101.95$ 117.53$ 334.75$ 806.58$
LTM EV/EBITDA -4.26x 0.76x 5.34x 9.25x 24.56x 2,396.00$ 87.26-$ 58.65-$ 32.47-$ 10.18-$ 77.17$
Discounted Cash Flow Analysis
6%~7.52% WACC, (2.5%)~0.5% Terminal Growth Rate 7.50$ 6.25$ 9.35$ 7.88$ 20.33$
Valeant Implied Per Share RangeValeant Range of Valuation Multiples
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