Valeant Acquisition of Bausch & Lomb
Mergers and Acquisitions
FINA 415
With Dr. S. Betton
Ben Gotlieb(1963546)
Isaac Lempriere(9783512)
Gabriel Leung(6271081)
Phuong Thao Nguyen(1948156)
Frederic Premji(3826112)
Wednesday, December 4th, 2013
John Molson School of Business
Table of ContentsIntroduction4Industry at a Glance5Nature of the
Industry5Demand5Stability5Emerging Markets6Barriers to
Entry6Capital Intensity7Technology7Competition7Government
Regulations8Life cycle of Industry8Valeant acquisition of Bausch
& Lomb Background8Valeant8Products9Consumer
Products9Prescription Medication9Branded Generic
Medications9Pipeline10Geographical Distribution10Bausch &
Lomb10Products10Vision Care11Prescription Medication11Surgical
Products11The Deal12Overview12Timeline12Financing12Expected
Synergies13Valuation14Valuation Comparable Companies
Approach14Bausch & Lombs Unique Profile14The Cooper Companies,
Inc. (COO US Equity)15DENTSPLY International Inc. (XRAY US
Equity)15Essilor International SA (XRAY US Equity)15Valuation
Approach16Valuation Discounted Cash Flow
Approach16Assumptions16Growth rate16Cost of Goods Sold
(COGS)17Selling, Admin, & General Expenses (SA&G)17Research
& Development (R&D)17Depreciation & Amortization
(D&A)17Capital Expenditures (Capex)17Change in working
capital17Tax rate18Terminal rate18Adjusted EBITDA18Weighted Average
Cost of Capital (WACC)18Enterprise Value19Risks19Post-Merger
Results20Conclusion21Appendix22Appendix 1 Industry Revenue
Growth22Appendix 2 Industry Geographic Spread22Appendix 3 Industry
Cost Structure23Appendix 4 Valeant Geographic Spread23Appendix 5
Deal Timeline24Appendix 6 Valeant Product Pipeline24Appendix 7
Comparable Companies Overview25Appendix 8 Comparable Companies
Valuation25Appendix 9 Discounted Cash Flow Valuation26Appendix 10
Assumptions for DCF Valuation26Appendix 11 WACC Calculation27Works
Cited28
30
Valeant Acquisition of Bausch & Lomb
Introduction
Mergers and acquisitions are tools used by companies worldwide
as management hopes to create shareholder value. Corporations hope
that by combining two separate entities, they will be able to take
advantage of a certain set of synergies previously unattainable. In
2012, there were over 15 thousand deals made in the Americas
totaling 1.37 trillion dollars. The average deal size was 184.4
million with a premium of approximately 39% (Trindade). The
pharmaceutical industry is no different. In the past three years
there have been over 600 significant deals. The industry has had to
deal with many issues including lost revenue from expiring patents.
In order to recover from the losses, many companies have resorted
to a variety of cost-cutting measures, restructurings and portfolio
arrangements. According to Five Star Equities, this will lead to
many new deals in 2013 (Five Star Equities). Valeant
Pharmaceuticals has had a history of acquiring targets and growing
them under the Valeant brand. The latest acquisition is Bausch
& Lomb, a U.S. company specializing in the research,
manufacturing and distribution of a variety of eye care products.
The deal was worth $8.7 billion dollars and is considered a large
cap acquisition. This paper will go into the details about current
industry trends and issues followed by an overview of the two
companies involved in the merger. Details concerning the deal will
then be discussed along with a comparables valuation and a
discounted cash flow valuation of the acquired company. Finally,
the paper will go over the risks of the acquisition as well the
results as seen on the market following the merger.
Industry at a Glance
For its industry, Valeant Pharmaceuticals International is
currently under Pharmaceutical and Medicine Manufacturing. In
general, this industry comprises of establishments that are mainly
engaged in manufacturing drugs, medicines and related products for
human use. According to recent reports, over the last 5 years the
Global Pharmaceutical and Medicine Manufacturing industry enjoyed
moderate growth. It is expected to have $1.1 trillion of revenue in
2013 and it represents annualized growth of 3.7% (Appendix 1).
Meanwhile, the emerging markets, such as China, India and Brazil,
all have an exponentially higher growth rate than the current
mature markets, which consist of Europe and United States. The
reason behind this occurrence is because of patent expirations of
blockbuster drugs, greater government spending on healthcare, and
increased drug use. Nature of the IndustryDemandCurrently, this
type of industry has great importance to the economy and the well
being of people. It is considered to be in rising demand because of
the growing life expectancies, emergence of new viruses and
pandemics, drug resistant infections, and a growing median age.
According to the Agency for Healthcare Research and Quality, more
than 90.0% of seniors and 58.0% of non-elderly adults rely on
prescription medication on a regular basis (IBISWorld). As a
result, the increase of the average population age is directly
correlated with the production of drugs in this industry. It is
expected that as time goes by, the elderly population will become
the largest age group, because the average life expectancy is on
the upswing. StabilityAs it was explained before, the industry is
mainly influenced by consumers health and the seriousness of the
epidemic of viruses. As such, this industry is currently impervious
to cyclical economic variables. This industry is mainly driven by
the demand of consumers. If income were to drastically decrease,
consumers would look for cheaper alternatives for their medication,
leading to the use of generic products. Another reason why it is
impervious to the economic variables is the presence of government
support. Since it is highly regulated and affects consumer well
being, many governments around the world support these
pharmaceutical companies. Emerging MarketsThe pharmaceutical and
medicine manufacturing industry has recently been growing at a fast
pace in the emerging markets. Many of these are rapidly growing
because of the expiration of patents for blockbuster drugs. This
allows generic brands to take the original compound and synthesize
a cheaper version of the drug. The growth in these industries has
led to more opportunities for companies in emerging market to excel
and compete with the powerhouses in the US and Europe. As the
demand for drugs and production of drugs increase in the emerging
markets, it has led to increasing growth for both imports and
exports. Barriers to EntryCurrently, in this industry, the barriers
to entry are very high. There are two main reasons why it is a hard
industry to enter. The first reason is the cost. The main expense
for most pharmaceutical companies is the cost of research and
development. This industry is mainly focused on making drugs that
can improve consumers well being. It takes a high capital
expenditure in order to create a new type of drug. The longer it is
to produce the drug the higher the cost will be for the
pharmaceutical company. Only 1 out of 24 drugs that successfully
reach the trial phase are approved to enter the market.
Furthermore, even if the drug successfully enters the market, it
does not mean that all R&D expenses will be covered. Indeed,
only 2 of 10 drugs on the market meet or exceed R&D expenses
(PhRMA).The second factor contributing to high barriers to entry is
government regulations. Amongst various industries, the
pharmaceutical and medicine manufacturing industry has one of the
most highly regulated industries. This is mainly because these
products contribute to the consumers' well being. This means that
many of these companies would need to follow specific regulations
if they want to market and sell their drugs.Capital IntensityThis
industry is highly intensive because of the cost of products and
the cost of developing a leaner and more efficient corporation. A
substantial portion of the available capital is tied up in the
production of these drugs. One of the explanations for the large
capital expenditure is because of the increase of new diseases and
drug resistant infections. In order create high tech drugs capable
of combating these diseases pharmaceutical companies must invest in
R&D. Another reason that it is capital intensive is because of
the innovative measures it must take to stay ahead of competition.
In order to remain market leaders, these companies have to create
strategies that will make them a more efficient and a leaner
corporation. TechnologyIn this industry, technology is also growing
to be more complex and more efficient. Creating these drugs does
not only rely on labor forces but also on having a technological
advantage that would allow R&D models to advance. This allows
for more chances of creating new drugs to enhance consumer well
being. By having a more technologically advanced R&D
department, it allows companies to have a stronger competitive
advantage against other companies that cannot create and support
these R&D models.CompetitionThe pharmaceutical and medicine
manufacturing industry is highly competitive. Currently, the top
player for this industry is Pfizer and controls 5.3% in the global
pharmaceutical market (Appendix 3). Competition is mainly based on
product innovation. By having a higher concentration on R&D
expenses, it allows the company to have an advantage on
competition. Another reason for the increased competition is the
rise is of the generics market where other companies are producing
drugs developed in one company. This results in more competition
since the branded pharmaceutical companies are competing against
companies that are taking advantage of the patent expirations of
blockbuster drugs. Government RegulationsGovernment regulations for
this industry are high. The main reason why the pharmaceutical
industry is so strictly regulated is due to the impact on consumer
health and well-being. The industry is subject to tight regulations
with numerous governmental policies. These policies mainly affect
the manufacturing, pricing and marketing of products. Furthermore,
the high costs of government-mandated testing trials and the
continuous watch can discourage many new firms from entering in
this industry.Life cycle of IndustryCurrently the life cycle for
this industry is mature. Many companies in this industry have had a
slowed growth rate because of blockbuster patent expiration and
consumers now turning to emerging markets. Many established
companies are stuck in the maturity phase and are now seeking for
ways out of this life stage. There are two ways that most companies
use in order to reposition themselves. The two ways are: By
adopting new business models (as R&D expenses are increasing).
By turning to mergers and acquisitions.Valeant acquisition of
Bausch & Lomb Background Valeant
Valeant Pharmaceuticals International, Inc (VRX) is a medicinal
corporation that was established in 1983. Although the company is
located in Montreal, Quebec, it was founded as a United States
business. In 2010, Biovail (BVF), a Canadian pharmaceutical
company, acquired Valeant. Biovail decided to retain the Valeant
name and incorporated the company in Canada. Valeant
Pharmaceuticals is a public specialty pharmaceutical company,
traded on both the Toronto Stock Exchange (TSX) and the New York
Stock Exchange (NYSE). Since their acquisition by Biovail, the
company has undertaken a major managerial, operational, and
strategic restructuring in order to expand within the medical and
pharmaceutical industries. Subsequently, the company has been
actively acquiring companies with late stage pipelines in order to
continue releasing new products. Valeants CEO, Michael Pearson,
believes acquisitions to be an essential growth strategy for the
company. For the last three years, Valeant has been acquiring an
average of 20-25 companies per year with the largest being Medicis
and Bausch & Lomb (Valeant).Products
The company specializes in development, manufacturing and
commercialization of over the counter pharmaceutical products and
medical devices. Valeant has over 500 products under its market
portfolio umbrella including consumer brands, prescription brands
and branded generic product lines; as well as several drugs in
late-stage clinical trials (Valeant).Consumer Products
Valeant has many over-the-counter products from dermatological
products, such as CeraVe and Kinerase, to homeopathic medication,
like COLD-FX. Valeants highest selling drugs are adapted from
variations of their propriety Kinetin formula, derived from plant
hormones that promote cell division. This innovative research is
the basis of their multi-award-winning anti-aging skincare product
Kinerase. Kinerase vividly repairs, restores and resists all
visible signs of aging (Valeant).Prescription Medication
Valeants main focus is on dermatology and ophthalmology,
industries with historically high margins. Valeant has many
products on the market, as well as in the pipeline, related to
these industries. Some of their top selling products include;
Wellbutrin and Zovirax among many others. Their prescription
medications mainly focus on dermatological medications treating
everything from acne to rosacea (Valeant).Branded Generic
Medications
A branded generic is an equivalent to an original product whose
patent has expired and can now be manufactured and labeled as a
product from a competitor. This is an excellent market to be a part
of. Also, emerging markets are often more interested in buying
branded foreign products which they deem more trustworthy than
locally produced medications. These products have lower R&D
costs, lower risk and more stable sales (Valeant).
Unlike industry trends, although patent expirations do affect
Valeant, the company has many other sources of income. Generic
medication and OTC medication allow for a stable return even
without the release of new prescription medication or the expiry of
patents of Valeants current products (Valeant).Pipeline
With a large focus on dermatological and ophthalmological
products, Valeant has been developing many new medications. In the
dermatological portion, products include three topical lotions that
are in the late portion of Phase 3 and submitted for approval. The
ophthalmology portion is carrying out research on a new product in
the early stages of development that will join the line of Bausch
and Lomb products, should the product be successful (Pipeline).
Finally, a partnership with GlaxoSmithKline has given rise to a new
product equally in the late stages of development
(Valeant).Geographical Distribution
Valeant distributes a wide range of products in different
markets. As shown in the map in Appendix 4, Valeants specialty
pharmaceutical products are mainly sold in developed countries such
as the United States, Canada and Australia. In emerging markets
including South East Asia, Central and Eastern Europe and South
Africa, Valeant has chosen to promote their branded generics. This
is due to the trustworthiness and quality associated with the
Valeant brand name (Valeant).Bausch & Lomb
Bausch & Lomb (BOL), founded in 1853 by John Jacob Bausch
and Henry Lomb, is an American supplier of eye health products,
based in Rochester, New York. The company was previously publically
traded on the New York Stock Exchange (NYSE) until it was acquired
in 2007 through a leverage buyout by the private equity firm
Warburg Pincus LLC. Bausch & Lombs main products include
implants for eye disease, contact lenses, lens care products as
well as medical research (Bausch).Products
Similarly with Valeant, Bausch & Lomb develops, produces and
commercializes its products. The company specializes in high end
specialized eye care products. Due to the high price of these
quality products, Bausch & Lomb can enjoy higher that market
average margins. Bausch & Lomb products are specialized,
however the company strives to treat each condition from start to
finish. For example, both contact lenses and care products are
available within the company and the same can be said for cataract
treatment where surgical implants as well as post-surgery care
products are available (Bausch).Vision Care
A large portion of the companys returns is due to their contact
lens products that include the actual contact lenses as well as all
the associated care products. This includes market-leading products
such as the Renu line and Biotrue. Bausch & Lomb also produce
many products such as Opcon-A redness eye drops and Liposic gel,
products that are preferred by pharmacists as go-to products.
PreserVision is a vitamin supplement targeting older patients with
age-related macular degeneration (AMD). Although the content of the
vitamin is not patented, due to Bausch & Lombs participation in
the AREDS 2 studies, the company is considered the leading brand in
vitamin supplements targeting age-related eye diseases
(Bausch).Prescription Medication
Bausch & Lomb produces three well know prescription eye
drops. Two of the three eye drops are to treat eye infections and
the last drop, Lotemax, is used as a post-cataract surgery drop.
This last product fits in with the companys surgical products used
to treat cataracts (Bausch).Surgical Products
The surgical products made are focused on treating cataracts, a
clouding of the eyes natural lens. This is a condition that affects
a large portion of the older community and is a common surgery to
get done. Bausch & Lombs implants are used worldwide to treat
this condition (Bausch).
The DealOverview
Valeant Pharmaceuticals (VRX CN) submitted a bid to acquire
Bausch & Lomb Inc (BOL US) as a cash deal from a private group
of investors, including Investor Group, Warburg Pincus LLC and
Welsch Carson Anderson & Stowe LP. The deal was set to be for
$8.7 billion (Bloomberg). This was an interesting deal for Valeant,
as it fit with the companys strategy of acquiring smaller players
in the skin care and eye care industries for their large margins.
This deal would allow Valeant to enter and to become a strong
competitor in the eye care market. Timeline
Valeant announced the deal on May 27th, 2013 on which date both
the acquirer and target board of directors voted and approved the
acquisition. The approval rate was 100% and 91% respectively
(Bloomberg). At the time of announcement, VRX stock price reached a
high of $96.14 from $77.28 on the 23rd of May. The deal was
completed on August 6th, 2013 and the closing stock price was
$99.72 as shown in Appendix 5 (Bloomberg). The increase in value of
the Valeant stock, from the time of announcement to the time of
completion, shows the positive outlook for the
company.Financing
As of May 2013, Valeant was listed as the largest pharmaceutical
company in Canada, placing it as the 17th largest public company in
Canada with an enterprise value of $33 billion in March 2013. In
May 2013, Valeant finalized the deal to acquire Bausch & Lomb
from Warburg Pincus LLC for $8.7 billion paid in cash, marking
Valeants largest acquisition to date. The Bausch & Lomb
acquisition structure was financed by approximately $2 billion in
new equity, at $85.00 per share, and the remainder was financed in
debt. Goldman Sachs redeemed $0.3 billion in options on the stock
(Valeant). Valeant signed a loan agreement with Goldman Sachs Bank
USA for a $3.2 billion loan at LIBOR +225 bps. Although Moody and
S&P gave a BB- rating to Valeant due to its high leverage, the
company managed to get an excellent rate thanks to the CEOs
background and connections at Goldman Sachs. The company also
launched a private offering on June 18th of senior unsecured notes
totaling approximately $3.2 billion. The market perceived the
acquisition as an excellent fit for Valeant, which resulted in a
25% stock rise once the deal was announced (Bloomberg). The
financing of the deal was separated into $4.5 billion paid to
Warburg Pincus LLC, Investor Group and Welsh Carson Anderson &
Stowe LP and $ 4.2 billion to repay Bausch & Lombs debt
(Michom) (Wayne).Expected Synergies
In order to reduce costs, Valeant will relocate its existing eye
care businesses to Bausch & Lomb headquarters in Rochester.
Valeants CEO, J. Michael Pearson, expects to cut overhead costs
from 40% to 20% of sales. This will result in annual cost savings
of approximately $800 million. This is including an expected
decrease in working capital of 10-15% of Bausch & Lombs current
11,000 employees, which amounts to between 1,850 and 2,775 job cuts
(Financial Times). The job cuts will be due to a relocation of the
manufacturing facilities to the same building as the headquarters
as well as a cut in the sales and marketing departments, services
that are duplicated in the two companies. The job cuts are also
said to include upper management members in both Valeant and Bausch
and Lomb (Wayne).
The acquisition of Bausch & Lomb will be an excellent fit
within the Valeant umbrella. Valeant will be able to use Bausch and
Lombs goodwill to their advantage by incorporating Valeant eye care
products in the Bausch & Lomb brand. They plan on taking
advantage of the growing demand worldwide due to an aging
population, higher growth in emerging markets, and higher diabetes
occurrences. Valeant expects that the combined company will have a
stronger portfolio and Valeant will be able to take advantage of
Bausch & Lombs late stage pipeline. By combining Valeants
current early stage pipeline, as shown in Appendix 6, with Bausch
& Lombs late stage pipeline, it can be expected that this will
propel Valeant into the top leading companies in eye care worldwide
(Pipeline). Valeant will have a full range of both over-the-counter
products and prescription medication on the market as well as in
different stages of development. The company will have more stable
returns and a more complete range of products. Bausch & Lomb is
an excellent fit with the corporate strategy at Valeant, where they
acquire large stable companies with a strong product base and a set
customer base. The acquisition will allow Valeant to enhance value
by penetrating new markets in the eye-care industry. It will enable
Valeant to expand into fast-growing emerging markets such as China,
which it previously did not compete in. Another value enhancing
synergy includes the diversification of Valeants product mix to
lower patent and approval risks (Blackwell). The eye care market,
being a high margin industry, will allow Valeant to have better
returns (Wayne).
Valeants acquisition of Bausch & Lomb characterizes Pearsons
ability to look past the typical fields that pharmaceutical
companies operate in and explore niche products, within areas such
as dermatology and ophthalmology. Pearsons rollup strategy has
helped increase their earning power (Wayne). Valeant intends to
pursue more mergers and acquisitions in order to grow the company,
after they have successful adjusted to managing Bausch & Lomb.
One of Valeants many strengths lies within its ability to combine
its acquisitions successfully within their existing company.
Pearson states that "We certainly continue to explore, continue to
have discussions and we hope [mergers of equals] will eventually be
part of the playbook (Valeant).ValuationValuation Comparable
Companies ApproachBausch & Lombs Unique Profile
Bausch & Lomb is known for its high quality branded generics
and is a household name in the eye care industry for medical
consumables. The company has a large sales force and sells all of
its products directly to optometrists, which include contact
lenses, eye-care products such as contact solution, pharmaceuticals
e.g. medicines for various eye diseases and irritations, and
surgical products such as aids and implants. What sets Bausch &
Lomb apart from other healthcare companies in Biotech &
Pharmaceuticals is that it has been able to successfully
differentiate a branded generic in both developed and emerging
markets and at the same time manufacture medical supplies and
consumables. This gives the company much more stable cash flows
then traditional biotech and pharmaceutical companies, while still
requiring a much higher level of R&D than a medical equipment
company that sells commoditized products.
There are few publicly traded companies that are comparable to
Bausch & Lomb, given its unique profile and only one direct
competitor that sells medical consumables that address the market
in ophthalmology. We analyzed the different revenue segments of the
constituents of the healthcare supplies sub-industry, both along
product lines and geography to ensure that the companies we chose
were. We chose four companies whose operating profile matched
Bausch & Lombs and operated within the same GICS sub-industry,
which are The Cooper Companies, Inc., DENTSPLY International Inc.,
Essilor International SA and Coloplast A/S. (Appendix 7)The Cooper
Companies, Inc. (COO US Equity)
The Cooper Companies, Inc. develops, manufactures, and markets
specialty healthcare products specifically contact lenses and eye
care solution for the vision care market, as well as diagnostic
products, surgical instruments, and accessories for gynecologists
and obstetricians. Like Bausch & Lomb, they also sell directly
to optometrists and have a significant part of their revenue that
comes from outside North America.DENTSPLY International Inc. (XRAY
US Equity)
DENTSPLY International Inc. manufactures and distributes dental
supplies. The companys products include dental prosthetics,
endodontic instruments, dental sealants, ultrasonic scalers, dental
x-ray equipment, and intraoral cameras. DENTSPLY also provides
impression materials, orthodontic appliances, and other dental
products. Although DENTSPLY is more on the manufacturing side, a
quarter of its revenue comes from medical consumables and nearly
half from specialty dental products. DENTSPLY International has a
similar business model to Bausch & Lomb where it has a sales
force that sells directly to dentists. It has also been successful
in building a reputation for quality and differentiating products
with little intellectual property.Essilor International SA (XRAY US
Equity)
Essilor International SA is the leading manufacturer and seller
of plastic and glass ophthalmic lenses, i.e. eye-care glasses. The
company has a large international presence like Bausch & Lomb
with a focus outside the US and has successfully differentiated its
product by having higher levels of research and development than
its competitors. It was named the 28th most innovative company in
the world (Forbes).Valuation Approach
While selecting valuation ratios to try and estimate the
intrinsic value of Bausch & Lomb we chose to use ratios that
are agnostic to capital structure, such as EV/Sales, EV/EBITDA and
EV/EBIT, where EV is enterprise value or the total cost to acquire
the firm. We also used backward and forward looking financial
information e.g. NTM and LTM figures, where NTM is the next twelve
months or four quarters and LTM is the last twelve months or four
quarters. The range of multiples was the greatest for EV/LTM Sales
and EV/NTM Sales and was between 2.83x to 4.18x and 3.32x to 3.90x
respectively. The ranges were closer proportionally for EV/LTM
EBITDA and EV/NTM EBITDA at 14.69x to 15.32x and 13.37x to 15.04x
respectively and the tightest for the EV/LTM EBIT multiples at
19.41x to 20.35x and moderately close for NTM EBIT at 16.10x to
19.34x. Taking a simple average gives an implied enterprise value
of $12,103.41, which is 40% higher than the $8.7 billion paid by
Valeant. Given that most of the variance in the data is coming from
the EV/Sales estimates it makes sense to remove them, which gives a
lower intrinsic value of $11,283.99, which is still fairly high. By
dropping forward looking estimates taken from our financial and
relying solely on historical data, namely, EV/EBIT and EV/EBITDA we
arrive at a value of $8,806.63, which is in line with the price
paid by Valeant suggesting the target was fairly valued in the
acquisition. (Appendix 8)Valuation Discounted Cash Flow
Approach
Bausch & Lomb was a public company up until 2007 when
acquired by Warburg Pincus. It was then operating as a private
company until the Valeant purchase. Due to the acquisition by
Valeant, Bausch & Lomb had to file a Form S-1 with the SEC. It
was via this form that financial numbers for Bausch & Lomb were
available as the basis to construct a valuation
model.AssumptionsGrowth rate
Between 2010 and 2012, the growth rate for Bausch & Lomb
fluctuated between 7% and 10%. The assumption was made to use the
average, 8.5%, as the annual growth rate for this 5-year model.
(Appendix 9)Cost of Goods Sold (COGS)
Looking at the archival financial data from 2006, COGS was 44%
of sales then. In 2012, COGS was down to 38%. An assumption was
made that the COGS would continue to go down by 1-2% annually until
it reaches 31% in 2017. (Appendix 10)Selling, Admin, & General
Expenses (SA&G)
In 2006, SA&G was 43% of sales. By 2012, it had increased to
46%. Here, an assumption was made that SA&G would be reduced
due to the synergistic effect of merging Bausch & Lomb into
Valeant, and getting rid of redundant costs. In the first year
after the merger, SA&G would drop to 40% and then go down
annually by 1-2% until it reaches 35% of sales in 2017. (Appendix
9)Research & Development (R&D)
In 2006, R&D was 9% of sales, and in 2012 it was down to 7%
of sales. We assumed that moving forward, no changes would be made
to R&D and it would remain at 7% throughout the model and drop
to 6% in 2017, the last year of the valuation model. (Appendix
9)Depreciation & Amortization (D&A)
D&A was 6% of sales in 2006 and hadn't changed much by 2012,
at 7% of sales. An assumption was made that D&A would be
slightly higher due mainly to the increase in depreciation of
assets over the coming years, and it would rest at 9% of sales by
2017. (Appendix 10)Capital Expenditures (Capex)
CapEx went from 4% of sales in 2006 up to 7% of sales by 2012.
Due to the merging of the company and operating under the Valeant
umbrella, CapEx is assumed to remain constant to current values,
approx. 7% of sales. (Appendix 10)Change in working capital
Change in working capital was 1.5% of sales in 2012, and it is
assumed to remain steady around 1% of sales for the duration of the
valuation model. (Appendix 10)Tax rate
The tax rate for the company is 35%. In the financial
statements, there are sometimes provisions for income taxes, which
can skew the percentage (75% in one year). This was ignored for the
simplicity of the valuation model, as well as the unpredictability
of it for the upcoming years.Terminal rate
The rate used to calculate the terminal value is the industry
growth rate, which is approximately 3.5%. As the rate used for the
larger part of the valuation, it made more sense to use the
industry growth rate than the yearly growth rate, especially
considering the position of the firm on the life cycle curve by
2017 (more along the mature phase). (Appendix 9)Adjusted EBITDA
In the Form S-1 filed by Bausch & Lomb, there were
adjustments made to the EBITDA, such as with stock-based
compensations, goodwill impairment, litigation expenses, foreign
exchanges, etc. These adjustments usually boost the value of the
EBITDA upwards. For the sake of the credibility of the model, and
to have a conservative approach to the valuation of the firm, these
types of adjustments were not taken into consideration. (Appendix
9)Weighted Average Cost of Capital (WACC)
The WACC was calculated using the latest financial data
available from Valeant (2012). Looking at their long-term debt
($12.4B) and the amount of interest paid ($473M), a cost of debt of
3.8% was obtained. The tax rate of 35% was used in the calculation.
For the equity part, the market cap of $36.6B (latest figure as of
this writing) was used and the cost of equity was calculated using
the CAPM model, where the beta used was 1.37, the historical market
return used was 11.20% and the risk free rate used was 3.0%
(Bloomberg). Cost of equity was found to be 14.23%. The weight of
debt was 12.4/(12.4+36.6) = 25.31% and the weight of equity
100-25.31 = 74.69%. Using the WACC equation, the cost of capital
ended up being 11.26%. This is the discount rate that was used to
discount the free cash flow into net present values for the
valuation model. (Appendix 11)Enterprise Value
Using the aforementioned assumptions above, the valuation model
constructed resulted in an enterprise value of $9.322 Billion,
slightly above the paid price of $8.7 Billion for Bausch & Lomb
by Valeant. (Appendix 9)Risks
Valeant has multiple risks including competitive, tax-related,
debt-related risks and multiple other risks. This is mainly due to
the large number of acquisitions led by Valeant over multiple
years, starting with the acquisition of Biovail in 2010.
Subsequently, CEO Mike Pearson has led an average of 25
acquisitions per year with Bausch and Lomb being its largest
acquisition (Economist). As such, the potentially poor management
and transition of ownership could have a negative effect on the
remaining portions of the business. Following the acquisition,
Valeant must make investments into personnel and systems control
methods to ensure the proper procedures are in place to manage
growth.With Valeants focus on acquiring high-margin markets such as
dermatology and eye care, Bausch & Lomb was a strategic choice.
However, it is imperative that the company successfully integrates
the target. Once the target has been acquired, there are many risks
including excessive time-consumption towards achieving the expected
synergies. Furthermore, the potential synergies may have been
originally overvalued. There is a risk that the expected synergies
may not be realized. Some of the challenges of synergies
include:
Integrating personnel, operations and systems (although the main
focus of the organization must remain the sale and promotion of the
companys products) Geographic scattering of the organization (where
Valeant is Montreal based and Bausch and Lomb is based in
Rochester, New York) Distraction of employees from the companys
main activities Retaining customers that may feel uncomfortable
with the change of management (Heinick).
The risk of acquisition also includes concerns that the expected
business strategy may not materialize. It may also bring additional
competition, both due to the product range and the
multi-geographical company base (Annual Report). The main risks
associated with an acquisition are the subsequent synergies,
however risks such as tax risks due to the international expansion
and the governmental responsibilities must also be considered. The
debt risks have also changed as Moodys has downgraded Valeants
rating and therefore have higher covenants to meet. The increase in
debt levels to finance the acquisition could potentially lead to
further downgrading by Moodys, which would ultimately increase the
cost of debt. Valeant might have to find alternative ways to raise
capital if needed. With Valeant high indebtedness, any change in
LIBOR could greatly affect interest payments. This would
consequently affectthe companys stock price (Annual Report). As the
acquisition is expected to result in over $800 million in
synergies, there is a large employment related risk. The company
must retain and motivate the employees throughout the potential
budget cuts surrounding them. Employment related risks are a real
issue that the company must address continuously throughout the
transition process (Annual Report).Post-Merger Results
Following the merger, Valeant has gone through with the job cuts
and now expects that synergies will amount to $850 million instead
of $800 million. Furthermore, there has been an overall growth from
2012 to 2013 third quarter of 74% whereas its organic growth is of
only 4% (Q3 Results). Valeant executives also raised EPS guidance
by $0.05 within the Q3 report. Before the acquisition, Valeant had
a share price of $99.72. The share price as of November 27th is
$114.75, a 15% increase in share price within half a year
(Bloomberg).
Conclusion
With the acquisition of Bausch & Lomb, Valeant has continued
to do what they should do in order to thrive in their industry and
provide the best value to its shareholders: it elevated itself into
a new division which is part of a higher growth field.
Ophthalmology and eye care are fields that have experienced higher
growth than what Valeant has experienced in its core business. With
this acquisition, Valeant now positions itself as a major player in
the contact lens, ophthalmology, and eye care industries with a
7.8% market share from which to growth from. With such an
acquisition, Valeant has improved its position on the life cycle
curve, from a company with a more mature position, to now at more
of a growing position.
Valeant's 15% increase in stock price since the deal closed,
along with the upgraded expected synergies to $850 million instead
of $800 million show that this was a very smart deal for the
company. Our valuations have demonstrated that Valeant paid a fair
price for Bausch & Lomb and thus did not indebt themselves due
to an excessively high premium. What this has shown is that Valeant
has strategically used mergers & acquisitions to not only help
grow their business, diversify their offerings, cut costs, create
synergies, and position themselves in a better life cycle phase;
but they have shown that they have done so while doing what's best
for its shareholders by making these deals smartly by acquiring
high quality companies such as Bausch & Lomb, not overpaying
for them, synchronizing them efficiently with its core business and
thus providing value that helps maximize the return for its
investors.
AppendixAppendix 1 Industry Revenue Growth
Appendix 2 Industry Geographic Spread
Appendix 3 Industry Cost Structure
Appendix 4 Valeant Geographic Spread
Appendix 5 Deal Timeline
Appendix 6 Valeant Product Pipeline
Appendix 7 Comparable Companies Overview
Appendix 8 Comparable Companies Valuation
Appendix 9 Discounted Cash Flow Valuation
Appendix 10 Assumptions for DCF Valuation
Appendix 11 WACC Calculation
Works Cited
"About Valeant." About Valeant. N.p., n.d. Web. 2 Dec. 2013.
.
"Annual Report 2012 ." Valeant Pharmaceutics. N.p., n.d. Web. 2
Dec. 2013. .
Bausch&Lomb Holdings Incorporated, December 29, 2013 Form
S-1 (filed March 22, 2013).
http://www.sec.gov/Archives/edgar/data/1416436/000119312513122167/d502777ds1.htm.
Blackwell, Richard, Sean Silcoff, and Bertrand Marcotte.
"Valeant Pharmaceuticals eyes China with Bausch dealAdd to ...."
The Globe and Mail. N.p., 27 May 2013. Web. 2 Dec. 2013. .
Bloomberg L.P. (2013) Merger and Acquisition: Valeant and Bausch
and Lomb. Retrieved Nov. 5, 2013 from Bloomberg database.
Bloomberg L.P. (2013) Stock price graph for Valeant 01/01/13 to
11/20/13. Retrieved Nov. 20, 2013 from Bloomberg database.
Bloomberg L.P. (2013) Valeant Pharmaceuticals Rates. Retrieved
Nov. 20, 2013 from Bloomberg database.
Capital IQ:Valeant Pharmaceuticals, Capital IQ, Inc., a division
of Standard & Poor's.
Capital IQ:Bausch&Lomb, Capital IQ, Inc., a division of
Standard & Poor's.
Economist. "Shop 'til you drop." Economist. N.p., 1 June 2013.
Web. 2 Dec. 2013. .
Five Star Equities. "Mergers and Acquisitions on the Rise in
2013 as Big Pharma Companies Hold Record Amounts of Cash on
Hand."Yahoo Finance. Market Wired, 07 Feb. 2013. Web. 03 Dec.
2013.
Heinick, Rick. "Overcoming Merger Risks." Bloomber Business
Week. Bloomberg, 2 Dec. 2010. Web. 2 Dec. 2013. .
IBISWorld. Global Pharmaceutical & Medicine Manufacturing.
IBISWorld Industry Report, published May 2013.
http://0-clients1.ibisworld.com.mercury.concordia.ca/reports/gl/industry/default.aspx?entid=720.
Michom, Clive . "Warburg Pincus Hits Home Run : Sells Eye Care
Company Bausch & Lomb for $8.5 Billion Jewish Business News."
Jewish Business News RSS. N.p., 28 May 2013. Web. 2 Dec. 2013.
.
"Official Home Page : Bausch + Lomb." Official Home Page :
Bausch + Lomb. N.p., n.d. Web. 2 Dec. 2013. .
"Pipeline." Pipeline. N.p., n.d. Web. 2 Dec. 2013. .
"Reporter's Handbook: Key Industry and PhRMA Facts | PhRMA."
Reporter's Handbook: Key Industry and PhRMA Facts | PhRMA. N.p.,
n.d. Web. 2 Dec. 2013. .
Stoye, Emma. "Thousands face job cuts after Valeant's Bausch
buyout." RSC RSS. N.p., 30 July 2013. Web. 2 Dec. 2013. .
Trindade, Mariana, Chong-Kul Park, Devanshi Desai, and Fernando
Simon. "Mergers & Acquisitions Financial Advisory
Rankings."Bloomberg 2012 Annual Report(2012): n. pag.Bloomberg.
Web. 02 Dec. 2013. .
"Valeant Pharmaceuticals Announces Closing of Public Offering of
Common Shares." Valeant -. N.p., 24 June 2013. Web. 2 Dec. 2013.
.
"Valeant Pharmaceuticals Announces Exercise Of Over-Allotment
Option." Valeant -. N.p., 20 June 2013. Web. 2 Dec. 2013. .
"Valeant Pharmaceuticals Announces Pricing Of Private Offering
Of Senior Notes." Valeant -. N.p., 27 June 2013. Web. 2 Dec. 2013.
.
"Valeant Pharmaceuticals International, Inc. Completes
Acquisition Of Bausch + Lomb." Valeant -. N.p., 6 Aug. 2013. Web. 2
Dec. 2013. .
"Valeant Pharmaceuticals International, Inc. To Acquire Bausch +
Lomb For $8.7 Billion." Valeant -. N.p., 27 May 2013. Web. 2 Dec.
2013. .
"Valeant Pharmaceuticals Reports 2013 Third Quarter Financial
Results." Valeant -. N.p., n.d. Web. 2 Dec. 2013. .
"Valeant to cut as much as 15% of jobs after Bausch + Lombdeal."
Financial Post Business Valeant to cut as much as 15 of jobs after
Bausch + Lombdeal Comments. N.p., 29 July 2013. Web. 2 Dec. 2013.
.
Wayne, Alex. "Valeant Agrees to Buy Bausch & Lomb in $8.7
Billion Deal." Bloomberg.com. Bloomberg, 28 May 2013. Web. 2 Dec.
2013. .Sheet1Bausch & Lomb ValuationBausch & Lomb
Valuation12345201220132014201520162017TerminalSales$3,038$3,296$3,576$3,880$4,210$4,568COGS$1,162$1,187$1,252$1,319$1,389$1,416SA&G$1,410$1,318$1,359$1,436$1,516$1,599R&D$227$231$250$272$295$274Operating
income$239$560$715$854$1,010$1,279
Taxes$84$196$250$299$354$448add
deprec.$213$264$286$310$379$411CAPEX$213$231$250$272$295$274Working
Capital$46$33$36$39$42$46
Free Cash
Flow$110$364$465$555$699$923$12,307NPV$327$376$403$456$541$7,219Enterprise
Value9,322
Depreciation-to-Capex
ratio100.00%114.29%114.29%114.29%128.57%150.00%Depreciation$213$264$286$310$379$411CAPEX$213$231$250$272$295$274ArchivalActualAssumptions%
of
sales2006201220132014201520162017COGS44%38%36%35%34%33%31%SA&G43%46%40%38%37%36%35%R&D9%7%7%7%7%7%6%Depreciation
& Amo6%7%8%8%8%9%9%Capex4%7%7%7%7%7%6%Change working
cap-1.5%1%1%1%1%1%
Tax rate35%35%35%35%35%35%35%
Growth rate8.5%WACC11.26%Terminal growth:3.5%Wacc
Calculation:Long term Debt$12,410,229,000.00Interest
paid$473,396,000.00Cost of debt3.8%Beta1.37Historical Rm11.2%Risk
Free Rate Rf3.0%Cost of Equity14.23%Total
Equity$36,600,000,000.00Weight of Debt25.32%Weight of
Equity74.68%WACC11.26%
Sheet2
Sheet3
Sheet1Bausch & Lomb ValuationBausch & Lomb
Valuation12345201220132014201520162017TerminalSales$3,038$3,296$3,576$3,880$4,210$4,568COGS$1,162$1,187$1,252$1,319$1,389$1,416SA&G$1,410$1,318$1,359$1,436$1,516$1,599R&D$227$231$250$272$295$274Operating
income$239$560$715$854$1,010$1,279
Taxes$84$196$250$299$354$448add
deprec.$213$264$286$310$379$411CAPEX$213$231$250$272$295$274Working
Capital$46$33$36$39$42$46
Free Cash
Flow$110$364$465$555$699$923$12,307NPV$327$376$403$456$541$7,219Enterprise
Value9,322
Depreciation-to-Capex
ratio100.00%114.29%114.29%114.29%128.57%150.00%Depreciation$213$264$286$310$379$411CAPEX$213$231$250$272$295$274ArchivalActualAssumptions%
of
sales2006201220132014201520162017COGS44%38%36%35%34%33%31%SA&G43%46%40%38%37%36%35%R&D9%7%7%7%7%7%6%Depreciation
& Amo6%7%8%8%8%9%9%Capex4%7%7%7%7%7%6%Change working
cap-1.5%1%1%1%1%1%
Tax rate35%35%35%35%35%35%35%
Growth rate8.5%WACC11.26%Terminal growth:3.5%Wacc
Calculation:Long term Debt$12,410,229,000.00Interest
paid$473,396,000.00Cost of debt3.8%Beta1.37Historical Rm11.2%Risk
Free Rate Rf3.0%Cost of Equity14.23%Total
Equity$36,600,000,000.00Weight of Debt25.32%Weight of
Equity74.68%WACC11.26%
Sheet2
Sheet3
Sheet1Bausch & Lomb ValuationBausch & Lomb
Valuation12345201220132014201520162017TerminalSales$3,038$3,296$3,576$3,880$4,210$4,568COGS$1,162$1,187$1,252$1,319$1,389$1,416SA&G$1,410$1,318$1,359$1,436$1,516$1,599R&D$227$231$250$272$295$274Operating
income$239$560$715$854$1,010$1,279
Taxes$84$196$250$299$354$448add
deprec.$213$264$286$310$379$411CAPEX$213$231$250$272$295$274Working
Capital$46$33$36$39$42$46
Free Cash
Flow$110$364$465$555$699$923$12,307NPV$327$376$403$456$541$7,219Enterprise
Value9,322
Depreciation-to-Capex
ratio100.00%114.29%114.29%114.29%128.57%150.00%Depreciation$213$264$286$310$379$411CAPEX$213$231$250$272$295$274ArchivalActualAssumptions%
of
sales2006201220132014201520162017COGS44%38%36%35%34%33%31%SA&G43%46%40%38%37%36%35%R&D9%7%7%7%7%7%6%Depreciation
& Amo6%7%8%8%8%9%9%Capex4%7%7%7%7%7%6%Change working
cap-1.5%1%1%1%1%1%
Tax rate35%35%35%35%35%35%35%
Growth rate8.5%WACC11.26%Terminal growth:3.5%Wacc
Calculation:Long term Debt$12,410,229,000.00Interest
paid$473,396,000.00Cost of debt3.8%Beta1.37Historical Rm11.2%Risk
Free Rate Rf3.0%Cost of Equity14.23%Total
Equity$36,600,000,000.00Weight of Debt25.32%Weight of
Equity74.68%WACC11.26%
Sheet2
Sheet3
