Valeant Remains On Prowl For Deals After Losing Cephalon

Valeant Pharmaceuticals International Inc.'s (VRX) failure to reel in Cephalon Inc. (CEPH) earlier this year hasn't stopped the Canadian drug maker from aggressively casting for more acquisitions.

The Wall Street Journal reported Tuesday Valeant has made a takeover approach for Swedish specialty drug maker Meda AB (MEDA-A.SK), a deal that could be worth more than $4 billion if consummated. Meda said Wednesday its board hasn't received such an approach. A spokeswoman for Valeant, which licensed North American rights for two drugs from Meda last month, declined comment.

This month alone, Valeant has agreed to shell out a combined $770 million for certain dermatology drugs from Johnson & Johnson (JNJ) and Sanofi-Aventis SA (SNY), including treatments for acne and fungal infections.

It's all part of Valeant's effort to differentiate itself by acquiring older drugs for diseases that aren't in the crosshairs of larger companies like Pfizer Inc. (PFE), and doing it on the cheap--with a low tax base and minimal spending on marketing and research and development.

It's a disruptive strategy that has drawn fans among investors frustrated by a decade of relatively weak output from the research labs of major drug makers. Valeant shares have doubled so far this year, on Wednesday rising 0.7% to $56.10.

"It's based on trying to do things differently than large pharma companies," Valeant Chief Executive J. Michael Pearson said in an interview before the report of the interest in Meda. "As a smaller company, the one thing I didn't want to do was compete against them. Our whole strategy is based on creating value for shareholders in areas that the large players in the industry aren't focused on."

Since Pearson joined the company in 2008, Valeant has made about 30 deals to build up a portfolio of drugs mainly for two disease areas: skin-related and neurological conditions.

In some cases, the sellers no longer actively promote these drugs because they have either lost patent protection or are nearing patent expirations, limiting prospects for sales growth, Pearson said.

Valeant tries to create incremental sales growth--and cost savings--by having its relatively small sales force promote a half-dozen such drugs to doctors, rather than two or three products that many Big Pharma sales reps promote.

"Are we going to get huge growth? Probably not," Pearson said. "We're not looking for the next Lipitor," he added, referring to Pfizer's blockbuster cholesterol drug. But he is looking for products that throw off steady amounts of cash, which can be returned to shareholders through stock buybacks.

Valeant also has no intention of inventing the next Lipitor in its R&D labs. The company spent roughly 5% of total sales on R&D last year, versus more than 20% for some big drug makers. "That's not one of our core capabilities," Pearson said, a contrast to companies including Merck & Co. (MRK), which defends its multibillion-dollar R&D budget as being essential to future medical advances and company success.

Valeant grabbed the spotlight earlier this year when it made an unsolicited, $5.7 billion bid for Cephalon, considered by many observers to be a low-ball offer. Pearson vowed to sell off much of Cephalon's R&D pipeline and other parts of the business that didn't fit Valeant's strategy.

Cephalon ultimately spurned Valeant in favor of a more generous, $6.8 billion bid from Teva Pharmaceutical Industries Ltd. (TEVA), but Valeant--and its stock price--took the loss in stride.

The offer signaled to many investors that Valeant was on the prowl for beaten-down assets, and that it would slash R&D and marketing expenses at its targets, helping its earnings growth.

"We actually look for companies that have some difficulties we think we can fix," said Pearson, a veteran of consulting firm McKinsey & Co. before joining Valeant.

This approach, in turn, has helped prop up the valuations of other midsized specialty-pharmaceutical companies including Endo Pharmaceuticals Inc. (ENDP) and Cubist Pharmaceuticals Inc. (CBST). Investors have speculated they could either become takeover targets or cut costs in moves closer to Valeant's strategy.

"Time will tell whether our strategy and approach will work," Pearson said. "So far it's worked OK."

-By Peter Loftus, Dow Jones Newswires; 215-982-5581; [e-mail]