The great thing about takeover battles in the US is that they are so much more interesting than they are in the UK. In contrast to the polite press releases that accompanied Pfizer’s recent unsuccessful attempt to buy AstraZeneca, Valeant’s ongoing efforts to get hold of Allergan have been accompanied by unrestrained mud-slinging on both sides, combined with that great US tradition – litigation. While Allergan has claimed that Valeant has a flawed business model that produces no organic growth and that the huge ‘synergy benefits’ that Valeant expects to generate are unachievable without damaging the future prospects of the Allergan operation, Valeant has countered that Allergan is massively inefficient and that its own way of doing business, far from being flawed, not only does create growth but also represents the way of the future in an increasingly cash-constrained world. Consequently, it argues, Allergan’s shareholders would be better holding stock in Valeant (the current offer on the table is more stock than cash) than in Allergan.
So, which of these interpretations of Valeant’s – definitely novel – way of doing business is correct? Or more correct, since we can presumably take the statements of the two companies to represent extreme interpretations, with the truth somewhere in the middle? The heart of the matter is definitely the question of organic growth. Valeant imposes drastic cost-cutting on the companies that it buys, such that profits growth in the first couple of years is just about guaranteed, but by stripping out R&D expenses in particular, is it robbing these businesses of the ability to generate longer term growth driven by sales? Because Valeant is a serial acquirer of companies, tracking organic growth is – conveniently – almost impossible to do by looking at the company’s accounts from the outside. However, one way to answer the question is to consider the IMS data for the company. IMS operates such that whenever one company buys another, the products of the latter are re-assigned to the former, not from the moment of acquisition, but back-dated to the start of the database. In other words, IMS only ever shows organic growth. Admittedly, a proportion of Valeant’s sales come from OTC products which do not show up in IMS’s database, so this analysis is not going to be complete, but it can definitely tell us something.
Considering the IMS data for the three year period 2011-13, we see a business that has grown by a total of 1.5% in value terms and 2.6% in volume, declining slightly (in value) in 2012 and then picking up again in 2013. From a country perspective, there has been slightly higher volume growth in the US than elsewhere, but the performance is generally mixed across the company’s top markets. It should be noted that IMS is not very good at capturing gross-to-net and that the sales values that it records are therefore much more accurate for innovative products (which have low discounts attached to them) than for generics (where discounts are high). This being so, Valeant’s value growth is probably being over-stated, since a deeper look into its growth areas shows that they are predominantly generic products.
One of Allergan’s main accusations was that any growth at B&L and Medicis, Valeant’s two biggest acquisitions to date, is coming from price increases rather than volume, but the IMS data does not entirely back this up. Total Bausch and Lomb sales are recorded as rising by 6.2% in volume and 2.5% in value over the last two years, with growth ex-US offsetting a sharp drop of 8.5% in US sales, which in turn was mainly due to sales of B&L’s leading product, Xibrom, declining by 20% in value (and 35% in volume – so price rises did soften the blow). Medicis, on the other hand, has seen sales decline by a massive 55% in volume terms and 33% in value over 2011-13 – a pretty catastrophic performance by any standards. IMS also shows that Valeant has been pushing through steep price increases in its core US Valeant Pharma business, as well as in some of its overseas markets such as Russia and Poland. Allergan questions the sustainability of this (in the US, at any rate) and it may have a point, although US health insurers have been relatively tolerant of price rises to date. We have more concerns over the situation outside the US, particularly Poland, where IMS shows a dramatic drop in sales volumes over the last two years, which has just about been balanced out by price rises. Russia is also one to watch, given the recent decline in the value of the rouble, which somewhat surprisingly does not appear to have impacted Valeant to date, despite a number of its competitors reporting lower sales as a result.
In its riposte to Allergan, Valeant held an investor event at which it showcased the management of all its main businesses and regions, each of which is claimed to be growing at a respectable rate. In most cases, these claims are not borne out by the IMS data. For instance, Valeant said that organic growth at Bausch & Lomb had increased from 4% to 10% since acquisition, whereas, as mentioned above, IMS shows that B&L’s sales have hardly increased at all. Similarly, Valeant claimed that its Polish business grew 25% in 2012 and 23% in 2013, making total growth of 53% over the two years, with organic growth of around 9%, whereas IMS shows value growth of just 3.8% over the two years, with volumes actually falling by 21%. In Russia, the IMS data more closely bears out the Valeant claim of organic sales growth of around 19%, but with the caveat that volume sales have been falling sharply, leaving the company heavily reliant on price rises. Price rises have also been key in western Europe, where the overall picture is of sales of the vast majority of products falling sharply following Valeant’s acquisition of B&L (Valeant didn’t have a west European business prior to this) with one or two growing brands managing to keep overall revenues flat in value terms.
Turning back to B&L, we note that IMS shows that the bulk of the recently-launched products in the division – which are providing the offset to the declining leading brands – are generics. This is entirely consistent with the R&D strategy outlined by Valeant, but not with a sustainable growth strategy, since the generics that Valeant is bringing to market are not particularly differentiated and will generally have plenty of competition. This means that Valeant is going to need a lot of them in order to maintain any sort of growth rate, but only if it actually cares about what happens over the longer term, which it may not. In recent weeks, Valeant has announced a number of asset disposals, particularly of declining brands, suggesting that we may be seeing the start of a new phase in the company’s development; one in which it attempts to sell its historically-acquired companies at a profit. Indeed, if it can’t take over Allergan (and Valeant’s falling share price is making the offer to Allergan’s shareholders look less attractive by the day), asset sales may be the only option to keep the banks happy, suggesting that, paradoxically, it is Valeant’s shareholders that need Allergan, not the other way round.