Revenue and stock value–along with debt–continue to climb for a Montreal-based company determined to become one of the five biggest drug companies in the world.
Valeant Pharmaceuticals’ revenues totalled $3.7 billion U.S. for the first nine months of 2013, 45 per cent more than the same period in 2012. Meanwhile its stock price has more than doubled in the last year.
But its long term debt has been mounting steadily too, rising 62 per cent in the first nine months of 2013 to over $17 billion.
It all traces back to what Aegis Capital analyst Raghuram Selvaraju calls “a buying spree of monumental proportions.”
That spree included the purchase of eye health company Bausch and Lomb for $8.7 billion and medical device systems maker Solta Medical for $250 million in the last year.
If interest rates stay low, Valeant can comfortably keep borrowing money to fund the acquisition streak it hopes will launch it into the ranks of the world’s five most valuable pharmaceutical companies by 2016, Selvaraju said.
Some are concerned a change in interest rates could spell disaster for the company, though. Such a rise would make it harder for Valeant to raise the funds it needs to keep up its expansion, Selvaraju said.
“In recent months the company has faced some criticism for the high debt that it insists on carrying in order to fund all of these acquisitions,” Selvaraju said in a phone interview.
But with revenues high and interest rates low, at least for now, that criticism hasn’t been reflected in the company’s stock prices.
Only a hike in interest rates will make Valeant feel the weight of its debts, Selveraju said. “If long term interest rates start to spike, the party’s over.”
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Valeant will also have to keep its effective tax rate low to maintain its acquisition streak. Selvaraju said that rate was 2.8 per cent in the third quarter of 2013, well below Canada’s 15 per cent corporate tax rate.
“That’s another reason why shareholders love this company,” Selvaraju said.
The company keeps taxes low by spreading its operations across various jurisdictions worldwide, including several with extremely low corporate taxes, Selvaraju said.
“This is a company that moves ahead of the tax authorities very aggressively,” Selvaraju said. He said you’d need a PhD in tax law to understand the company’s tax-management system. He’s confident that system will succeed in keeping Valeant’s tax rate low “for at least the next five years.”
That’s good news for investors, since a low tax rate is a big part of what is making Valeant’s revenues climb. It’s the other crucial factor, along with low interest rates, in the company’s success. Valeant’s low tax rate means it can lay out huge sums to acquire a company and then reap more revenue from it than the company was making before being sold.
“Every time Valeant acquires a company, the cash flows associated with the products of that company wind up being taxed at Valeant’s lower effective tax rate, as opposed to the effective tax rate that was being applied to them before. That effectively makes the cash flows associated with companies that Valeant acquires two-to-three times more profitable immediately after the acquistion is closed,” Selvaraju said.
With some major acquisitions under its belt and an expansion strategy investors appear confident in, Valeant seems poised for its biggest-ever takeover. There’s widespread speculation that the company is eyeing a merger of equals in the near future. Selvaraju said Aegis Capital’s top choice is for Valeant to merge with Isreal’s Teva Pharmaceutical Industries Ltd.