Passionate Investing

Some recent drug news has been of interest to both the business press and late-night comedians: a new pill to enhance female libido that some are calling Viagra for women.

On Tuesday, Sprout Pharmaceuticals received approval from the U.S. Food and Drug Administration on its New Drug Application for flibanserin, which will be marketed as Addyi in the U.S. Addyi has demonstrated improvements in desire for sex, reducing distress from the loss of sexual desire and increasing sexual satisfaction in women.

And just this morning, Valeant Pharmaceuticals International (NYSE: VRX) and Sprout announced that they have entered into a definitive agreement under which a wholly-owned subsidiary of Valeant will acquire Sprout, on a debt-free basis, for approximately $1 billion in cash, plus a share of future profits.

But so far this summer the stock has been sliding; some analysts may have believed its price-earnings ratio had gotten too high (it is over 90). But with this new growth announcement and a promising strategy for its existing product line, the company is due for an upswing in its share price.

Valeant’s Chief Executive Officer, J. Michael Pearson, said, “Delivering a first-ever treatment for a commonly reported form of female sexual dysfunction gives us the perfect opportunity to establish a new portfolio of important medications that uniquely impact women. We applaud the efforts of the Sprout team to address this important area of unmet need and look forward to working with them to bring the benefits of Addyi to additional markets around the world.”

Valeant has been one of the most aggressive companies in its sector in terms of growing through acquisition. The Canadian pharmaceutical giant was involved in a fascinating takeover battle for Allergan Inc. (NYSE: AGN). That deal did not work out, but this new acquisition promises to raise Valeant’s profile higher than it already was.

The focus of the Montreal-based company is on neurology, dermatology and infectious disease with several drugs in late-stage clinical trials and several currently on the market. In addition, Valeant has a portfolio of more than 500 products from its prior history as a group of specialty chemical and radio-chemical research, development and supply companies with a history stretching back to the 1960’s.

Valeant sells a wide range of drugs, including over-the counter medications and medical devices, as well as prescription drugs such as the well-known antidepressant Wellbutrin XL. Kinerase, which uses kinetin as active ingredient, is one of its most popular products.

An important part of the growth strategy for Valeant has been acquisitions, sometimes in the multi-billion dollar range, of medical and pharmaceutical companies. As of May 2015, the company was valued at $30.5 billion, making it the 16th largest public company in Canada. It’s also the largest pharmaceutical company in Canada.

You may not have heard of Valeant, but you’ve almost certainly heard of Bausch & Lomb, the well-known eye care company. Valeant acquired Bausch & Lomb in 2013 and has integrated it well into its existing marketing and production processes.

Valeant was founded as a United States business. It has undergone major management, operational and strategic restructurings since the 1990s when shareholders of several group units approved the merger of ICN Pharmaceuticals (founded by Milan Panic), ICN Biomedicals, SPI Pharmaceuticals and Viratek into a new global entity, ICN Pharmaceuticals, the immediate forebear of Valeant.

“Valeant delivered exceptional results for the second quarter and exceeded our expectations on all key metrics,” stated Pearson. “With our acquisition of Bausch + Lomb now annualized (August 5) and the impact of generics largely behind us, the true strength of our business and operating model can be clearly seen by our financial results. We are particularly pleased to deliver over $600 million in GAAP operating cash flow to our shareholders.”

Valeant already had a strong market position, and it just got stronger. It’s a buy up to 270.

Tom Scarlett is an investment analyst with Personal Finance.