Having established a goal of five new ex-U.S. acquisitions or partnerships in 2011, Valeant Pharmaceuticals International, Inc., got off to a quick start with a Feb. 1 proposal to purchase PharmaSwiss S.A., a privately held branded generics and over-the-counter products firm.

Based in Zug, Switzerland, and with operations in much of Central and Eastern Europe, PharmaSwiss will cost Valeant €350 million (about $480 million).

Created by the $3.3 billion reverse-merger of Valeant and Biovail Corp. last June, Valeant completed eight acquisitions worth a total of about $450 million in 2010, CEO Michael Pearson said during an investor call Jan. 6 ([See Deal]).

Pearson seemingly alluded to the PharmaSwiss deal during that call, setting the goal of five ex-U.S. acquisitions and partnerships for 2011, including one of "significant" size, defined as between $200 million and $500 million. Valeant, based in Mississauga, Ontario, Canada, hopes to develop a business mix with at least half of its portfolio outside the United States, he said.

"We just think that's a better balance in terms of diversified portfolio. Also, none of us know what's going to happen in the next few years in terms of health care reform in the U.S.," he said, ruling out, however, another Biovail-type deal.

PharmaSwiss brings Valeant a broad product portfolio across seven therapeutic areas, with operations in 19 countries, highlighted by Poland, Hungary, the Czech Republic, Serbia, Greece and Israel. It posted revenues of roughly €180 million (about $250 million) in 2010, and its growth rates over the past five years have averaged 20%.

"This is a significant acquisition, as PharmaSwiss more than doubles Valeant's existing branded generics business in Europe," wrote Jefferies & Company analyst Corey Davis in a Feb. 1 note.

Since Pearson assumed the helm of Valeant in February 2008, the company has built a niche among specialty pharma companies by expanding both geographically and by product into small but undervalued markets. In Europe, for example, its biggest market is Poland, where sales of branded generics are rapidly growing.

At the same time, PharmaSwiss' geographic reach, importantly, has established it as the "partner of choice," according to Davis, of blue-chip biopharmaceutical companies wishing to enter the Central and Eastern European markets without the cost of building their own commercial infrastructure in such locations. The company's commercialization partners include Pfizer, Inc., Eli Lilly & Co., Bristol-Myers/Squibb, Astellas Pharma and Amgen.

Infrastructure Benefits: New Horizons, Better Margins

PharmaSwiss' commercial infrastructure offers Valeant multiple benefits, said UBS Investment Research analyst Marc Goodman in an interview. As part of the deal, the PharmaSwiss senior management team will remain in place, led by CEO Pavel Mirovsky, with a plan to gradually combine Valeant's Europe-based business into PharmaSwiss.

"By getting that broadened infrastructure, now Valeant can take some of its own products and push them through that infrastructure," Goodman explained. "In addition, by keeping the previous management a part of the company, they will continue to do the business model of working with other companies ... It's a huge opportunity to continue on with that business model. And it's growth in areas where Valeant wants to be ... Eastern Europe."

"The other [benefit] is that [with] the infrastructure in place," he continued, "as you drive more products through these areas, you're going to get margin expansion. If you look at the EBIT [earnings before interest and taxes] margin of what this business used to do, it should be getting better."

Valeant has also focused heavily on improving its tax rate. A big driver behind the Valeant/Biovail merger, for example, was tax benefits, both from excess net operating losses from operations in Canada and performing intellectual property development and management in Barbados, which offers a very low tax rate (Also see "Can't Please Everybody: FDA's "Brief Summary" Redesign May Require Flexibility" - Pink Sheet, 21 June, 2011.).

Setting up European operations in Switzerland will offer Valeant the chance to take advantage of that nation's low rates, below 10% according to Goodman.

"The structure, going through Switzerland, actually helps the tax rate dramatically," he noted. "When you combine it obviously with the broader organization and you start to drive new [initiatives] through Switzerland - now they've got both Barbados and Switzerland to drive businesses through to help with the tax rate. I think that having both is going to be helpful."

Valeant isn't the first U.S. specialty pharma to buy a Swiss generics house - in order to obtain a platform for moving into Eastern Europe; in February2010, Cephalon bought Swiss-based, family-owned Mepha Holdings AG, for $587 million, about 1.5 times sales. The deal enabled Cephalon to diversify geographically and by product line; in addition, the Swiss location provided tax advantages (Also see "Cephalon Buys Swiss Generics Firm Mepha, Talking Up Diversification" - Pink Sheet, 1 February, 2010.

A company release quoted Valeant CEO Pearson as saying that the acquisition is expected to close in the first or second quarter of 2011 and be accretive to earnings immediately. PharmaSwiss has €38 million cash on its books, so the transaction will have a net cost of €312 million. In addition, PharmaSwiss stockholders, which include HBM BioVentures (Cayman) Ltd. and Polish Enterprise Fund VI, could earn contingent value right payments of up to an additional €30 million.

No further details were available on the CVR, but Goodman speculated that the payment would be sales-goal based. "Our best guess is that is has to do with the achievement of some goals," he said. "I'm sure those goals are either top-line or margin-related, or both."

-Joseph Haas (j.haas@elsevier.com)

Valeant Continues Its Expansion With Acquisition Of PharmaSwiss

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