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Deal maker Valeant reaches for biggest prize yet

By Rod Nickel and Jessica Toonkel

WINNIPEG/NEW YORK (Reuters) - After five years and some 60 deals that have turned Valeant Pharmaceuticals International Inc into a stock market darling with a market capitalization of $22 billion, Chief Executive Michael Pearson still has some surprises up his sleeve.

One was the Canadian drugmaker's pursuit of U.S.-based generic pharmaceutical company Actavis Inc , a prize worth more than $13 billion that would be both Valeant's biggest deal by far and a move into less familiar territory.

The deal stalled after the companies failed to agree on terms, people familiar with the situation said. An Actavis spokesman declined to comment and Valeant did not respond to inquiries. It was not clear if the deal could be revived.

Montreal-based Valeant, known for prescription drugs such as anti-depressant Wellbutrin and over-the-counter remedies such as Cold-FX, has built up its dermatology and anesthetics portfolio in a dozen deals in the past year, most recently for Obagi Medical Products.

When Canada's Biovail Corp acquired California-based Valeant in 2010 for $3.3 billion, assuming its name but keeping the head office in Canada, the deal signaled the brisk pace of M&A that was to follow.

Pearson, a former director at consulting firm McKinsey & Co and a proud Eagle Scout, the highest rank in the Boy Scouts program, left McKinsey to become Valeant CEO in 2008 and quickly began snapping up dermatology products like sunscreen and anti-aging items in a plan with aggressive revenue growth targets.

He tapped Howard Schiller, a former chief operating officer of the investment banking division at Goldman Sachs , to be his chief financial officer in 2011, a move that has helped Valeant's acquisitive strategy.

"I am pleased with what we have achieved ... but will not be satisfied until we join the ranks of the true industry leaders," Pearson said in the company's 2012 annual report.

"He (Pearson) seems to be going for scale," said a banker involved in the health care sector, although not the Valeant-Actavis talks. "Valeant isn't only about racking up deals. They've also done a pretty decent job at integrating their acquisitions."

But at least one investor, High Pointe Capital Management, a Chicago-based investment management firm that has slightly less than a 1 percent stake in the company, would not be disappointed if the Actavis deal does not happen.

"I would like Valeant to focus on deals that are similar to the deals done in the past, which were mid-sized but have bigger cost-cutting opportunities," said Gautam Dhingra, a portfolio manager with High Pointe. "This (Actavis) deal would have limited its growth because the company would be too large."

But others said a big deal may not be off the table, even if Actavis is no longer a target.

"This provided a glimpse into the size and type of deal Valeant is considering," Stifel analyst Annabel Samimy said. "That Valeant had considered a leading generics and specialty brands company rather than another deal in the various areas of its expertise further suggests that any company could be on the table, not strictly those in its known wheelhouse," she wrote in a note to clients.

Valeant's stock price has doubled in the past 18 months to around $76 in New York, and Actavis is up more than 40 percent in the past year to around $104.88.

On Monday, Valeant and Actavis shares notched gains of 3.8 percent and 4.6 percent, respectively, reflecting the deal talk. On Tuesday afternoon, both stocks were little changed.

Valeant's rise, unusual for a company poised for a costly deal, reflected confidence that the deal would add to earnings if it can be revived, said Morningstar analyst David Krempa, noting that Valeant has proven efficient at integrating its acquisitions and squeezing out synergies.

Typically, Valeant buys a product or company, shuts down or downsizes research and development, and focuses on sales.

"They don't want to take the risk of R&D. They'd rather buy an existing product that's already approved (by regulators), rather than swinging for a home run," Krempa said.

"They'd rather get a reliable single or double."

GENERIC DRUG PROFITS TO GROW

Actavis seems to be anything but a safe, simple play, but there's a reason it landed in Valeant's cross-hairs.

Generic drugmakers are expected to profit immensely as several top-selling branded medications lose patent protection between now and 2016. Generic drugs often sell at a fraction of the branded drug's price, but are typically more profitable products.

And while there is limited overlap between the two businesses, tax synergies could have boosted profits.

If Valeant can fit Actavis under its lower, Canadian tax structure, a merger could take the Actavis tax rate from well over 20 percent down closer to Valeant's 5 percent, said Gabelli & Co analyst Kevin Kedra.

"That creates a lot of earnings power that you can get out of the combined business," he said.

Valeant aims to expand annual revenue from $3.5 billion last year to $10 billion or $20 billion in the near future, Pearson says.

In any case, Valeant isn't the kind of company to wait, said Kedra. "When they see something they want, they go for it and they usually act quickly ... or they walk away quickly," he said.

(Additional reporting by Soyoung Kim and Bill Berkrot in New York, Ben Hirschler in London, Esha Dey in Bangalore and Euan Rocha in Toronto; editing by John Wallace)

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