After Allergan loss, is Valeant dumpster diving?

J. Michael Pearson, Chairman of the board and Chief Executive Officer of Valeant Pharmaceuticals International Inc., waits for the start of their annual general meeting in Laval, Quebec
J. Michael Pearson, Chairman of the board and Chief Executive Officer of Valeant Pharmaceuticals International Inc., waits for the start of their annual general meeting in Laval, Quebec May 20, 2014. Canada's Valeant Pharmaceuticals International Inc said it will not make an all-cash bid for drugmaker Allergan Inc as many had expected last week when the company said it would improve its cash and stock offer for the Botox maker. REUTERS/Christinne Muschi (CANADA - Tags: BUSINESS HEALTH) - RTR3Q13S
Photograph by Christinne Muschi — Reuters

Fresh off its failed bid to acquire Allergan, Valeant Pharmaceuticals has found a new target. In the first deal it has announced since unsuccessfully attempting to buy the maker of Botox, Valeant said late Thursday that it has agreed to purchase the bankrupt biotech firm Dendreon Corp. (DNDN) for $296 million in cash.

Valeant’s (VRX) modus operandi has long been to buy other drug companies to grow its own portfolio, rather than spend a lot developing its own pipeline. But the Dendreon purchase surprised some market watchers, partially because Valeant is taking a totally different tack than it did with Allergan (AGN). For one, the Dendreon deal is much smaller—a drop in the bucket compared to Valeant’s $54 billion offer for Allergan, which Actavis (ACT) acquired for $66 billion in November.

And while Allergan was considered a high-quality pharmaceutical firm with lucrative products, Dendreon is quite the opposite: The company entered bankruptcy in the fall after sales of its flagship immunotherapy treatment for prostate cancer, Provenge, apparently fell short of its development costs.

Indeed, Valeant’s deal with Dendreon is complicated by the bankruptcy proceedings: Valeant has essentially claimed the rights to take first dibs at an auction of Dendreon’s assets, including Provenge, in what’s considered a “stalking horse bid.” That means it could still lose to a higher bidder, but if that happens, Dendreon will owe Valeant a fee.

On the surface, Valeant’s move appears to be just the sort of vulture behavior of which Allergan repeatedly accused it during the takeover battle, alleging in legal documents that Valeant was trying to “pillage Allergan.”

But some analysts say that Valeant is just thinking more like Wall Street than your typical pharmaceutical company—shrewdly scooping up valuable assets at fire-sale prices. In fact, Valeant is paying less for Dendreon than the $300 million Provenge fetched in sales in 2014—and that doesn’t even count revenue from Dendreon’s other products, meaning Valeant would basically get those for free.

At that bargain price, Valeant will make money on the deal even if Provenge sales don’t increase at all, and still break even if sales decline, according to Evercore ISI analyst Umer Raffat. And because Provenge is just filtering into the European market, Raffat thinks Valeant could eventually reap more than $1 billion from the acquisition.

It may help that Jeffrey Ubben of ValueAct Capital, a successful activist investor with a big stake in Valeant, sits on its board, says Ken Squire, who tracks shareholder activism and manages the 13D Activist Fund, a mutual fund that currently owns Valeant.

“It’s like having your own investment banker on your board,” Squire says. “But in this case, their interests are totally aligned with Valeant and its shareholders, whereas an [actual] investment banker just wants to get paid.”

So far, Valeant’s eye for treasure among other people’s trash seems to be paying off for its shareholders: Since abandoning its Allergan takeover attempt in November, Valeant’s shares have risen 17%.

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