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Bausch & Lomb Purchase Highlights Value-Creation Ability of Valeant's Moat

Ophthalmology will be more challenging for Valeant than dermatology, but the deal is highly accretive.

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With the acquisition of Bausch & Lomb,  Valeant Pharmaceuticals (VRX) is jumping headfirst into ophthalmology. Although the firm is issuing equity to pay for a portion of the $8.7 billion deal, the acquisition looks highly accretive to shareholders and gives Valeant another major growth platform. However, given the high concentration of the industry and the presence of larger players like Novartis (NVS) and Johnson & Johnson (JNJ), we do not expect Valeant to be as successful as it was in dermatology. Although investors shouldn't expect a repeat of Valeant's success in dermatology with this deal, we still believe the ophthalmology market provides opportunities for expansion that will generate returns significantly higher than Valeant's cost of capital over the next several years.

Valeant's relentless focus on efficiency is likely to yield some improvements at Bausch & Lomb, but the acquired firm holds low share in highly concentrated markets, so Valeant is unlikely to continue strengthening the ophthalmology segment's competitive advantages as it currently is in its dermatology, emerging-markets, and Canadian segments. With Bausch & Lomb making up 40% of the combined entity's estimated 2014 sales, we believe it is large enough to keep the companywide moat from expanding.

David Krempa does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.