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Compelling Financial Benefit in Valeant's Latest Buy

The proposed Salix acquisition boosts our fair value estimate significantly.

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The $14.5 billion acquisition of Salix Pharmaceuticals (SLXP) brings  Valeant Pharmaceuticals (VRX) into an entirely new therapeutic area, but the deal is very compelling financially. Management expects the deal to increase 2016 earnings per share more than 20%, and we believe this target is obtainable. As a result, we have significantly increased our Valeant fair value estimate to $230 per share. We do not plan any changes to our narrow Morningstar Economic Moat Rating.

Salix--as well as the overall gastrointestinal market--carries some of the attributes Valeant has historically been attracted to, such as an undertreated market, minimal generic competition, and low Big Pharma presence, but it lacks many of important attributes that have been a key component of Valeant's strategy. The deal takes a step backward on the firm's shift toward durable and cash pay products. Salix's portfolio is entirely insurance- or government-reimbursed products, and although GI products tend to be tougher for generic manufacturers to replicate, the branded products are ultimately reliant on limited-duration patents for protection. In addition, Salix's lead product Xifaxan has a May PDUFA for the irritable bowel syndrome diarrhea indication, which would require significant primary-care physician marketing, an area Valeant has in the past avoided because of the inefficiencies of trying to address such a broad market.

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