Valeant Pharmaceuticals Intl Inc (VRX), Actavis Inc (ACT): How Would A Combined Company Look?

News that Montreal-based Valeant Pharmaceuticals Intl Inc (NYSE:VRX) was in talks to merge with Parsippany, New Jersey-based Actavis Inc (NYSE:ACT) emerged barely a week after the completion of the company’s tender offer for Obagi Pharmaceuticals (OMPI). Although the deal remains in its early stages and has been the subject of wild and conflicting rumors, it could prove to be one of the largest pharmaceutical mergers in recent years. Its current value is estimated at $13 billion.

Over the past year, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has been engaged in an aggressive growth program. Before completing its tender offer for Obagi, the company purchased a leading dermatology-focused concern known as Medicis. Although that acquisition has yet to produce the synergies that Valeant’s management has anticipated, it may ultimately prove to be successful. Obagi also made a number of skin care products and advanced dermatology solutions, and Actavis Inc (NYSE:ACT) is heavily invested in the area as well. Investors who believe that Valeant can create a powerful dermatology company may wish to watch the company closely during the coming months.

Although it employs just 7,000 people, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is a major player in the fast-evolving dermatology and neurology sub-fields of the pharmaceutical industry. The company sells over-the-counter dermatology products like AcneFree and CeraVe as well as specialized prescription drugs like popular Zovirax Ointment and the powerful Retin-A acne treatment. By contrast, Actavis Inc (NYSE:ACT) engages in a wide range of activities. Its principal dermatology offerings include generic products like various acne creams as well as the AndroDerm and AndroGel hormone skin treatments.

Financial Comparison: Valeant, Actavis and Teva Pharmaceuticals

Valeant, Actavis and Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) all engage in a variety of overlapping areas of operation. Of the three, Teva has the largest market capitalization. With a market cap of between $22 and $23 billion, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is roughly two-thirds the size of Teva. Actavis’s market capitalization of around $13 billion puts it at about 40 percent of the size of Teva.

Two of these companies are narrowly profitable. In 2012, Actavis Inc (NYSE:ACT) earned about $97 million on revenue of about $5.9 billion for a profit margin of just over 1.6 percent. Meanwhile, Teva earned about $2 billion on gross revenue of $20.3 billion for a margin of just under 10 percent. For its part, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) posted a narrow loss of about $116 million on revenue of over $3.5 billion. This made for a marginal loss of just over 3.5 percent.

All three of these firms are highly leveraged. With a cash balance of $328 million and a debt load of nearly $6.5 billion, Actavis is the most debt-ridden of the bunch. With $920.5 million in cash on hand and debts of about $11 billion, Valeant is not far behind. Meanwhile, Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) has $1 in cash for every $6.50 in debt that it carries on its books.

How the Deal Might Happen

Although the deal is still in the exploratory phase, rumors that Valeant Pharmaceuticals Intl Inc (NYSE:VRX) and Actavis are in serious talks have excited investors. Any deal that emerges between the two companies is likely to value Actavis at $13 billion or more and create a company with combined annual revenue of nearly $10 billion.