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Valeant and Paladin: Seeking a prescription for growth Add to ...

Valeant Pharmaceuticals International Inc. has cemented its deal to absorb Afexa Life Sciences Inc. , after 74 per cent of shareholders of the Cold-FX maker tendered to the takeover bid, which expired Monday but has been extended to next week to allow others to offer up their shares.

The take-up of shares marked the end of a bidding war between Valeant and Canada’s other diversified drug distributor, Paladin Labs Inc. Paladin folded its tent when the price of Afexa got beyond its range.

Valeant and Paladin are very different companies – particularly in size – but they have many similarities beyond their interest in Afexa. Both are Canadian based, both are constantly on the hunt for acquisitions, and both glean most of their revenue from distributing a large portfolio of prescription and over-the-counter drugs.

And they have something else in common. After a big runup in stock price, both Valeant and Paladin have seen the legs kicked out from under their shares in the past couple of months. Valeant has slumped from more than $54 in July to below $37, while Paladin has fallen from more than $45 to below $38 over the same period.

Both companies say overall market conditions are a factor, but they also acknowledge that other issues are at play.

Valeant chief executive officer Michael Pearson said in a recent interview that investors were perturbed that his company’s organic growth rate slowed in the second quarter and some are also worried about the firm’s concentration in the sluggish U.S. market. There is also a “lingering concern” about companies like Valeant that get so much of their growth through acquisitions, he said.

Still, Mr. Pearson said, “if we can continue to show that we have good organic growth, can generate strong cash flow, can find acquisitions, [and]don’t have any big operational hiccups, I think our stock will start moving in the right direction.”

Paladin’s acting CEO Mark Beaudet said his company’s stock, too, has been caught up in the overall worries about the markets. But he also noted that there was some concern among investors after founder and CEO Jonathan Goodman was badly hurt in a bicycling accident in August. Mr. Goodman is now recovering, but there is no timetable yet for his return to the company.

Mr. Beaudet’s current focus is the absorption of Labopharm Inc., a small Montreal drug company Paladin recently purchased. The Labopharm acquisition included the world-wide rights to the pain-killer Tramadol, but it also included an R&D division that Paladin doesn’t want to keep and will be sold or spun off in a joint venture.

As for the failed bid for Afexa, Mr. Beaudet said he was disappointed to lose that auction, but noted that the decision not to try to outbid Valeant “demonstrated financial discipline.” With more than $200-million in cash at the ready and no debt, Labopharm will be making more acquisitions, he said.

Valeant and Paladin are similar in their acquisitive strategies, said Alan Ridgeway, an analyst at Paradigm Capital Inc. in Toronto, but he is more enthusiastic about the prospects for Valeant because of its wide international exposure in the U.S., eastern Europe and elsewhere. Because Paladin is essentially a Canadian company with just a few international investments, “Valeant has exposure to markets that Paladin doesn’t,” giving it greater growth potential, he said.

Mr. Ridgeway has a “hold” rating on Paladin, and a “buy” on Valeant, mainly because at the moment “the cash producing capabilities of Valeant are being undervalued,” he said.

Selective Asset Management CEO Bob McWhirter held both Valeant and Paladin shares in the NorthWest Specialty Innovations fund that he runs. But he’s recently sold both stocks – Paladin because he expects growth to slow sharply in 2012, and Valeant because he felt the shares appeared to have peaked.

Still, he said, both companies are significant generators of cash, and he will consider buying back in if the stock prices begin to look cheap.

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