My Mistake! The Rumored Price Is Three AND A HALF TIMES B + L’s 2012 Sales Revenue; Over 20 Times 2012 GAAP Earnings!

I am sure that Valeant sees this as a pretty attractive possibility, but at 3.5 times 2012 sales (see page 8 of B + L’s as-amended SEC registration statement, for its planned IPO), this is simply an overpriced deal. B + L’s current and reasonably-expected product lines do not offer high-enough margins — to justify that lofty buyout price. Early 2000s era four-times annual sales pricings have come. . . and gone — for good.

Measured another way, on GAAP (not adjusted, non-GAAP) earnings (EBITDA, actually), this $9 billion price would be around 20 times B + L’s 2012 earnings. Even the pure branded, high margin proprietary pharmas no longer command a 20 multiple. 12 to 15 would be a more realistic multiple — even if this was a pure pharma. Bausch & Lomb is no pharma. It mostly sells sterile saline water solutions, for rewetting contact lenses, and the contacts themselves – primarily. Those are highly commoditized business lines — with many tough competitors in the space, well-entrenched. B + L’s surgical line is newly acquired, and isn’t really in its own wheelhouse (nor is it a core skill-set of rumored acquiror Valeant). And so, I’ll say it yet again — if this rumor turns out to be true, at the $9 billion price — Valeant has overpaid by perhaps 30 percent, here.

Moreover, do recall that Warburg Pincus took about $700 million out of B + L in cash, just about two months ago (see the first full paragraph on page 4 of the Form S-1 amendment) — using additional bank debt to do so. Will Valeant assume that bank debt? I’d argue that it shouldn’t — that $700 million ought to be repaid by Warburg, prior to closing any rumored deal, and were I advising Valeant, I’d insist on it.

Said another way, if Valeant allows Fred and Warburg to push that $700 million of debt onto Valeant’s books, Mr. Hassan will have acheived $9.7 billion of his wanted $10 billion asking price. Recall that Abbott, Cardinal, Merck, Hospira, Pfizer and many other major strategic players, declined to even make firm offers anywhere near Mr. Hassan’s $10 billion asking price — just five months ago, now. That, too, should tell Valeant that it is about to over pay, here. [Updated, and an aside: see below the pull-quote -- for how this little cha-cha may have cost the B + L shareholders a chunk of their return, in other ways, as well. Time is money, afterall.]

In any event, here’s more from the WSJ:

. . . .[I]n 2010 Warburg recruited Fred Hassan, a longtime pharmaceutical executive with a history of leading turnarounds and arranging megadeals, to join the firm as a partner and become chairman of Bausch & Lomb. Before joining Warburg, Mr. Hassan led drug maker Schering-Plough and merged it with Merck. Earlier he helped combine Pharmacia & Upjohn Inc. with Monsanto and then sold the resulting company to Pfizer.

It is unclear exactly how much Warburg and its minority partner on the deal, buyout shop Welsh, Carson, Anderson & Stowe, would make on a sale—for reasons that include uncertainty around how much assumed debt would be included. Nonetheless, the return on a $9 billion sale would be multiples of the $1.3 billion or so the firms put into the deal, securities filings show.

The return was plumped by a $772 million dividend Bausch & Lomb paid its owners in March, according to a securities filing associated with the planned IPO. Bausch borrowed $800 million to fund the payout. Warburg owns about 87% of the company, the filing shows, with Bausch executives and Welsh Carson owning the remainder. . . .

Obviously, the above is an updated version of the WSJ’s original rumor piece, of Friday afternoon. It goes into much detail, about Warburg Pincus, and Mr. Fast Fred Hassan. If Fred, or his people (at Warburg, or Bausch + Lomb — including the ex-Merck press guy), are making themselves available for the above sort of background color, on Fred’s career, they are effectively closing the IPO window — at the SEC — for at least six more months.

Applicable SEC rules impose a “cooling-off” period, once it has been shown that the issuer (Bausch + Lomb) or/and its affiliates (here both Warburg, Fred and the other bankers) have been “priming the pump” — for the IPO, without filing amendments to the SEC registration statement.

And so, all this deal chatter is jolly good fun, but if it falls through, Mr. Hassan and his crew have likely put B + L in a pinch.

B + L is likely to be locked out of the IPO market by the SEC for about six months from the date that the last bit of this rumor is repeated (if it turns out to be among the sources for the rumor). Nicely-done, Fred! Once again, you’ve narrowed the stockholders’ realistic options for a return of their capital, to inflate your own personal net worth, and feed your ego-driven vanities (all assuming, of course, that you’ve been allowing these rumors to circulate freely).

Rumor Mill Grist: Quiet Pre-Holiday Friday “Fast Fred” Chronicles Edition

Normally, I’d leave this alone. It only tangentally connects to New Merck, in any sense. However, it’s a quiet Friday here in the office, so. . . I’ll comment on this WSJ-sourced rumor piece.

While it is true that Valeant, a Canadian outfit, has shown a true proclivity for bidding into deal spaces, recently — it has closed very few of those it has set out to hunt down – and none, in this size range, as far as I can tell.

At (a rumored) more than three times B + L’s TTM sales revenue, this would be very rich pricing, indeed. Recall that no one would firmly offer to pay Mr. Hassan’s wanted $10 billion price, at the end of last year. Recall also that B + L has spent quite a bit to get ready for an IPO, this Spring.

Knowing Fast Fred as I do, it wouldn’t shock me if this is simply a “stalking horse” rumor, to get the IPO fires stoked — and get potential retail investors in such a planned IPO thinking that the newly public company called B + L (soon to be renamed from the awful WP Prism, Inc.) could at some future point be “flipped” — at near these valuations. Get ‘em hearing the sizzle — then deliver no steak. . . That’s Fred’s usual way.

In any event, for what it’s worth — here is a bit of the WSJ piece — do go read it all:

. . . .Bausch & Lomb, which is owned by private-equity firm Warburg Pincus LLC, could strike a deal to be sold to Valeant next week, the people said. The deal isn’t done yet and could still fall apart, one of the people cautioned.


Should that happen [Valeant deal falls apart], Warburg and Bausch & Lomb could proceed with an initial public offering of stock in the eye-care company that had been planned. . . .

Me? I’ll be surprised if it does turn out to be true — certainly, at that $9 billion price. Note that I added the bracketed matter to the quote, to clarify what the writer meant. If the deal falls apart, Fred has now already been able to generate some great (pre-IPO) “quiet period” pump-priming rumors. Normally, rumors a-swirling are no big deal — but if he uses them to help him flog the stock, prior to SEC granting the IPO an effectiveness order, he’s likely to be in some hot water. [I wonder if the SEC will open a jacket on this one, as well -- if such a leak were traced back to B + L, or its bankers, or Warburg Pincus -- that would be a plain violation of about a dozen SEC rules.]

Yep — this looks to me like some cha-cha to help sell the initial public offering of B + L stock, in the next couple of weeks. To be clear, I expect that Valeant is actually in talks, and actually believes it might “win” the deal. I just think Valeant may be serving as Fred’s cannon-fodder — for the IPO. But what do I know?

Nation’s Most Populous State Unwraps Its Health Care Exchange — And At Least 13 Private Insurers Join The Effort

California has unveiled its private public state-run exchange. And it is a model of cooperation. Even the rhetoric in the health insurance companies’ on-air ads reflects this: last fall, health insurers were referring to the effort’s prospects “an uncertain time” — as they pitched their products — to individuals and businesses.

Yesterday, in the land of Big Sur, I heard several on-air FM radio ads that touted the “great opportunities” in “health care reform” for all of the state’s insureds. Yes, a private, for profit insurer was calling “reform” by its name — and lauding it, as “positive reform“. That is how far we’ve come.

[BTW, Congressional Republicans planning on running at the mid-term against this wave, will do so at their considerable peril.]

Of course, there will be glitches, and of course it will need some fine tuning and mid-course correction(s) — but we are seeing a new delivery model, in action, in California — with millions more patients eligible for, and receiving at least basic health care, at an affordable price.

Yes, change is always hard — but that is what most of the complaining will be about, from here on, in California — people just get uncomfortable around change. But it is the way of all things — they change. We will keep an eye on all of this for the readership, of course.

From a bit of The New York Times story, then — do go read it all:

. . . .The new rates for individuals will be about the same — or lower — than the current rates for small businesses, according to officials from Covered California, the group operating the exchange.

“The changes in the market are really making individuals much more like employer groups,” Paul Markovich, the chief executive of Blue Shield, said. Like people who now receive health insurance through their employers, individuals buying policies on their own will be able to enroll next year even if they have a potentially expensive medical condition, and the policies’ benefits and premiums will be more standardized.

“We held insurers’ feet to the fire,” said Peter V. Lee, the executive director of Covered California, who said that the exchange had received interest from 33 insurers and actively negotiated with them over their proposed rates and the kind of network of doctors and hospitals they would offer. Covered California estimates that the plans offered will allow consumers access to about 80 percent of the state’s practicing physicians and hospitals.

While Washington, Vermont and several other states have also announced the details of their respective exchanges, California’s size and previous support for the health care law made it an important test of the law, said Paul B. Ginsburg, the president of the Center for Studying Health System Change, a nonpartisan research group in Washington. “A lot of people will be watching California to see how well it succeeds,” he added.

California chose to behave more like Massachusetts in aggressively negotiating with insurers on behalf of its residents. . . .

I think California (and Massachusetts) have that just right — these states must negotiate fiercely with the private insurers — on price. That is their duty, to their citizens. The charge is to provide as much health care as possible, at the best price, to the highest number, and widest swath, of state residents. It will be bumpy at first — but it bears watching. It is the wave of the future. And it is the right thing to do.

Finally, even though anti-reform worry-warts were predicting close to 30 per cent premium increases for healthy young people in California, the increases are averaging around 13 per cent — less than half the fear. And, it is highly likely that these healthy young people were being undercharged under the prior rubric. So now you know.

Legacy Schering-Plough Parkinson’s Candidate (SCH 420814) No Better Than Placebo; Phase III Program Terminated.

The chemical name of the candidate was (is) Preladenant (SCH 420814). Kudos to Merck, I guess — for promptly sticking a fork in it — and not waffling about other potential redesigns.

[Insert here my usual rant about legacy Schering-Plough CEO Fred Hassan's [non-] pipeline dreams. I’m even boring myself, with this stuff — so repetitive, right?]
I’d guess that between them, Schering-Plough and Merck spent north of $400 million from early-concept, to the latest three Phase III studies, on this.

From the presser:

. . . .The Phase III clinical program for preladenant included three randomized, controlled clinical trials to evaluate safety and efficacy. Two of these studies assessed preladenant when added to levodopa therapy in patients with moderate-to-severe PD, and one assessed preladenant as monotherapy in early PD. More information about the preladenant Phase III clinical trials is available on http://www.clinicaltrials.gov. . . .

And. . . yet another one bites the dust.
Thanks, Fred! [We can't spell "Failure" without. . . U!]

A “White Whale” — Now Disappearing — Over The Still-Luminous Horizon?

More than a few usually-reserved journalists have referred — over the last few days — to suvorexant’s potential to be an insomnia agent with a “clean” morning wake-up (no impairment, or grogginess) as the “great white whale” many a pharma-captain has long roamed the oceans, hunting, just as we all remember, Ahab did.

Me? i’m not so sure. . . .

Based on the newly-public, more detailed looks at the study data Merck submitted to support FDA approval of suvorexant, several FDA staffers are now apparently concerned that — as is true of all agents now on the market (including many cheap generics) — a 40 mg dose of suvorexant will be associated with some non-trivial morning after impairment.

And so — when you read of stock analaysts boldly predicting north of $500 million in peak annual sales for this drug — they are doing so on the assumption that it is the legendary white whale: a drug that lets you sleep, but doesn’t leave you foggy, in the morning.

After hearing Merck’s own science staff suggest that suvorexant is likely “not very effective” at improving sleep, at the 10 mg dose which these FDA staffers felt would be “safest” (for driving, on the morning after), I simply cannot shake the notion that this agent — while first in its brand new class — is going to be much more of a “me too” product. A me too — fighting it out with the generics – at perhaps ten times the cost.

So, now it is up to FDA: does Merck get approval for a sleep maintenence indication, at the higher doses (30/40 mg)?

And, if so, will FDA slap lots of tough label restrictions, onto to the bottle/into the insert? That is, will the label read like all the others now on market: “don’t drive the morning after taking,” etc.? [If so, why not take the cheaper generic?]

If, on the other hand, FDA grants approval on the 10 mg dose only, and thus sends a signal that “safety” here is far more important than being sure to sleep through the night (go low and slow, at first) — will doctors write off-label, in double (or higher) doses? And even if they don’t — what to make of patients who decide to double dose, on their own, when they cannot sleep?

All of these vagaries lead me to the strong hunch that suvorexant’s approval — which will happen in 2013 — will only be moderately good news for Whitehouse Station. I remain convinced that it will peak at under $200 million in annual sales — in 2017 or so, based on the signals buried in the study data, seen yesterday.

And so, Ahab’s “great white whale” has likely crested the horizon, showing its tail to us, yet again. At least that’s my guess. What’s yours?

Merck Should Be Preparing Contingency Plans — For Other Means Of Generating “No- or Low-Tax” Transfer Pricing/Licensing, On Its Intellectual Property

An Irish minister just “played the soft part, loudly” — on multinational corporate tax gamesmanship (see quote, below – uttered midday time in Dublin — very early in our morning hours, on the east coast). It is clear that this is going to become a larger problem for Merck, GE, Pfizer, Lilly, HP and Intel — just to name a few. Yep — today, the ministry-level official tasked with encouraging multi-nationals to locate on the Emerald Isle called for an end to the aggressive gaming of the “stateless” corporate structure, for taxation purposes.

[By the way, a few days ago, I said I'd (at some point) get into how Merck's use of intellectual property transfers (primarily off-shore licensing of the patents, and know how, related to its drug compounds and molecules, but increasingly, on the brand names' registered trademarks, as well) differed from Apple's. Consider this to be that post.]

As a result of some sharp questioning before Congress, we all learned yesterday that Apple does essentially the same thing Merck does. And to be fair, Pfizer, and Abbott and Baxter and Lilly and HP and Intel all do it, too. That is, Apple has caused ownership of its patents and know how, on its tech products, to reside in companies set up in Ireland. So, we may quibble about whether Tim Cook is engaging in sophistry when he declares Apple uses no “tax gimmicks“, but it is now certain that Mr. Cook’s company uses almost every one of the same structures (gimmicky or not so) the multinational pharmaceutical companies use, to minimize its tax payments in high rate jurisdictions like the United States, and shift profits to low rate jurisdictions like Ireland, and parts of the Carribean.

I’d look for PhRMA to shortly come out, from behind the Oz-curtain, and make a pronouncement supporting reform — corporate tax reform — that would reduce the incentive for this sort of maneuvering. It seems that Apple has been a stalking horse for pharma, right along. Because Apple’s gagets are so widely-adored, it was thought by PhRMA, Apple would have a better chance of getting through Congress or the White House, on a lowered tax rate mantra. Mean old evil pharma was long-known to have no such possibility — not even remotely so.

Afterall, pharma would certainly like to have easier access to all its retained cash earnings, worldwide, at some overall lowered tax rate. And that will be exactly what the conjectured, but likely coming PhRMA white paper will ultimately angle toward — though quite completely silently — like a shark, in the deep, azure, open oceans. Watch for it in 3… 2… 1…

We will keep you posted — but as several of these companies execute the (i) parent-only obligor debt issuance, followed by the (ii) super-sized stock buyback and (iii) debt repayment strategies across the globe, they will have a reduced near term need for an outright tax holiday, on repatriating overseas earning,s to the US. Why? Because they are acheiving much the same thing, in these three step transactions — without having to get Congress or the President involved.


From AppleInsider, then:

. . . .The minister in charge of attracting foreign companies to Ireland is now saying that those companies need to be brought under control, according to Reuters.

“They play the tax codes one against the other,” Richard Bruton told Irish state broadcaster RTE, “and I think we do need international cooperation through the [Organization for Economic Cooperation and Development] to deal with the aggressive nature of that.”

Ireland has long drawn criticism from other European nations for its low corporate tax rate of 12.5 percent. That tax rate encourages companies to locate at least some operations in Ireland for tax purposes, which is what Apple does, along with Google and Yahoo, Pfizer, and Intel, as well as many others. Of Ireland’s two million-strong labor force, about 150,000 work for foreign companies headquartered there for tax purposes. . . .

It seems that the antiseptic effect of. . . sunshine. . . is starting to take hold — even in my cousins’ government, on the Emerald Isle. Having said all of that, I do support a simplification of the US tax code applicable to multinational corporations. We could easily take away the vast incentives to engage in this sort of gamesmanship, and have a no-deductions, straight-ahead tax on corporations’ profits (Tim Cook even said so!). But, more on that — some other day.

UPDATE: 16 YES VOTES — We’re Monitoring FDA Advisory Committee Meeting On Suvorexant: Unfolding As Expected

As expected, most of the healthy skepticism centers around dosing levels — not overall safety, or efficacy. You can follow along here, by logging in as a “guest” — no password or email needed.

4:35 PM EDT | UPDATE | VOTE 8 against suvorexant’s automatic up-dosing, at 30/40 mg dosing, if no improvement seen at lower doses (15 mg) — 7 vote for higher doses — 2 abstaining. So Merck may have labeling warnings, as to the higher doses.

3:36 PM EDT | UPDATE | VOTE 11 vote against new 10 mg efficacy studies — 5 in favor of new studies — 1 abstaining. So Merck need not do additional studies — the dose discussion continues — labeling may be where this is sorted out.

2:53 PM EDT | UPDATE | VOTE 16 in favor of approval — 0 against — 1 abstain — on the question of “sleep maintenance”. So Suvorexant is approvable — now the dose discussion begins.

2:50 PM EDT | UPDATE | VOTE 12 in favor of approval — 4 against — 1 abstain — on the question of “sleep onset”. So Suvorexant WILL reach the US market, in a about a month.

2:40 PM EDT | UPDATE | There is a move toward separating the approvability vote into a “sleep onset” and “sleep maitenence” votes — essentially suggesting two separate indications will be voted upon, at 4:30.

In either case, it does seem that there is a visible majority of committee members who are leaning toward recommending approvalbility (on one or both indications) — but likely with some suggestions about lower dosing, to start.

I will post the outcome of the vote, around 4:30 PM EDT. And although the full FDA Commission is not required to follow the Advisory Committee’s views, they usually do. I do continue to see a 2013 approval date in the US for Suvorexant.

I also see only modest sales uptake, given the number of generic competitors in the sleep aid space.

Debt Deal Closed Last Night; Merck Up 4.7% On Triple Volume Today. Why? Goldman Sachs, That’s Why.

We interrupt my dry, wonkish patter (on tax advantaged foreign earnings repatriation strategies), to note for the record that less than 24 hours after Merck closed on the $6.5 billion debt deals, it hired Goldman Sachs (a lead underwriter of the same just-closed debt deals) to conduct an accelerated stock repurchase, or buyback — of up to $5 billion, or about 99 million Merck shares, at yesterday’s NYSE closing price.

I have to wonder, though, whether the SEC market surveillance folk don’t already have a file open — given that Merck fell almost 2 per cent yesterday, on average volume — only to rise 4.7 per cent today, on triple volume, to boot.

It sure feels like someone knew about the accelerated timing, and massive sizing, on this Goldman contract for the ASR. [I suppose it could be that the market finally agrees with me, that Suvorexant will be given a green light tomorrow afternoon at the FDA Advisory Committee meeing -- but that is not even a one quarter of one percent uptick event, in my estimation -- and Merck was up close to five per cent at various points today.] So — does someone at Goldman have loose lips? We will soon know.

Well, if I was a Goldman Sachs bond buyer last night, who also happens to hold Merck common stock — I might promptly ask to get best price sales treatment on my Merck shares, given that Merck is buying them with my money — money I just lent Merck, yesterday.

From Merck’s just-issued press release, then:

. . . .Under the terms of the ASR, Merck has agreed to repurchase $5 billion of its common stock from Goldman, Sachs & Co., in total, with an initial delivery of approximately 99.5 million shares based on current market prices. The final number of shares to be repurchased will be based on Merck’s volume-weighted average stock price during the term of the transaction, which is expected to be completed no later than November 25, 2013. . . .

This is exactly why that FINRA Rule 5121 discussion matters. It is very easy for the little guys to get crushed here — but Merck will rise, as I said, through the end of 2013 — in general, broad strokes — and this sort of stuff is no small reason why.

Since I’ve Been Comparing Merck To Apple — On Repatriation — Here’s Is (Apple CEO) Tim Cook’s Testimony, For Capitol Hill, This Week

UPDATED: 6:05 PM CDT | 05/20/13 — The New York Times now has released its piece on all of this, online — and Apple’s Time Cook gets excoriated in it — for some of the hyperbole in his 17 pages, below. In my estimation, it is only a matter of time before the Times catches up to Merck and Pfizer. And possibly Congress will, too. [End, updated portion.]

At some point tomorrow, I’ll get around to explaining the ways in which Apple’s corporate structure, and use of CFCs, or controlled-foreign-corporations, differs from Merck’s approach. [Hint: It primarily involves the transfers of intellectual property, to generate more income in tax haven jurisdictions -- in Merck's case.] But for now, you may safely assume that — in the main — they are largely similar. At least similar enough to make it worthwhile to watch what Apple does — on foreign cash repatriation, as a “canary in the coal-mine” — for what Merck might do.

And so, here is the advance-copy (that is some 17 pages of PDF goodness!) of Mr. Cook’s upcoming testimony before Congress — on Apple’s recent $17 billion debt issuances, its unimaginably large $60 billion stock buyback program. . . . all of which drives his call for reform of the United States corporate tax code (which, he argues, makes most of these complex financial machinations necessary).

Having said all of that, though — Apple does pay an immense amount of US corporate income tax. Mr. Cook estimates that Apple is responsible for almost $1 of every $40 the US Treasury collects, in corporate income taxes, from all corporate taxpayers — paying more than $6 billion in federal taxes in 2012 (which, to be fair, of course – may just mean that companies like Merck and Pfizer aren’t paying their fair share). Wow. Apple’s effective 30.5 per cent federal income tax rate here in the US is much higher than Merck’s (which stood at 27.9 per cent at year end 2012) — and dwarfes Merck’s 2012 $2.44 billion in tax payments, on a dollar for dollar basis.

. . . .Apple, a California company, employs tens of thousands of Americans, creates revolutionary products that improve the lives of tens of millions of Americans, and pays billions of dollars annually to the US Treasury in corporate income and payroll taxes. Apple’s shareholders – from individuals and institutions to pension funds and public employee retirement systems – have benefitted from the Company’s success through the appreciation of its stock price and generous dividends. Apple safeguards the capital entrusted to it by its shareholders with prudent management that reflects the Company’s extensive international operations. Apple complies fully with both the laws and spirit of the laws. And Apple pays all its required taxes, both in this country and abroad. . . .

More tomorrow. And by the way, Merck CFO Kellogg did talk about why he did the aggregate of $6.5 billion debt deals last week, and why the $16.5 billion stock buy-back is happening now, at Merck — but didn’t even remotely hint at repatriation, in his UBS talk today, in Manhattan. And he didn’t mention the underwriters’ conflict of interest — even though Merck did a much more complete job of disclosing it, under FINRA Rule 5121, than Apple did — in its similar definitive 424(b) debt prospectus, of early May.

Suvorexant Update: Still On Track For 2013 FDA Approval, Sales Uncertain In Crowded, Genericized Sleep Space

The good news here is that nothing untoward has turned up in this morning’s FDA reviewer/staff packet, in advance of Wednesday’s FDA Advisory Committee meeting.

The candidate is still on track. However, the pitch has always been that suvorexant’s appeal would lie in its “next morning clarity” — that is, it would not be associated with impairment in the morning after being taken — as so many previously FDA approved sleep aids are, on market.

The FDA reviewers are now noting some morning after impairment — and talking about lower initial dosings — all in a space full of generic competitors. That makes the sales outlook a little cloudy. A bit from Reuters, then — do go read it all:

. . . .Merck’s experimental insomnia drug suvorexant appears generally effective, according to reviewers at the U.S. Food and Drug Administration, but they questioned the company’s proposed dosing levels.

The reviewers posted their comments on the FDA’s website on Monday, two days ahead of a meeting of outside medical experts which will advise the agency on whether or not it should approve the drug. . . .

We will of course keep you posted on Wednesday afternoon, but I expect a solid majority vote, in favor of US FDA approvability.