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Will Valeant Keep Bausch’s OC Eye Device Hub?

Valeant Pharmaceuticals International Inc. looks set for now to retain all of its new acquisition, Bausch & Lomb Inc., including an Aliso Viejo-based surgical unit.

Valeant is a Quebec-based drug maker with $3.5 billion in annual sales and Orange County roots. It was known as Biovail Corp. when it bought the formerly Aliso Viejo-based Valeant in 2010, took its name, and consolidated its operations to Canada.

Last week Valeant said it plans to spend $8.7 billion in cash for Bausch, a Rochester, N.Y.-based maker of contact lenses, contact lens solutions, prescription drugs and eye surgical equipment.

Competitors across several of its business lines include drug maker Allergan Inc. in Irvine; Santa Ana-based Abbott Medical Optics, a division of Chicago-based Abbott Laboratories; Alcon Inc., a Fort Worth, Texas-based unit of Novartis AG in Switzerland with 850 OC workers; and New Brunswick, N.J.-based Johnson & Johnson.

Warburg Pincus

The price Valeant has offered for Bausch includes $4.2 billion in debt, with the remaining $4.5 billion going to seller Warburg Pincus LLC, a New York-based private equity firm. The deal comes roughly a month after news broke that Warburg, which has owned Bausch since 2007, filed for an initial public offering of Bausch that analysts said could raise up to $1.5 billion, a price that Bausch’s value at $9 billion to $10 billion.

Valeant primarily makes dermatology, neurology and branded generic drugs.

The deal for Bausch, which has $3.3 billion in annual sales, brings Valeant a portfolio of prescription eye drugs and a sizable consumer business centered on contact lenses along with surgical devices.

Bausch made Orange County its eye surgery hub after buying Aliso Viejo-based replacement lens maker Eyeonics Inc. in 2008. It added to its local presence with its $500 million buy of Irvine-based eye drug maker Ista Pharmaceuticals Inc. last year.

Analysts on a conference call about the deal questioned whether Valeant would retain the non-drug portions of Bausch after the deal closes, which is expected to take place in the third quarter.

They got a qualified response from Valeant Chief Executive J. Michael Pearson, who said the company is “committed” to the medical device and consumer business lines it has acquired but has “always stated that we’ll never fall in love with any of our assets.”

“If any of our assets are worth more to someone else, we will divest them, because, again, it’s in the shareholders’ best interest,” Pearson said.

“But we are committed to all three platforms now. We actually think there [are] some real nice selling synergies” between Bausch’s prescription drug, contact lens and surgical device businesses, he said.

Scale

He said that some of the leading prescribers of Bausch’s eye drugs are cataract surgeons, “so there is real scale from a sales force.”

Not everyone sees the Aliso Viejo-based eye device business staying in Valeant’s fold.

“They said they’re going to hold on to it, but I guess it wouldn’t be shocking to see them spin it off,” David Krempa, an analyst with Chicago-based Morningstar Research, said in a phone interview, although he added that he didn’t “know if there [are] any other buyers out there for it.”

Valeant’s “slowly been building a presence in the [eye] market through the recent acquisitions … so it is not a completely new market for the firm,” Krempa said.

The push into eyes has come on buys of drug makers rather than device manufacturers, though.

Valeant last year bought Palm Beach Gardens, Fla.-based EyeTech Inc. and Visudyne, which was developed by Vancouver-based QLT Inc. Both make drugs to treat age-related macular degeneration, a common cause of blindness.

Ophthalmology

Valeant is looking at ophthalmology as a niche market that it can consolidate, similar to its dermatology business, according to Krempa.

“Like dermatology, the ophthalmology market sees a high cash-pay component, so it faces minimal pricing pressure from governments and managed care,” Krempa wrote in a research note.

Valeant, however, “had no previous presence in the contact lens or surgical device markets that make up nearly two-thirds of Bausch’s sales,” Krempa said.

Bausch’s Aliso Viejo surgical unit had $508.1 million in sales in 2012, about 17% of the company’s overall revenue, according to its IPO filing with the Securities and Exchange Commission.

Products include the Crystalens, SofPort, Akreos and enVista replacement intraocular lenses, and Victus, a femtosecond laser for cataract, vision correction and therapeutic procedures.

Management

Valeant executives said several members of Bausch’s senior management team would join the company after the deal closes.

Dan Wechsler, now a Bausch executive vice president and president of its global pharmaceutical business, is expected to become an executive vice president and company group chairman for ophthalmology and eye health at Valeant.

Wechsler previously led the integration of Ista into Bausch and will do the same with Bausch and Valeant.

Corporate Vice President John Barr, who heads Bausch’s Aliso Viejo surgical unit, was not specifically named in Valeant’s release.

Spokesperson Laurie Little said last week that Valeant anticipates additional members of Bausch’s senior management team to come on board but did not mention Barr specifically.

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