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The Valeant-Allergan Story

 5 min read / 

Allergan has been the subject of much speculation this year after acquisition attempts by Valeant and Johnson & Johnson. Valeant has already had 3 bids refused, and Allergan have no intention to sell.

Allergan have a portfolio of products, but is most famously known to be the sole producer of Botox, the anti-wrinkle wonder. In 2013, Allergan generated revenue just over $6 billion; of which just under a third accounted for Botox. The marvel of Botox has meant that other firms have tried to enter the market with alternatives. Valeant have Dysport and Restylane which were acquired during their buyout of Medicis Pharma in 2012 for $2.6 billion. However, Botox sales increased by 12% from 2012. Furthermore, in Valeant’s 2013 annual report, it stated their facial care products have declining sales due to generic brands entering the market. This contributed to Valeant’s 25% decrease in profits.

Allergan’s ophthalmic products, Lumigan, Restasis and Refresh helped to account for 54% of the total revenue. These products are also very well cemented in their markets with a strong global reach. Valeant also has a large ophthalmic range thanks to its acquisition of Bausch & Lomb last year for $8.7 billion. These overlapping markets make for an excellent reason for their acquisition. In terms of business models, Valeant have a leveraged research and development model meaning they buy firms who have developed products or extremely promising drugs in the pipeline. Their M&A strategy differs from that of Pfizer. Pfizer buy their competition out, lay off the majority of their workers; then use that additional capital to fund their earnings, until their labs come up with the next wonder drug. Valeant buys the company, and then instead of spending all the money on R&D, they give a lot to their shareholders. This could be the reason their share price has rocketed from approximately $20 in July 2010 to $120 today.

In 2012, Valeant CEO Pearson said in an interview to the Wall Street Journal “We spend less than 5% of our revenues on research and development.” Allergan in contrast spend a lot more on R&D, this year they expect to spend 16.5% of its net sales, about $1.6 billion. Should Valeant succeed in taking over Allergan, their figure can be expected to decrease to $300 million. Allergan has rejected 3 bids from Valeant, the latest being $72 cash and 0.83 of a Valeant share for each Allergan share. Allergan rejected the bid saying the bid undervalues the company, and even went further to say Valeant have a risky business model it does not agree with. In a bid to force the takeover, Valeant have teamed up with Bill Ackman, CEO of the hedge fund Pershing Square Capital LP to try and gain 25% of Allergan shares in a hostile takeover in order to force a vote for a new board, one whom would accept the takeover. As of April, Bill Ackman had acquired 9.7% of the shares before the bid for Allergan had been announced by buying almost $4 billion worth of call options on the stock. Valeant put up $75.9 million in the deal. This sounds good for Valeant; except that now a hedge fund will own a large chunk of its shares should everything go to plan. So why go down this route? In an interview with Bloomberg, Pearson said Valeant didn‘t have $4 billion to put at risk. The buyouts of Medicis and Bausch & Lomb were financed mostly with debt. “Bill put at risk $4 billion. First of all, we did not have $4 billion sitting at the bank. We do not accumulate cash, we use our cash to build our business,“ said Pearson in the interview. 

The SEC filing shows that Valeant and Pershing have new jointly-owned entity and the shares are in a fund called “PS Fund 1”. Once the acquisition is complete, the entity will dissolve and Pershing will invest $400 million in shares of Valeant stock at a 15% discount to the per share market price. Ackman supports Pearson’s business model, and called him “one of the greatest operators in the business.” Valeant is now trying to rally enough Allergan stockholders to try and call a special meeting to overturn and vote for a new board.

To stop Valeant, Allergan exercised a “poison-pill” defence by using the one-year stockholder rights plan. It states that if a party owned more than 10% of its shares, other stockholders can buy its shares at a discount. The reason for this is to counter Valeant’s direct offer to the shareholders, and to prevent Pershing from increasing its stake. In a further attempt to stop Valeant, Allergan are planning a broad restructuring programme which will be outlined in their earnings announcement later this month. It plans to shelve unpromising pipeline drugs and an overhaul of management incentives. This is an attempt to boost profit to convince shareholders that the company is fine by itself. Allergan is currently speculating whether to buyout Shire, who is already on AbbVie’s radar after a failed bid attempt. Shire is based in Ireland, therefore would offer great tax incentives for any company. As it stands, AbbiVie made a 4th bid for Shire for $51.6 billion. I feel that Allergan trying to take over Shire is a mistake. They do not have any overlapping products, other than possibly Shire’s new eye-drop for dry eyes which is currently being reviewed by the FDA. Other than this, they are two very different companies which completely different focuses. Ultimately I feel Valeant will progress with a takeover of Allergan for the simple reason, shareholders like a company which is ambitious and committed to the best for their shareholders, as Valeant has proven.

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