Allergan rejects Valeant offer, challenges rival's business model
A Valeant Pharmaceutical sign is pictured at its head office in Montreal on Monday, May 27, 2013. (Ryan Remiorz / THE CANADIAN PRESS)
Ross Marowits, The Canadian Press
Published Monday, May 12, 2014 7:37AM EDT
Last Updated Monday, May 12, 2014 1:14PM EDT
MONTREAL -- Allergan spurned a takeover bid from Valeant Pharmaceuticals, saying the Botox maker can do a better job growing the company alone and challenging what it describes as its Canadian rival's slash-and-burn strategy.
"Our model works, whereas Valeant's model of cutting and slashing really doesn't work for more than a very short period of time," chairman and CEO David Pyott said Monday during a conference call to discuss the unanimous rejection of the Valeant offer by its board.
Pyott said the unsolicited cash and share offer worth about US$46.6 billion undervalues the company and carries significant risk because of the hefty share component of the offer given the "unsustainability" of Valeant's business model.
Under the proposed deal, Valeant said that it would exchange each Allergan share for $48.30 in cash and a portion of shares of Valeant Pharmaceuticals International Inc. (NYSE:VRX, TSX:VRX).
California-based Allergan (NYSE:AGN) said that its deep investments in research and development will generate double-digit annual revenue and earnings growth for at least the next six years.
For example, Pyott said Allergan transformed anti-wrinkle Botox from a $100-million a year product in 1989 to one that generates $2 billion for both its aesthetic and therapeutic uses.
Overall, US$7 billion invested by Allergan in various products between 1992 and 2013 has generated more than US$50 billion in sales to date, and about US$120 billion in potential sales over the next decade.
"Some would argue that early-stage R&D out drives profitability. However, we think that's a short-sighted approach," he said, taking a swipe at Valeant, adding that abandoning early-stage research would be "value destructive" for Allergan shareholders.
Valeant has said Allergan spends too much on early R&D, saying the proposed Allergan deal will result in more than US$2.7 billion in annual cost savings, 80 per cent of which would be achieved in the first six months. It says last year's acquisition of eyecare company Bausch & Lomb is an example for removing layers of management while driving higher sales.
Pyott told analysts that Valeant's approach generates low organic growth as it focuses primarily on acquisitions of late-stage pharmaceutical companies.
In a letter to Valeant CEO Michael Pearson, Allergan said its rival's strategy "runs counter to Allergan's customer focused approach."
"In particular, we question how Valeant would achieve the level of cost cuts it is proposing without harming the long term viability and growth trajectory of our business."
Allergan said it plans to meet with its shareholders over the coming week to explain the company's growth plan and "listen loudly" about their views on the proposed transaction that would see them own 43 per cent of the combined company under the takeover bid.
Valeant has said it plans to initiate a "shareholder referendum" of investors and may pursue a special meeting to remove some or all of the U.S. company's board of directors.
Bill Ackman's Pershing Square Capital Management LP -- Allergan's biggest stockholder at 9.7 per cent -- agreed to take only stock if the deal went through, and would remain as a long-term shareholder of the combined company.
Pyott said Ackman's views and interests may not be completely aligned with other stockholders.
However, Pyott wouldn't say of the company would be open to another Valeant offer that includes greater or all cash.
David Maris of BMO Capital Markets said investors are growing skeptical about "Frankenpharma" deals in which companies are relying on tax inefficiencies and R&D as the main reasons for deals.
"We think Allergan is in a great spot," he wrote in a report, pegging the chances of this deal being completed at less than 50 per cent.
"We base that on cost cuts that seem both unachievable and damaging to the Allergan business."
Allergan, based in Irvine, has long been considered one of the star performers in the specialty pharmaceutical sector. "Specialty pharmaceutical" is an industry term that differentiates smaller drug makers from much bigger companies that sell a wide array of drugs, such as Pfizer and Merck.
Shares of Allergan, which hit an all-time high this month, lost $2.26 at $159.04 in midday trading on the New York Stock Exchange. Valeant's shares were down $1.56 at $129.61 in New York and $1.99 at C$140.97 in Toronto.
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