Allergan CEO Finds Valeant Business Model Incompatible
November 12, 2015
By Mark Terry, BioSpace.com Breaking News Staff
Now that Pfizer Inc. (PFE) is in friendly talks to acquire Allergan (AGN), analysts are interested in what Allergan chief executive officer Brent Saunders thinks about Valeant Pharmaceuticals International Inc. (VRX).
In April 2014, Valeant and Bill Ackman’s New York hedge fund, Pershing Square Capital Management, made a hostile takeover bid of Allergan. This acrimonious acquisition attempt led to accusations of insider trading and an investigation by the U.S. Security and Exchange Commission (SEC).
In March 2014, Pershing Square started buying over-the-counter call options, becoming Allergan’s largest shareholder, owning about 10 percent of company stock. A month later Valeant and Pershing announced their joint bid. The stock jumped 15 percent, which gave Pershing about $1 billion in gains.
Allergan filed a lawsuit, which stated, in part, “Because of the crippling debt required to finance its many previous acquisitions, Valeant was unable to borrow enough money to acquire Allergan, and therefore needed an ally with capital to contribute—and found one in Ackman. Ackman, in turn, found in Valeant an incredible opportunity to buy Allergan stock with advance inside knowledge of a tender offer that was certain to cause the stock price to increase—guaranteeing him a massive return in record time.”
That deal eventually fell apart and Valeant went on to buy other companies—at least eight this year so far. Dublin-based Actavis (ACT) acquired Allergan in March of this year for about $70.5 billion in cash and equity.
In a recent interview with Bloomberg, Saunders was asked if Allergan had any thoughts of acquiring Valeant, particularly now that Valeant’s stock is so low after a series of bad news over inflated drug pricing and a Citron Research report comparing the company to Enron and accusing it of “channel stuffing.” It is also part of an SEC investigation over its acquisition of Paragon Vision Sciences.
“The things we look to buy are really first-in-class drugs, growth assets,” Saunders told Bloomberg. “There are a few of those in Valeant but there are also a lot of older medicines. It does not fit perfectly with the business model and the types of things we’ve been buying.”
Valeant stock really is having a tough year. Shares traded on Feb. 24, 2015 for $202, rose to $262.52 on Aug. 5, then dropped to $242.14 on Sept. 18. Shares dropped again to $177.56 on Oct. 16, and plunged shortly afterward, currently trading for $78.90.
The most recent fall came after yesterday’s news that Bill Ackman, one of Valeant’s biggest shareholders, will have to deal with Allergan’s insider trading lawsuit. Although Valeant and Pershing Square have argued they did nothing illegal by sharing information before the original bid, the judge has indicated he has “serious questions” about whether “substantial steps” were actually taken in the direction of a hostile takeover bid.
TheStreet gives Valeant shares a “hold” rating, noting that there is a mix of indicators, some for strengths, some for weaknesses. “The company’s strengths can be seen in multiple areas, such as its robust revenue growth, good cash flow from operations and expanding profit margins,” Rachel Graf wrote for TheStreet. “However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, unimpressive growth in net income and generally higher debt management risk.”
Meanwhile, a decision regarding a Pfizer-Allergan merger is expected by Thanksgiving. There is also some speculation that the merged company, which would make it the largest drug company in the world, exceeding Johnson & Johnson (JNJ)’s $300 billion annual revenue, would not remain a single huge company for long.
Instead, it would be split as soon as possible—probably sometime in 2017 — into two companies, one focused on research and development and high-growth products, and the other focused on mature products and generics.
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