Valeant’s growth prospects questioned after losing Allergan acquisition

MONTREAL – Valeant Pharmaceuticals’ growth prospects came under scrutiny Monday after the Quebec-based concern waved the white flag in its hostile bid for Botox maker Allergan.

California-based Allergan reached a friendly US$66-billion agreement to be acquired by Actavis in a cash and stock deal that easily surpassed Valeant’s previous offer, worth nearly US$55 billion.

Valeant (TSX:VRX) (NYSE:VRX) had indicated a willingness to raise its offer above US$200 per share from US$184, but wouldn’t attempt to top the Actavis bid.

“While we will review any such agreement in determining our course of action, Valeant cannot justify to its own shareholders paying a price of US$219 or more per share for Allergan,” said chairman and CEO Michael Pearson, who had spent months attempting to add Allergan to the company’s acquisitions.

Valeant, which has its headquarters near Montreal in Laval, Que., will remain focused on its operations and evaluate acquisition opportunities “prudently, in a disciplined manner and in the best interests of our shareholders,” Pearson said.

Under the deal announced Monday morning, Allergan shareholders will receive US$129.22 in cash and 0.3683 share of Actavis (NYSE:ACT) for each of their common shares.

Allergan has been fighting off a takeover by Valeant, which is working with Pershing Square — a New York-based private equity firm headed by Bill Ackman that is a major shareholder of Allergan.

Shares of Allergan (NYSE:AGN) hit an all-time high Monday, and closed up more than five per cent to US$209.20 in Monday trading in New York, while Actavis stock also set a new high on the New York Stock Exchange before closing at US$247.94. Even Valeant shares were up, gaining $2.84 or 1.87 per cent to C$154.31 on the Toronto Stock Exchange.

Allergan said the white knight offer from Actavis has been unanimously supported by the directors of both companies and could close in the second quarter of 2015.

They said a combined Allergan-Actavis would have more than US$23 billion in annual revenue and become one of the world’s largest pharmaceutical companies with an enterprise value exceeding US$147 billion.

Valeant’s failure to acquire Allergan isn’t a total loss for Pershing Square, which will see its leading stake in the company almost double in value with the Actavis offer.

A shell fund started in February by Pershing Square and Valeant spent about US$3.2 billion to acquire a 9.7 per cent stake in Allergan for an average of about US$111 per share. The approximately 29 million shares would be worth US$6.35 billion under the Actavis deal.

Vicki Bryan of Gimme Credit said the often nasty battle for Allergan has exposed questions about Valeant’s business model that could haunt efforts to land future large deals.

“The problematic part of their story persists and the main thrust of their highly touted business strategy to buy their way to victory continues to lose credibility,” she said in an interview.

The corporate bond analyst criticizes Valeant’s “very opaque numbers” which hide its real organic growth. It’s the same complaint levelled by Allergan, which accused Valeant of relying on more than 100 acquisitions since 2008 to fuel its growth and by using price increases to camouflage what it claimed were weak increases in organic sales.

Valeant has called those allegations “baseless.”

In addition to concerns about the quality of Valeant’s core operating trends, Bryan said Valeant faces lawsuits and regulator probes on alleged insider trading in Allergan.

“I am skeptical on their prospects,” she said, adding that Valeant may have trouble financing a takeover of a company with a lesser quality than Allergan.

Allergan was attractive for Valeant primarily because of its eye care and Botox lines, along with more than US$4 billion in cash.

Valeant’s next targets are likely going to be much smaller and not as well-respected, Bryan said. Among the names that have surfaced as possible contenders is animal health pharmaceutical maker Zoetis Inc., in which Pershing Square has acquired an 8.5 per cent interest.

David Pyott, Allergan’s chairman and CEO, said the Actavis deal provides Allergan shareholders with substantial and immediate value and the opportunity to participate in significant upside potential from two companies with similar approaches to growth.

Actavis forecasts generating at least US$1.8 billion in annual cost savings starting in 2016 in addition to US$475 million previously announced by Allergan. About $450 million of the savings will come from taxes.

The new buyer also plans about US$1.7 billion in annual research and development spending, something that Valeant intended to cut by US$900 million.

“So this is all about building long-term value and not short-term cost-cutting,” Pyott said during a conference call.

Brent Saunders, the CEO and president of Actavis who will head the combined company, said that the deal will make it one of the world’s top 10 pharmaceutical companies.

“Anybody can cut costs. The real goal here is for us to be very smart and intelligent and thoughtful and deliberate in driving these efficiencies without impairing our ability to grow,” he told analysts.

David Maris of BMO Capital Markets expects the deal to win broad support from Allergan’s shareholders hoping to avoid the prospect of seeing much of the company’s research and development dismantled.

“While some might see this as the end of an era, we believe that this is the dawn of another, one that will see a sustainable high-growth Actavis with a compelling pipeline, high organic growth, and exceptional cash flow,” he wrote.

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