Orange County Business Journal

Allergan Raises Bar on Raiders With Cost Cuts, Pledge on Profits

Jane Yu Monday, July 28, 2014

Allergan Inc.’s promise of cost cuts and higher profits might have put the company out of its hostile suitors’ reach.

Wall Street analysts helped drive that notion last week as they upgraded their views on the Irvine-based drug maker’s value over the near term, putting more distance between Allergan and the bid by Valeant Pharmaceuticals International Inc. and Bill Ackman’s Pershing Square Capital Management LP.

How much distance? Valeant’s current bid is about $7 billion short of Allegan’s potential market capitalization, based on recent analyst projections for where Allergan shares could trade in the next year or so.

That means Valeant would have to put more cash on the table or boost its stock by more than 20% just to get to Wall Street's price target on Allergan.

The boost in price projections by numerous analysts was followed by a modest but steady increase in Allergan shares last week. The upward movement began when the company reported strong second-quarter results and plans to trim its workforce and early-stage programs to save $475 million next year, along with upbeat guidance through 2016, including $10 in earnings per share.

The Business Journal compiled nine price targets for Allergan shares, ranging from $180 to $230 against the current price of about $170. Analysts said their forecasts were based on EPS estimates and on price-to-earnings multiples that are in line with Allergan’s historical levels, between 22 and 25.

The average of the nine price targets—$198.22—gives Allergan a potential market capitalization of $59.1 billion in the next year or so.

Valeant’s current bid—which calls for $72 and 0.83 of its own shares for each share of Allergan—totaled about $52 billion late last week.

Allergan has consistently called Valeant’s offers “grossly inadequate.”

Last week’s action seemed to justify that view. Indeed, Valeant’s bid was just slightly above Allergan’s market capitalization of nearly $51 billion as the week drew to an end—not to mention the shortfall when compared to the analysts’ projections going forward.

Allergan Chief Executive David Pyott told the Business Journal the company would not “put out numbers on what we personally think is the right value of the company, [as] I think that’s inappropriate.”

Pyott instead pointed to the numbers presented by analysts, all of which were in line with historical P-E multiples between 22 and 25.

Wall Street throughout the week moved more toward Allergan’s contention that Valeant undervalues the company.

Analyst Sean Lavin at BTIG LLC in New York wrote in a recent research note that “a bid north of $200 [per share] is needed” to acquire Allergan, which would bring the overall price to at least $59.6 billion.

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