Expect the fight over Irvine-based Allergan Inc. to turn toward the drugmaker’s board room.
Activist investor Bill Ackman is standing by a slate of six new directors he and Valeant Pharmaceuticals International Inc. are proposing as part of their hostile bid.
“They have strong fiduciary track records,” Ackman said last week in a telephone interview. “What you will find is that [our candidates] are quite impressive.”
Allergan late last week responded directly to Ackman’s comments—a rarity in the back-and-forth of recent months.
“We recognize that the primary issue at the December 18th special meeting will be creating stockholder value, and the actions taken by the Allergan board—both before and after Valeant commenced its offer—have generated significant value for Allergan stockholders,” according to a statement from the company. “Wall Street analysts have recognized the unprecedented value creation overseen by the board and have increased their forecasts for a standalone Allergan, with an average target price now of $209. In contrast, we believe Pershing Square’s hand-picked nominees have only one agenda — advancing Valeant’s grossly inadequate offer.”
Canada-based Valeant and Ackman have pursued Allergan for more than six months—their current unsolicited bid for the drugmaker was valued at $54.5 billion, compared to Allergan’s market value of about $56.4 billion late last week.
The would-be raiders have more recently set a benchmark at around $60 billion—or $200 a share—for Allergan. That hasn’t been formally offered, though, and Ackman said it would not be put on the table as a starting point for negotiations unless Allergan’s board agreed to sit down for talks.
Meeting, Candidates
Allergan has yet to directly engage its hostile suitors, who succeeded in getting enough votes to force a special shareholders’ meeting scheduled for Dec. 18. Valeant and Ackman’s Pershing Square Capital Management LP hope to convince a majority of Allergan investors to oust six of the company’s nine directors.
Pershing Square has offered a slate of six candidates as replacements in case the call for the ousters succeeds.
Allergan’s by-laws call for the three directors who would remain—a group that includes Allergan Chairman and Chief Executive David Pyott—to fill any vacancies.
Maris
The proposed ouster and slate put forward by Ackman, who owns about 10% of Allergan through Pershing Square, drew a critical response in a recent note by analyst David Maris of BMO Capital Markets.
Maris contended that “Ackman’s Wish List” (see box right) was “a slate that we believe Allergan shareholders will not support due in large part to what appears to be limited experience with healthcare.”
“This analyst believes there is no basis for investors to want to remove a majority of Allergan’s board―a board that has overseen outstanding total shareholder returns,” Maris wrote, noting that Chairman and Allergan Chief Executive Pyott ranked No. 4 on the Harvard Business Review’s ranking of top chief executives for delivering shareholder value, with a 1,948% return since taking the helm 16 years ago.
Ackman Responds
Ackman took up Maris’ critique head-on, standing behind his slate as bringing a diversity of experience that he said Allergan’s current board lacks.
“The last thing you want on a board is 10 members all in specialty pharmaceuticals,” Ackman said.
He said Valeant and Pershing Square are not seeking Pyott’s removal because Allergan’s bylaws pave the way for him to part ways with the company under certain terms if he is removed as chairman. The activist investor also said he values Pyott’s leadership.
“We didn’t want to put him in that position,” Ackman said. “The company needs leadership.”
Ackman also addressed the question of whether Valeant would increase its bid for Allergan to some $200 a share.
“Valeant is not willing to increase its bid further” until Allergan directors are willing to negotiate, he said. “They are tired of negotiating against themselves.”
Valeant Chief Executive Mike Pearson has said the Canadian company won’t walk away from Allergan prior to the special meeting.
Background Critiques
Maris’ report included specific concerns about the Pershing Square candidates’ backgrounds. He criticized Betsy Atkins and John Zillmer’s service on tobacco company boards, including Winston-Salem, N.C.-based Reynolds American Inc. and R.J. Reynolds.
He wrote that Cathleen Black’s career in publishing, which includes serving as president of Hearst Magazines, “is very impressive,” but added that “we do not see what relevant experience she adds to Allergan’s board.”
Ackman praised Black, noting that her experience in running consumer magazines brings marketing experience to Allergan and that she’s also been involved with big brands, such as Coca-Cola and IBM, in her director service.
The analyst noted that two other candidates—Fredric Eshelman and Steven Shulman—have healthcare experience but mentioned potential conflicts of interest for both. Maris cited Eshelman’s recent sale of Morrisville, N.C.-based gastrointestinal drugmaker Furiex Pharmaceuticals Inc. to New Jersey-based Actavis PLC, which has been tabbed as a potential “white knight” suitor for Allergan.
The analyst said Shulman has seats on six boards and wondered what “quality time input he can provide to Allergan, especially.”
David Wilson
Maris’ report also homed in on the nomination of David Wilson, who besides his time at accounting firm Ernst & Young was a former chief executive of the Reston, Va.-based Graduate Management Admission Council.
Wilson has no healthcare background, “and we are confounded as to why Pershing Square would propose [him] to be a director, as it seems as a director of a publicly traded datacenter realty company and the well-known struggling chain of bookstores, Barnes & Noble, Mr. Wilson would bring no relevant industry expertise to Allergan’s board,” Maris wrote.
Ackman responded that Wilson brings accounting experience and the ability to assess questions Allergan has raised about Valeant’s accounting.
Allergan has said its current board has “significantly more industry experience” and characterized the Pershing Square/Valeant slate as a “further attempt” to acquire Allergan at a “grossly inadequate price that substantially undervalues the company.”
Maris praised Allergan’s incumbents.
He mentioned that lead independent director Michael Gallagher “has significant experience in branding and marketing of household and personal wellness products, and we believe Allergan benefits from leveraging Mr. Gallagher’s expertise.”
Director Louis Lavigne Jr. “contributes a wealth of experience in business strategy, management and finance specific to the pharmaceutical industry,” Maris said.
And he added that new director Henri Termeer’s “expansive knowledge regarding the pharmaceutical industry benefits Allergan.” Termeer sold biotech company Genzyme Corp. in 2010 to France-based Sanofi SA for $20 billion.
