Orange County will remain a nerve center for Allergan Inc., according to the chief executive of its future parent company.
“Irvine may very well be the headquarters for Actavis’ specialty pharmaceutical division,” Brent Saunders, chief executive of Actavis PLC, said in an interview last week.
A big part of the reason for retaining a strong presence in Irvine is that “people don’t move from Orange County to New Jersey,” said Saunders, referring to Actavis’ operational base. He added that he “worked in Orange County” earlier in his career and got a first-hand feel for the area’s appeal and talent pool.
“We are very committed to Orange County, its talent and its people.”
Irvine-based Allergan, OC’s largest drugmaker, agreed last week to be acquired by Actavis, likely signaling the end of a nearly seven-month battle to thwart a hostile takeover by Canada-based Valeant Pharmaceuticals International Inc. and activist investor Bill Ackman’s Pershing Square Capital Management LP.
Actavis, which has headquarters in Ireland for corporate tax purposes, is paying $129.22 in cash and some 0.37 of its shares for each Allergan share, an offer that came out to about $67.3 billion, or $224 a share, late last week.
Actavis re-emerged as a “white knight” for Allergan in recent weeks after earlier talks stalled. The deal-making resumed while Valeant and Ackman were holding out an offer to set a benchmark of $200 a share if Allergan would negotiate with them.
Pyott’s Position
Allergan Chief Executive David Pyott steadfastly refused calls for negotiations by Valeant and Ackman, saying their various offers over the past seven months undervalued Allergan.
Pyott has guided Allergan’s growth from $700 million in annual revenue to more than $6 billion over 16 years, a period that has seen the company’s market capitalization increase more than 1,900%.
His stance on Valeant’s bid was borne out on the several occasions the would-be raiders raised the stakes, reaching about $55 billion, or $185 a share, on their last formal offer. The trumping offer from Actavis re-emphasized Pyott’s point.
He was blunt when asked why Allergan was willing to entertain Actavis after striving to remain independent over the past few months:
“We were able to avoid the company being stolen for a real low price,” Pyott said.
R&D
Allergan’s resistance to the hostile bid also reflected an unease with Valeant’s operating style, which has involved significant cuts to the research and development operations of companies it has acquired.
Allergan has long invested significant funds—more than $1 billion annually in recent years—in research and development. Much of the work goes on at its headquarters in Irvine.
The company recently trimmed some R&D programs in response to the pressure wrought by Valeant’s bid. The deal with Actavis will lead to more cuts, but the two companies are expected to combine for about $1.7 billion in spending on research and development a year, a total that appears sufficient to keep much of the Irvine operations intact.
“We are committed to innovate,” Saunders said.
Pyott said Actavis—which will become firmly part of Big Pharma with the deal—is fit to be a corporate parent to Allergan.
“In the short term, we are going to pass the torch … we want to hand over the company in excellent working order,” Pyott said.
Pyott did not comment on whether he might be one of two Allergan directors who would be invited to join Actavis’ board after the deal was complete.
‘Complementary’
Saunders addressed the anticipated makeup of the combined company’s management team.
Allergan and Actavis’ corporate suite “are similar and complementary … we look for the best athletes,” he said, using a sports metaphor.
“That’s what I’ve done [at Actavis],” said Saunders, who was chief executive of Forest Laboratories Inc. in New York when it was acquired by Actavis earlier this year.
“The management team is half legacy Actavis and half Forest,” he said.
Actavis confirmed last week in a statement that its executive chairman, Paul Bisaro, will continue in his role.
Pyott noted that it is not Allergan’s first change in ownership.
Longtime Chief Executive Gavin Herbert Sr. sold Allergan to SmithKline (now GlaxoSmithKline PLC) in 1980. Allergan was spun back out as an independent company in 1989.
Valeant, meanwhile, all but conceded that its pursuit has ended.
“While we will review any such agreement in determining our course of action, Valeant cannot justify to its own shareholders paying a price of $219 or more per share for Allergan,” Valeant Chief Executive Michael Pearson said.
The deal also brought the cancellation of a special meeting that Ackman and Pershing wanted to call in order to remove a majority of Allergan’s directors and compel Allergan to start negotiating with Valeant.
Ackman told CNBC that he supported the Actavis deal.
Allergan and Actavis are expected to combine for about $23 billion in revenue in 2015. The two companies employ some 36,000 people between them.
Saunders and Pyott said there are some redundancies but did not lay out any specific job cuts.
Wall Street Weighs In
Wall Street weighed in on the deal.
Analyst Liav Abraham of Citigroup wrote in a report that while the price tag “is slightly higher than we had anticipated,” there were several factors playing into that, including “the highly strategic nature of the transaction, which confirms [Actavis’] transformation into a global specialty pharma player.”
Actavis is “the most natural, thoughtful, strategic alternative for Allergan (and vice versa),” Cowen analyst Ken Cacciatore wrote in a research note issued before Ackman withdrew the special meeting.
“The companies are both sympathetic about proper investment in their current commercial portfolios and in thoughtful research and development—and their cultures would likely easily integrate,” Cacciatore said.
