Did Valeant Pharmaceuticals International Inc. make David Pyott’s point last week?
Look to this week’s performance of the Canada-based company’s shares for the answer.
It appeared that Valeant pulled out the stops last week as it pursued its hostile bid for Irvine-based drug maker Allergan Inc.
Valeant went public with a peek at better-than-expected earnings for the third quarter and reversed field by talking up its research and development—an area of the pharmaceutical business the company had earlier addressed in tones that struck many observers as dismissive.
Valeant Chief Executive Michael Pearson even sent a conciliatory letter to Pyott, his veteran counterpart who’s proved to be a deft adversary in leading Allergan’s defense against the takeover attempt for the past five months.
The result as markets neared the closing bell on Friday: The value of Canada-based Valeant’s offer stood at about $53 billion—or $179 a share. That was less than a 2% premium for Allergan, which had a market value of $52.2 billion on a share price of about $178.
Pyott has contended all along that the bid by Valeant and activist investor Bill Ackman’s Pershing Square Capital Management LP undervalues Allergan. The would-be raiders have raised the offer twice (see chart), and it now stands at .83 shares of Valeant and $72 in cash for each share of Allergan.
Valeant’s early view on the third quarter and other moves sent its shares on a significant runup that started midweek.
Pyott issued a polite response to Pearson’s letter—referred to by the Valeant boss as an “olive branch”—but didn’t yield an inch on his contention that Allergan and its shareholders are better off without the deal.
Pyott’s view gets some backing from the market, which has yet to put Valeant shares above Wall Street analysts’ price targets for Allergan, which ranged from $180 to $230 a share, with an average of about $198.
Valeant’s run-up started on Sept. 24 after it said it expects to beat consensus revenue estimates of $297.1 million when it reports third-quarter results—which had earlier been revised downward—on Oct. 20. It also said it expects profit, excluding charges, to be stronger than previously estimated.
The initial bump took Valeant shares up 8%, and they rose again a day later when it said Vesneo, a potential glaucoma drug being developed by the company’s Bausch & Lomb unit, could reach a peak of $500 million in the U.S. and $1 billion globally.
The flurry of newsmaking by Valeant could be a reflection of the likelihood that it must count on an increase in its stock price to raise the value of its Allergan bid. The company has long-term debt of about $17 billion, which some analysts believe would make it hard to borrow money to increase the offer’s cash portion.
Allergan declined comment, and Valeant couldn’t be reached.
The effect of the rise for Valeant’s shares was blunted by a strong week for Allergan, whose market capitalization increased 5% on a jump that came on reports of advanced talks on an acquisition of Raleigh-based Salix Pharmaceuticals Ltd. Allergan shares held much of the gain even after word surfaced that talks might have cooled and that New Jersey-based Actavis PLC—which recently expressed interest in Allergan—was in early talks with Salix.
Reports on Allergan and Salix brought a strong reaction from Ackman, who owns 10% of Allergan. He threatened to sue Allergan if it consummated a deal with Salix prior to the Dec. 18 special shareholders’ meeting regarding the Valeant-Ackman bid.
“This action would directly contradict your repeated published statements that: ‘While Allergan does not believe that Valeant’s offer provides compelling value relative to the alternatives available to the company, the Allergan board of directors fully supports the right of shareholders to vote on the value proposition offered by Valeant at the appropriate time,’” Ackman said in a letter to Allergan directors.
Several significant shareholders—including T. Rowe Price and Pentwater Capital Management—called late in the week for Allergan to give shareholders a say on any deal for Salix.
An Allergan buy of Salix remained in the mix of possibilities as of presstime, in any case.
An Allergan-Salix deal “makes sense,” said Shibani Malhotra, an analyst with Birmingham, Ala.-based Sterne, Agee & Leach Inc., in a client note last week.
“If Allergan is ultimately successful in acquiring Salix we believe the company can generate a substantial opportunity in the gastrointestinal and liver space,” Malhotra wrote. Her note pointed out that Allergan “appears to have options beyond Valeant’s offer” and “other levers to maximize shareholder value” in view of the report.
Letters
Valeant’s management changed its tone on Allergan in the exchange of letters last week. Pearson indicated a willingness to “take the temperature down” and asked for face-to-face talks.
“While I recognize that takeover battles can become very heated, it is regrettable that the tone of our public back and forth has become acrimonious at times,” he wrote. “I have not appreciated what I believe are baseless attacks on our business model, and I am sure there are things that have not sat well with you.
“We are committed to this transaction. While we would much prefer avoiding a three-month proxy contest, we will pursue it if we need to,” he added.
Pyott responded: “While we acknowledge your effort as a positive engagement, we continue to conclude that Valeant’s offer is grossly inadequate and substantially undervalues Allergan, from both the outset of this matter and particularly in consideration of the enhancements Allergan recently made to its anticipated business results.”
The reference to “anticipated business results” took in Allergan’s recent upward revision of its outlook for 2015 and 2016, with upbeat guidance including a $10 profit per share.
The temporary respite in what has at times been an acrimonious back-and-forth between the two companies eroded with a subsequent missive from Pearson, who lashed out at Pyott and lead independent director Michael Gallagher:
“While we continue to believe it’s in the best interest of your shareholders for you and your team to conduct due diligence on our business, you seem intent on avoiding constructive engagement at all costs.”
