Valeant Pharmaceuticals International Inc. got some traction on its hostile takeover attempt of Allergan Inc. last week, with a third-quarter earnings report reversing a weekslong dip that had dragged its bid below the market value of the Irvine-based drugmaker.
This week will likely tell whether the trend will hold in the face of a withering critique from Allergan, which is due for its own quarterly report this week.
Canada-based Valeant’s rally came after its earnings report for the third quarter—the last before Allergan holds a Dec. 18 special shareholders’ meeting to consider a call to remove six of its directors and replace them with board members more amenable to a takeover.
Valeant had earlier lowered guidance for the third quarter, and its report exceeded the revised expectations, touching off a run-up for its shares. That’s a crucial matter for Valeant, since its bid is a mix of stock and cash.
The increase brought the value of the bid Valeant has made with activist investor Bill Ackman’s Pershing Square Capital Management LP to around $194 a share, or a total of around $57.6 billion. That was slightly ahead of Allergan’s $186 share price, which came to a market value of about $55.2 billion late last week.
The latest value of the bid includes $15 more per share that Valeant recently said it would offer without indicating whether it would come as cash, stock or a combination.
Ackman and Valeant have said a possible revised bid could come in at more than $200 a share—the stock portion currently calls for 0.83 shares of Valeant for each share of Allergan.
Valeant said that it wouldn’t abandon its pursuit prior to the shareholders’ meeting.
Critiques
Allergan, meanwhile, continued to hit Valeant with critiques last week, including a 35-page response to the unwanted suitor’s third-quarter earnings.
Allergan’s riposte was based on Valeant’s Securities and Exchange Commission filings, which reported a profit before special items and noncash charges of $707 million, up 47% from $479.6 million a year earlier. Revenue rose 33% to $2 billion, something Valeant attributed to its August 2013 buy of diversified eye company Bausch & Lomb Inc.
“[We] delivered exceptional results for the third quarter and exceeded our expectations on all key metrics,” Valeant Chief Executive J. Michael Pearson said in a statement. “The true strength of our business and operating model can be clearly seen by our financial results.”
Allergan said investors should question several things about the financials in its rebuttal.
A bullet point on organic growth rates raised questions about why Valeant’s products “appear to lose market share,” as well as “the sustainability of Valeant’s price increases, which by their own admission, account for a significant portion of the company’s growth.”
Allergan also aimed to cast doubt on Valeant’s ability to grow brands, charting a number of Valeant’s products with revenues between $25 million and $125 million during the second quarter.
Allergan’s flagship Botox, by contrast, had $579 million in sales during the quarter, while its Restasis dry-eye treatment brought in $269 million.
“We believe Valeant has no experience managing large, sophisticated brands,” Allergan said in its filing, adding that it believed the Canadian drugmaker doesn’t have “the requirements to ensure successful commercialization.”
Medicis
Allergan’s rebuttal also cast a critical eye on the performance of the product lineup that came with the $2.6 billion acquisition of Scottsdale, Ariz.-based Medicis Pharmaceutical Corp. by Valeant in 2012.
That deal brought Valeant Restylane, a rival to Allergan’s Juvéderm dermal filler line, and Dysport, a neurotoxin that holds a relatively small share of the market compared to Botox.
“We believe that Medicis performance has deteriorated post Valeant acquisition,” Allergan said. “Does the seeming decrease in value of the Medicis business in Valeant’s hands raise concerns for other acquired businesses?”
Allergan noted, among other things, that Medicis/Valeant’s market share fell to 17% in the second quarter—when it had sales of $24 million—from 36% a year earlier. Allergan’s Juvéderm increased its market share to 64%—with $91 million in sales—from 40% a year earlier.
Allergan also offered a scathing assessment of how Valeant integrated Medicis into its operation from Valeant’s own SEC filings.
Valeant focused on the “best raw talent in both sales and marketing over maintaining relationships,” and it “took cultural integration for granted,” the rebuttal said.
The outcome, according to Allergan, was “disruption with customers” and “limited acceleration of growth.”
Allergan credited Valeant with some improvement on integrating Bausch a year later.
Allergan is believed to still be in the hunt for a deal that some analysts believe would put it out of Valeant’s reach. Possibilities include New Jersey-based Actavis PLC; Ireland-based Shire PLC; and Salix Pharmaceuticals, which operates from Raleigh, N.C.
