There was no shortage of numbers punctuating the battle for Allergan Inc. last week, when the sum total pointed to a possible shift in favor of the Irvine-based drug maker’s effort to stave off a hostile takeover bid by Valeant Pharmaceuticals International Inc.
Start with the 21% hike in the cash portion of Canada-based Valeant’s cash-and-stock offer for Allergan, an increase that was announced in a midweek webcast and put the value of the deal at about $50 billion based on share prices at the time.
That came up well short of some other key numbers, including $53.5 billion and $59.5 billion—the range that Allergan investors said Valeant would have to reach before its bid would get traction, according to a JPMorgan survey released prior to the webcast.
Valeant took another shot as the markets wound down and the Business Journal went to press late last week, upping its offer to around $53 billion with an additional increase in the cash portion of the deal.
That only touched the low end of the range identified as the playing field in the JPMorgan survey. Valeant’s shares perked up on first word of the latest offer, but soon fell back.
By the time the markets closed for the week it looked as though the latest move amounted to another nod toward Allergan’s independence.
The first indicator that the tide might be turning in Allergan’s favor had come earlier in the week, on the eve of Valeant’s midweek webcast. That’s when a research report by BMO Capital Markets’ specialty pharmaceutical analyst David Maris highlighted a survey of 85 of Allergan’s institutional investors that showed that 79% of them believe Valeant shares will “carry a higher-than-average risk over the next five years.”
Less Than 50%
The BMO report put Valeant’s chances of completing the takeover at “less than 50%” and found that 92% of Allergan shareholders who responded to the firm’s recent survey think Allergan has been “managed well over the years.”
“What we have, we believe, is a simple snapshot of respondents trusting Allergan more and seeing a riskier, less attractive future with Valeant,” Maris wrote.
BMO’s report noted that the Allergan shareholders it polled “also appear confused as to what they might be getting” if they take Valeant shares in a deal and noted that 88% of respondents agreed with the statement that “it’s not easy to follow all of Valeant’s numbers, adjustments and actual growth.”
The report also indicated that the JPMorgan survey set the bar high for Valeant and might have rendered its sweetened bids disappointments to respondents. 75% of them thought that Valeant’s updated bid would have equated to $53.5 billion or more, according to the poll. Most thought it should range up to $59.5 billion, while 21% anticipated even more.
The numbers that seemed to give Allergan more room in its battle to remain independent came with some new terminology last week that also pointed to the possibility that it has gained ground since Valeant’s initial $47 billion bid in late April, when most observers considered the deal an eventuality.
The maker of Botox and other drugs rejected Valeant’s first bid last month, contending it undervalued the company, created significant risks and uncertainties for its stockholders, and that it was not in the best interest of Allergan and its shareholders.
Allergan and Chief Executive David Pyott have been working to sway shareholders in private, for the most part, in the weeks since then—a contrast to the webcast and other pronouncements from Valeant.
Valeant Chief Executive Michael Pearson, meanwhile, left the door open last week for another hike in his company’s bid, provided Allergan comes to the negotiating table. Until then, he said, Valeant “won’t bid against ourselves.”
Pearson added that Valeant will not make an all-cash offer for Allergan and vowed not to “overpay” to close the deal—the first comment from him that entertained the possibility that the deal won’t go through.
Valeant’s higher public profile has included teaming up with activist investor Bill Ackman, who owns about 10% of Allergan through his Pershing Square Capital Management LP.
The Ackman-Valeant alliance prompted another number that leans toward Allergan’s effort to remain independent, according to the recent BMO survey of shareholders: 54% of survey participants answered that “it does not seem right” when asked about the alliance between Valeant and Ackman.
Valeant had its own view of its new offer to tout.
Pearson said he “was bullish that the updated offer would appeal to Allergan shareholders, based on his feedback from several Allergan shareholders,” Leerink Swann LLC analysts Jason Gerberry and Seamus Fernandez said in a flash note issued after the webcast.
Valeant’s new offer also included what’s known as a contingent value right, which could be worth up to $25 a share based on future sales of DARPin, an eye drug under development.
Pearson said feedback from Allergan shareholders he’s spoken with indicated that two primary concerns were the size of the offer and the benchmark payments that would factor in DARPin’s potential, concerns “which [management] believes were addressed in the latest offer,” according to Gerberry and Fernandez.
“On the conference call, management tone seemed confident that a deal will ultimately get done, but management doesn’t plan to bid against itself and is prepared to be patient,” Gerberry and Fernandez wrote of Valeant.
Time could begin to work against Valeant, though: Its recently announced $1.4 billion sale of some of its dermatology products, which compete with Botox and other Allergan aesthetic offerings, to Switzerland-based Nestle SA will take away revenue and earnings in coming quarters. In addition, Valeant’s buy last year of Bausch & Lomb Inc. will become subject to clear year-to-year comparisons.
Allergan made its case to remain independent in a presentation filed with the Securities and Exchange Commission on May 27. In the presentation, Allergan raised questions about Valeant’s organic growth, sales reporting transparency, performance of two major acquisitions, and management team stability, as well as research and development.
Research and development came up in some other Wall Street reports.
Analyst Annabel Samimy of Stifel, Nicolaus & Co. wrote in a research note that she does not believe that Valeant showed that it can manage and develop products better than Allergan.
R&D
Allergan executives and some investors have objected in particular to what they characterize as Valeant’s desire to slash research and development spending.
Valeant fired back against criticism of its business model in a shareholder meeting after the webcast. That meeting included appearances by several executives who talked about how their divisions have grown since being bought by Valeant, although one indicated that Valeant’s dermatology division suffered from patent losses and integration problems with the late 2012 buyout of Medicis Pharmaceutical Corp.
