Allergan rejects Valeant's takeover bid, but it's probably not over

Allergan rejects Valeant's takeover bid, but it's probably not over
A key part of Allergan’s research spending goes toward looking for new uses for existing drugs such as Botox. Above, a syringe of the drug. (Patrick T. Fallon, Bloomberg)

Botox maker Allergan Inc. rejected a $46-billion takeover offer from a Canadian rival, setting the stage for what analysts said may become a long and nasty fight for control of the Irvine company and its prized collection of eye and skin medications.

The battle pits Valeant Pharmaceuticals International Inc. and its partner, activist investor Bill Ackman, against Allergan and a board of directors that seems determined to hold on to the company.

Analysts said Valeant is unlikely to walk away. "It's very clear they got into this with the intention of completing it," said Shibani Malhotra, an analyst with Sterne Agee. "The biggest question is it boils down to the price."

Valeant offered a combination of cash and its stock for the company April 22. The Botox maker said little about the offer until Monday.


In a letter to Valeant, Allergan's chief executive, David E.I. Pyott, said the offer was too low and "creates significant risks and uncertainties for the stockholders." Allergan's board unanimously rejected the offer.


Neither Valeant nor Ackman responded to requests for comment. But they have been outspoken in recent weeks, suggesting Allergan needs a financial overhaul.

The company could be much more profitable, they said, by trimming its expenses, particularly the amount it spends developing new drugs.

Allergan came out swinging Monday in a conference call with industry analysts. Pyott said the company's future is promising, and he dismissed the idea that it spends recklessly.

The CEO said he expects the company's earnings per share to grow 20% to 25% in 2015 and at least 20% a year for the next five years.

He said the company's spending on research and development, about $1 billion in 2013, has produced huge returns. Valeant has said it would reduce that to about $300 million.

"Some would argue that abandoning early-stage R&D helps drive profitability. However, we think that's a shortsighted approach," Pyott said.

A key part of Allergan's research spending goes toward looking for new uses for existing drugs. The company has found multiple uses for Botox beyond the drug's ability to ease the appearance of wrinkles.

Botox is now prescribed to treat chronic migraine headaches, overactive bladders and eyelid spasms — helping it reach nearly $2 billion in sales last year. Under Valeant, those uses would not have been discovered, Pyott said.

"We've been very successful in utilizing our clinical expertise to expand the number of Botox indications and then launch them commercially," Pyott said. "Given Valeant's aversion to early-stage investment, under Valeant's ownership, this franchise would not have yielded the growth and remarkable value that Allergan has achieved."

The next move may be up to Valeant.

Experts say the company now has several options. It could try to sweeten the offer, withdraw it or urge shareholders to force Allergan to negotiate. In the end, shareholders might be asked to decide whether to take Valeant's offer.

If Valeant moves forward, it probably will step up its already heated efforts to sway major shareholders.

Allergan probably will do the same. On Monday, Pyott said Allergan officials intend to meet with investors to discuss his plans to grow the company.

Investors may end up facing some key questions: Should they take Valeant's money and run? Or would they be better off holding on and hoping that Allergan's earnings and stock price will continue to grow?

Valeant has offered to pay $48.30 in cash and 0.83 of a share of its stock for each share of Allergan stock. At Monday's closing price, that would amount to $156.33 for each Allergan share — 41% more than Allergan's Dec. 31 closing price.

"I think most shareholders are struggling with balancing the long-term versus the near-term certainty of an offer from Valeant," said Malhotra, the Sterne Agee analyst. "While they can see that Allergan is an outstanding company with strong prospects, that has to be balanced with the fact that you could get $185 to $200 this year."

Allergan, which once focused on ophthalmic medication, has grown substantially in the last decade. The company reported $6.3 billion in sales last year and now employs 11,400 people in more than 100 countries.

Valeant and Ackman are expected to keep pursuing a deal.

"We think Valeant has too much to gain and is thus unlikely to walk away," said Aaron "Ronny" Gal, an analyst with Bernstein Research. "It will stretch and bid higher."

Regardless of the outcome, Ackman and his company, Pershing Square Capital Management, appear likely to be significant winners. Earlier this year, the firm bought about 9.7% of Allergan's shares at about $120 each.

If a deal goes through, Valeant could end up paying as much as $200 a share by some accounts. If it doesn't, the stock probably will end up trading at about $145, given Allergan's new profit expectations, Gal said.

"Bill Ackman made $1 billion any way you look at it," he said.

Allergan shares fell 1% on Monday to $159.72. Valeant's stock was down 0.8% to $130.16.

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