Allergan rejects Valeant’s improved offer

Allergan rejects Valeant’s and hedge fund billionaire William Ackman’s improved $53 billion acquisition offer. The Botox maker has stood its ground since Valeant Pharmaceuticals International Inc. and Pershing Square Capital Management jointly made a bid in April.

Pershing, a company that Ackman founded, has a 9.7% share in Allergan. On May 28th, Pershing and Valeant improved their offer and then raised it again on May 30th. In the second offer, Pershing agreed to take a lower price for its Allergan shares to help up the bid. Mr. Ackman said he would ask Allergan shareholders to vote.

The latest offer includes $72 in cash plus 0.83 Valeant shares, making it worth approximately $177 per share.

Based in Irvine, California, Allergan Inc. operates in more than 100 countries.

Valeant offer undervalues Allergan

On Tuesday, Allergan again turned down the offer saying that it undervalues the company and is not in the best interest of its shareholders. Allergan also commented on Valeant’s business model, describing its financial data as “opaque”.

The value of Valeant shares are questionable, Allergan says, because it is unique among specialty drugmakers in failing to report sales of individual medications in its earnings report.

In a letter to Valeant’s CEO Michael Pearson, David Pyott, CEO of Allergan wrote:

“After thorough consideration, the Allergan Board has unanimously determined that your second revised proposal substantially undervalues Allergan, creates significant risks and uncertainties for the stockholders of Allergan, and is not in the best interests of Allergan and its stockholders.”

“In addition, we do not believe your latest proposal offers sufficient or certain value to warrant discussions between Allergan and Valeant.”

Valeant to approach Allergan shareholders

Laurie Little, a Valeant spokeswoman, said her company will now take the deal to shareholders for a vote, the aim being to replace the current Allergan board of directors with Valeant-friendly members. If this does occur, it will probably not be before November.

Ms. Little said:

“Valeant’s offer to combine with Allergan will create substantial value for both companies’ shareholders, and we look forward to giving Allergan shareholders the opportunity to speak for themselves.”

In an interview with Reuters, Mr. Pyott said he was in for the long slog “I’m an endurance player; I climbed Kilimanjaro last year.” Allergan has $14 billion in cash flow which he claims shareholders would like to use for acquisitions. If Allergan made acquisitions it would deter Valeant from pursuing its acquisition quest.

Valeant shuts down R&D

According to Valeant, Allergan spends too much money on research and development (R&D) of medications. It believes Valeant’s costs would be reduced and sales boosted if the two companies, which specialize in dermatological products, joined. Rather than spending on R&D, Valeant has a tendency to buy firms with proven treatments.

Two years ago, Valeant acquired Medicis Pharmaceutical Corp. Then the Medicis staff were gathered together and given envelopes. A black envelope meant the employee was fired. Most of Medicis’ R&D team received the black envelopes. It was not long before the thirty or so ongoing research projects were cancelled.

Acquiring companies, focusing on selling their successful products and stripping down their R&D, has helped Mr. Pearson increase Valeant’s annual sales to $5.8 billion in 2013, six times what it was in 2008 when he took the helm. During the six-year period, Valeant’s shares have risen 848%.

Mr. Pearson, who has spent about $19 billion taking over companies since 2008, says he wants Valeant to become one of the big five global drugmakers by 2006.

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