Allergan seen facing tough fight vs Valeant after improved bid, bankers say
Allergan (NYSE: AGN) has a long fight ahead of it as it attempts to fend off uninvited bidder Valeant (NYSE: VRX), said three industry bankers.
In its ongoing battle for Allergan, Valeant increased its takeover bid on 28 May to USD 58.30 and added a contingent value rights plan of up to USD 25 per share for DARPin, Allergan’s Phase II and preclinical drug candidate to treat wet age-related macular degeneration (AMD).
Valeant seems very motivated to buy the Irvine, California-based company, said the first banker. The significant increase in price offered by Valeant speaks to the Canadian firm’s “desperation” to acquire Allergan, added the banker.
Valeant does not have many other options for buys that would fit well with the company as an alternative, said the first banker. In order for Valeant’s business model to work, it must continue to make significant buys, he added. It would be too difficult to do multiple small deals to make up the growth offered by Allergan, said the banker.
Allergan is arguing against the merger in part because Valeant’s model seeks to cut R&D from the combined companies. “The whole industry dislikes what Valeant does. Ultimately, it is not good for people because no new drugs will come to market,” said a third banker. “Lots of people are questioning the strategic rationale of Valeant and how long it can last. It’s feeding itself off acquisitions,” said Todd Munn, PM of The Arbitrage Fund, which is part of the USD 3.6bn Water Island Capital Investment Group.
Allergan may need to conduct a transformative deal of its own in order to argue to its shareholders that the company is better off as a standalone, this banker said. Valeant is here for the long haul, and it is likely to take Allergan to a proxy fight, said two of the bankers.
As the deal has a stock component, Allergan has pointed to several issues with Valeant’s business model that would be detrimental to Valeant’s long-term value. In the new proposal, the deal, which includes 0.83 Valeant shares for each Allergan share, is now valued at around USD 165.5 per share, without factoring in the CVR, based on Valeant's closing price on Thursday of USD 129.22 per share.
These issues included Valeant’s absence of an effective organic growth strategy, decreasing sales following its recent purchases of Bausch & Lomb and Medicis, the likelihood of cost-cutting measures that would hinder Allergan’s operations and R&D efforts, and the high turnover among Valeant’s senior managers.
Allergan can argue to shareholders that it is not in their best interest to be long-term holders of Valeant stock as another line of defense, said one of the bankers.
A spokesperson for Valeant said Valeant does not have any timeline under which Allergan must respond to the new bid. When asked about alternative acquisition plans, the spokesperson said Valeant continues to seek out acquisitions.
Ronny Gal, a senior analyst at Bernstein Research, said in a research note that Valeant’s offer continues to underestimate the value of Allergan as a stand-alone entity. Valeant thinks Allergan shareholders will continue to believe the stock will decline to its pre-offer range of USD 120 to USD 130 if Allergan does not respond to the Valeant bid. But the analyst said he doubted such a decline is likely. The stock might slide to USD 140 but will then rebound immediately, said the analyst. The price at the end of 28 May was USD 165.
Valeant only wants to commit to developing one DARPin product, Gal said. Wet AMD is a competitive space, with multiple follow-on programs likely to raise the therapeutic bar in 2020. To be successful, Allergan and Valeant will need to commit to continue to develop product in this category. He added that “it is precisely the product that does not fit into the Valeant business model. We think that if Valeant succeeds in acquiring Allergan, this is the one program that they should sell, as it will wither under the Valeant model."
Allergan, investor Pershing Square, and its CEO Bill Ackman declined to comment for this story.