Allergan Attacks Valeant’s History With Mergers Ahead Of Potential New Offer

The Botox-maker wanted to make its case before Valeant could up its offer, which is expected later this week, arguing that Valeant paints a rosier picture than is realistic.

Going on the offensive ahead of a new offer from Valeant Pharmaceuticals International Inc., Allergan Inc.is contending that the firm’s handling of previous mergers indicates it would not be able to maintain growth for Allergan’s key asset – the aesthetic blockbuster Botox.

Allergan’s statement on May 27 was a preemptive move in preparation for Valeant to make a new offer, as promised by Valeant CEO Michael Pearson, during a conference call with investors slated for May 28 (Also see "Valeant Model Not Sustainable, Allergan Says" - Pink Sheet, 12 May, 2014.). The Allergan report was the product of analysis done by two financial consultants hired by Allergan, Alvarez & Marsal and FTI Consulting.

It attempts to raise questions about Valeant’s ability to integrate its largest acquisitions – Medicis and Bausch & Lomb. Valeant bought Medicis Pharmaceutical Corp. for $2.6 billion in 2012 and Bausch & Lomb Inc. for $8.7 billion in 2013 .

While Valeant has repeatedly touted the success of both deals and maintained the Bausch & Lomb acquisition is on track, Allergan notes that both businesses have undergone product erosion and seen a significant decline in units sold – Valeant has compensated for the decline “with significant list price increases” that Allergan calls “unsustainable.”

Overall, the U.S. Bausch & Lomb business has seen a 19% decrease in units sold, while price has increased 11%. Meanwhile, two of the strongest products in the Medicis portfolio have lost market share – Botox competitor Dysport’s share decreased from 17% to 14%, while Restylane fell from first place in the branded filler market to third.

“After B&L none of Valeant’s products account for more than 5% of revenues, so single product details, although nice to have, are not the best indicators of Valeant’s performance. Therefore, anecdotal arguments based on a handful of products could be misleading,” BMO Capital markets analyst Alex Arfaei, who covers Valeant, said in a same-day research note.

Valeant’s inability to maintain these products has Allergan questioning whether it can handle a product with the size and scope of Botox. “Botox's annual sales are more than seven times greater than each of Valeant's largest products, Zovirax and Wellbutrin, which are declining or stagnant,” noted the report. Botox had sales of almost $2 billion in 2013, while Zovirax brought in just $277 million in sales for the year.

Allergan’s report also attacks Valeant’s accounting methods, contending Valeant “seems to change reporting methodology when convenient” and has reported organic growth that was “overstated.” Valeant reported organic growth of 10% for the full-year 2013, but this number excluded the impact of generics on some of its largest brands. When the impact of generics is included, there was no growth in 2013.

Arfaei argues this is not a company trying to cover up its poor performance, but rather “reflects Valeant’s ability to grow franchises that are under its control for at least a year excluding products that decline based on loss of exclusivity.”

Allergan goes on to question the ability of Valeant to make its $2.7 billion in promised SG&A cuts, as well as R&D cuts, while still sustaining the performance of the business.

Valeant has maintained that it would continue some R&D activity – that required for post-approval and maintenance functions, product line extensions and late-phase projects – but Allergan argues the Canadian company “drastically underestimates the spend required by approximately $350 million.”

Setting The Tone

Ultimately, the report calls into question whether Valeant can continue on its rampant buying spree while maintaining its low tax structure and continuing to grow product lines. Allergan, which is known for its strong investment in R&D, as well as sales and marketing, doesn’t think so.

BMO Capital analyst David Maris, who covers Allergan, didn’t take on Allergan’s particular points in a note to investors, but summarizes that the report issued by the company “sets the tone for the discussion that will take place over the summer and into the fall.” He called each of Allergan’s points “a serious concern” for shareholders.

Pearson will try to dissuade investors otherwise on May 28, and is expected to increase Valeant’s offer for Allergan and potentially change the stock/cash mix of the deal. The $48 billion unsolicited bid from the Canadian company first became public on April 21, when it came to light that Valeant’s offer of $48.30 in cash and 0.83 Valeant shares per outstanding Allergan share was being bolstered by activist shareholder Bill Ackman and his investment company Pershing Square, which quietly bought a 9.7% stake in Allergan to become its largest shareholder (Also see "Allergan Fortifies Defenses In Response To Valeant’s Hostile Bid" - Medtech Insight, 23 Apr, 2014.).