Allergan Rejects Valeant's Proposal Yet Again - Analyst Blog

Allergan, Inc. ( AGN ) announced that its Board of Directors has unanimously rejected the revised acquisition offer by Valeant Pharmaceuticals International, Inc. ( VRX ) and Pershing Square Capital Management.

Valeant's Pursuit Relentless But Fruitless So Far

On May 30, 2014, Valeant proposed a revised offer to Allergan whereby each Allergan share would be exchanged for $72.00 in cash and 0.83 shares of Valeant common stock. Valeant offered a contingent value right of up to $25.00 per share for Allergan's ophthalmology pipeline candidate, DARPin. The candidate is currently in phase II.

This was the second time that Valeant had upped its offer. We note that Allergan's largest shareholder, Pershing Square Capital Management, L.P, with a 9.7% stake in the company, had agreed to elect only stock consideration in the transaction and exchange their Allergan shares for Valeant shares at a 1.22659 exchange ratio (based on closing share price on May 29).

Valeant had proposed in Apr 2014 that each Allergan share would be exchanged for $48.30 in cash and 0.83 shares of Valeant's common stock. Thereafter, the company upped its offer by 21% wherein the cash consideration of the offer was increased by $10.00 per share to $58.30.

Allergan's Reluctance from the Beginning

However, Allergan cited that the revised offer substantially undervalues the company, creates significant risks and uncertainties for the stockholders of Allergan, and is not in the best interests of the company and its shareholders.

Allergan remains confident of driving significant shareholder value on a standalone basis. The company expects earnings per share to increase by 20%-25% in 2015 accompanied by double digit top-line growth. Over the next five years, the company expects double-digit sales growth and a compounded annual growth of 20% for the bottom-line.

Allergan is also skeptical about Valeant's business model which relies heavily on acquisitions and cost reductions and not much on top-line growth and operational efficiency. Allergan believes that this model is unsustainable and has serious concerns about the stock component of the acquisition offer.

Our Take

Valeant currently has a Rank #3 (Hold) while Allergan carries a Zacks Rank #1 (Strong Buy). Valeant has been quite active on the acquisition front in the last couple of years. Valeant is a specialty pharmaceutical company, primarily focusing on dermatology, neurology and ophthalmology, among others. The company acquired Bausch+Lomb in 2013.

However, it is clear that Allergan is reluctant about the acquisition offer despite repeated attempts by Valeant. Allergan's key product, Botox, continues to drive momentum. On the other hand, it doesn't look that Valeant will let go that easily. Valeant expects the acquisition, if it goes through, to positively impact the bottom line by 25% on a full-year basis in 2014. We expect Valeant to now directly approach the shareholders.

Some better-ranked stocks in the healthcare sector include Gilead Sciences ( GILD ) and Alexion Pharmaceuticals ( ALXN ). While Gilead Sciences carry a Zacks Rank #1, Alexion Pharma is a Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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