Valeant swings back after Allergan assault

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Valeant Pharmaceuticals International Inc. raised the cash component of its $49.9-billion (U.S.) hostile offer for Botox-maker Allergan Inc. and staged an elaborate defence against Allergan's attack on Valeant's business model.

But investors appeared unswayed by Laval, Que.-based Valeant's latest moves in the gloves-off, drawn-out takeover battle.

Shares of both companies dropped Wednesday, indicating that the higher bid fell short of expectations.

Valeant – backed by U.S. activist investor Bill Ackman – proposed to sweeten its offer with a cash increase of $10 a share to $58.30 a share, with the stock portion remaining at 0.83 of a Valeant share.

That would value the revised bid at about $49.9-billion, up from the initial offer of $47-billion. Valeant also proposed to add a contingent value right on sales of Allergan's Darpin experimental eye drug that could go to $25 per share, potentially worth an added $7.6-billion.

At about $166.16 a share, the enhanced offer falls below the $180 to $200 some investors and analysts had expected.

Valeant chairman and chief executive officer Michael Pearson said on Wednesday at a marathon New York presentation to shareholders of both companies that an analysis filed by Allergan with U.S. regulators the day before is filled with "a number of inaccuracies."

The filing, based on work by an independent forensic accounting firm and a professional services firm, said Valeant overstates its organic growth, uses overly aggressive acquisition accounting, has high senior management turnover, is overly reliant on offshore tax deferrals and has a crushing debt load.

Allergan also challenged Valeant's claims it can cut $2.7-billion in spending at Allergan without hurting R&D, sales and marketing. It claims Valeant's approach to R&D generally is to cut and slash.

Allergan CEO David Pyott has from the start insisted his company is better off as a standalone and that there is too much risk involved teaming up with an acquisition-fuelled entity such as Valeant.

"It's unfortunate that Allergan has not taken the time to understand our business," Mr. Pearson said at a 31/2-hour session that included lengthy individual presentations from key members of his management team.

Mr. Pearson said Valeant's organic growth has been masked by the fact that generic versions of some of its key products are coming onto market. Growth is actually in the 7- to 8-per-cent range, he said.

In a 176-page slide presentation, Valeant said it has produced double-digit organic growth so far in 2014 and has developed a leaner R&D model without sacrificing product development.

Allergan's analysis is misleading because it "cherry-picked" only some underperforming products and excluded other signifcant contributors to sales, Mr. Pearson said.

As to senior executive departures, many of them retired or left to take CEO positions elsewhere, he said.

Mr. Pearson also took aim at Allergan's own growth curve, saying its mix contains both organic and inorganic growth, with 10 acquisitions over the past 10 years.

Analysts were lukewarm on the revised bid.

Valeant's "new offer is better, but may not be compelling enough given [Allergan's] strong stand-alone outlook," Credit Suisse analyst Vamil Divan said in a note Wednesday.

"Given that the majority of the offer would still be in Valeant stock, how one values Valeant stock goes a long way to determining the true value of the deal."

"The offer continues to underestimate Allergan value as stand-alone entity," said Bernstein Research's Aaron Gal.

"We hoped for something more imaginative, like substantially altering the share of cash and stock Valeant will use or a more substantial increase in the value offer."

Valeant also said it has agreed to sell the rights to five anti-aging products to Nestlé SA for $1.4-billion. The deal could address antitrust concerns if its takeover of Allergan goes through.

Allergan said on Wednesday its board will closely review and consider Valeant's latest proposal.