Hedge fund manager Bill Ackman has jumped into the health-care business with both feet, spending $4-billion (U.S.) to lubricate Valeant Pharmaceuticals International Inc.’s hostile takeover bid for Botox-maker Allergan Inc.
Mr. Ackman said he’s now a convert to the pharma business – at least the way Valeant runs it – and he plans to do more deals with the Montreal-based company if this takeover comes to fruition.
Valeant unveiled details of its proposal Tuesday: A cash-and-share bid for Allergan worth almost $50-billion and rising – Valeant and Allergan shares jumped sharply as investors expressed enthusiasm for the deal. Valeant plans to squeeze $2.7-billion in cost savings out of Allergan in the first year after the deal is complete, partly by cutting back sharply on its research and development. Allergan investors would own about 43 per cent of the combined company.
Mr. Ackman’s Pershing Square Capital Management LP bought 9.7 per cent of Allergan stock over the past few weeks to help Valeant gain a foothold at the California-based company. So far Allergan has said only that its board will carefully review the “unsolicited proposal.” It has hired advisers, and some analysts are predicting a protracted battle.
Pershing Square’s $4-billion investment is the largest the company has ever made, Mr. Ackman told a press conference in New York, and it represents about 30 per cent of the firm’s capital. Pershing never really looked at pharmaceuticals before, he said, because he didn’t see the value. “Then I learned about Valeant.”
He said he was deeply impressed by Valeant’s cash flow, cost controls, acquisition record and diverse line up of drugs and other products that are essentially consumer packaged goods. He also thinks Valeant’s chief executive officer Michael Pearson is a great manager. Mr. Ackman was almost evangelistic in his praise for Valeant, calling it “probably the most misunderstood $40-billion market cap company in North America.”
The stake in Allergan is essentially an investment in what he hopes will be a strong combined company after a merger, Mr. Ackman said. He promised that if the deal is done, he will work with Valeant on other acquisitions. “This is not the last deal we are going to do [together],” he said. “We are already working on the next one.”
In addition to his money, Mr. Ackman will bring his skills in pressuring reluctant companies to bend to his will. At Canadian Pacific Railway Ltd., for instance, he engineered a major board shift and the installation of a new CEO.
When asked what he would do if Allergan won’t negotiate with Valeant, he said his firm will “help [Allergan] do the right thing for shareholders. We have all kinds of ways of making that happen.”
For his part, Mr. Pearson described Mr. Ackman as someone who has “real credibility in terms of being a smart investor,” and said he hopes his new partner will help him run Valeant better.
Combining Valeant and Allergan, which sells skin and eye treatments along with products for neurological disorders, will create “a very, very powerful specialty pharma company,” Mr. Pearson said. “It will be great for patients and physicians around the world.”
As well as the cost savings from combining the two companies, there will also be “tax synergies,” he said, without going into details.
Valeant has attracted criticism in the past for taking advantage of its international structure, with nominal headquarters in Canada, to reduce its tax rate. Originally based in the U.S., it became a Canadian company when it merged with Biovail Corp. in 2010.
The R&D that remains at Allergan, after the cuts, will focus on new applications for existing drugs, “things that we’re quite comfortable spending money on,” Mr. Pearson said. There should be no regulatory or competition issues, he added. The combined company will keep the 20 cents-per-share dividend that Allergan now pays its shareholders.
If the merger is completed, the new entity, with more than $6-billion in annual cash flow, will be powerful enough to make many more acquisitions, Mr. Pearson suggested. With that size, even $1-billion or $2-billion purchases will be merely “tuck-ins,” he said.
Mr. Ackman said a counter offer for Allergan from another bidder is possible, but he said there are few companies that could afford to up the ante. If the merger offer fails, he said, he will likely look at other ways to become an investor in Valeant.