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Allergan said on Monday that Valeant’s proposal ‘substantially undervalues’ Allergan.

DEBORAH BAIC

Allergan Inc.'s board has unanimously rejected the hostile $47-billion (U.S.) takeover bid from Valeant Pharmaceuticals International Inc., saying it significantly undervalues the company and that Valeant's business is not sustainable.

California Botox maker Allergan also said on Monday it expects to see a boost in earnings per share of 20-to-25 per cent and to continue to produce double-digit revenue growth in 2015.

Allergan said on Monday that Valeant's proposal "substantially undervalues Allergan, creates significant uncertainties for the stockholders of Allergan, and is not in the best interests of the Company and its stockholders."

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Allergan executive chairman and chief executive officer David Pyott said in a letter to Valeant chairman and CEO Michael Pearson that the inclusion of a large stock component in Valeant's offer is a "risk for Allergan stockholders due to the uncertainty surrounding Valeant's long-term growth prospects and business model. Valeant's strategy runs counter to Allergan's customer focused approach. In particular, we question how Valeant would achieve the level of cost cuts it is proposing without harming the long term viability and growth trajectory of our business."

"Our model works, whereas Valeant's model of cutting and slashing doesn't work for more than a very short period of time," Mr. Pyott said on a conference call for analysts Monday.

"That is the Valeant model. It's cut and slash."

Mr. Pyott said he and lead independent director Michael Gallagher met with hedge fund manager Bill Ackman – a key backer of Valeant's proposal – about 10 days ago.

"We listened very carefully to what he had to say to us," said Mr. Pyott. But given Mr. Ackman's status as a backer of the Valeant bid, "his views and interests may not be the same as other stockholders," he said.

Mr. Ackman's Pershing Square Capital Management LP has accumulated close to 10 per cent of Allergan shares.

Laval, Que.-based Valeant last week threatened to remove Allergan's board if it does not sit down and negotiate. Valeant said it intends to canvas Allergan shareholders about its takeover proposal.

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Valeant unveiled its cash and share bid for Allergan in late April.

Allergan has put in place a "poison pill" defence to buy time to look for alternatives Valeant's proposal.

Mr. Pyott said on the call Monday it is too early to talk about what alternatives might be contemplated.

Allergan also said on Monday it expects to produce double digit sales growth and produce EPS compounded annual growth of 20 per cent over the next five years.

"The company believes this is achievable as a consequence of strong business momentum driven by a wide array of recent approvals and anticipated near term approvals ..."

"We are disappointed that Allergan has rejected our value-creating offer without engaging in any substantive discussions with Valeant or Allergan's largest stockholder, Pershing Square," Valeant said in a statement Monday.

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"We remain committed to pursuing this transaction."

"We think by stating that Allergan believes that Valeant has an unsustainable business model, Allergan will put further pressure on Valeant to account for the cost cuts it proposes and how these cuts will not hurt Allergan shareholders in a stock deal," BMO Nesbitt Burns analyst David Maris said in a research note Monday.

Valeant's offer is made up of $48.30 per share in cash and 0.83 Valeant shares for each Allergan share.

Last Thursday, Valeant reported a first-quarter net loss of $20.3-million, or 7 cents per share, down from a loss of $27.5-million or 9 cents per share in the year-earlier period.

But the company's huge appetite for acquisitions – two dozen last year alone – results in one-time gains and losses that make it hard to get an accurate fix on its financial status, say some observers.

Last year, one of Valeant's major acquisitions was the $9-billion deal for eye-care products company Bausch & Lomb Inc.

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Valeant shares have almost doubled in value over the past year.

Mr. Pearson has said his goal is to lift Valeant into the ranks of the top five pharmaceutical companies in the world.

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