Stymied by Actavis-Allergan deal, Valeant looks for another M&A

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Valeant Pharmaceuticals International Inc. chief executive Mike Pearson spent six months hunting Botox maker Allergan Inc. only to see it fall into the hands of white knight Actavis PLC.

Now, with Valeant stock nearly 9 per cent higher than its pre-bid level of $126 (U.S.), Mr. Pearson finds himself even hungrier for a big deal as he aims to triple the company's market capitalization by 2017.

To what extent he'll continue working with activist investor Bill Ackman to try to get there remains an open question. But even if the partners failed in their hostile takeover effort, they've already proven the consolation prize can be worth the trouble.

Mr. Ackman's Pershing Square will pay Valeant 15 per cent of the profit it makes on its Allergan investment after the unlikely partners put the company in play last April. The sum is estimated to be worth $400-million or more to Valeant, roughly equal to the net earnings the Laval, Que., company has tallied so far this year.

"I'm giving them high marks for being objective and not emotional by letting Allergan go," said Valeant investor Gautam Dhingra, chief executive of High Pointe Capital Management in Chicago, Ill.

"The market wants them to do a deal, there's no doubt about it. So the pressure will be there."

After a bitterly fought battle for Allergan that lasted more than half a year, Valeant on Monday abandoned the chase as Irvine, Calif.-based Allergan confirmed it struck an agreement to be bought by Irish pharmaceutical maker Actavis. The price is $219 a share in stock and cash for total consideration of about $66-billion.

Valeant "cannot justify to its own shareholders" paying $219 or more a share for Allergan, Mr. Pearson said in a statement Monday.

The CEO said Valeant will nevertheless "review any such [Actavis-Allergan] agreement in determining our course of action. He was not available to comment further.

Valeant's latest stock-and-cash offer for Allergan had been worth about $175 a share, a bid that never really grew substantially as doubts about Valeant's ability to get the takeover completed kept down its share price.

Pershing backed the acquisition effort by taking a 9.7-per-cent stake in Allergan and pushing for the removal of the company's board, which never engaged Valeant in talks. It was not immediately clear Monday whether a special meeting scheduled for Dec.18 to vote on removing Allergan's current directors would go ahead.

Several analysts have speculated that Valeant already has a "plan B" acquisition in mind for U.S. animal health specialist Zoetis Inc., which was spun off last year from Pfizer. Pershing recently disclosed an 8.5-per-cent stake in Zoetis and Mr. Ackman could conceivably persuade Mr. Pearson to go after it.

Valeant wants to become one of the world's five biggest pharmaceutical companies, based on market value, by 2017. Mr. Ackman, who has expressed his profound admiration for Valeant as a low-cost operator "in an industry where everyone else runs a very fat business," has already said the two partners are looking beyond the Allergan transaction to other deals.

Others speculated Valeant and Pershing might not be done with Allergan.

"Given the profound difference in Valeant's prospects if it is able to acquire Allergan [and its ability to pursue the likes of an Amgen at $100-billion plus in market capital] versus its prospects without … we highly doubt Pershing/Valeant will go quietly," Cowen and Co. analyst Ken Cacciatore said in a research note.

Actavis's deal to buy Allergan will vault the new entity into the ranks of the top 10 global pharmaceutical companies, with major franchises in ophthalmology, neurosciences, dermatology, plastic surgery and gastroenterology. The merger will generate at least $1.8-billion in cost savings and maintain research and development commitments worth $1.7-billion, the companies said.

Allergan said one of the key reasons for rejecting Valeant's overtures was its business model of serial acquisition and the slashing of R&D costs. The negative publicity from Allergan's claims may make it more difficult for Mr. Pearson to engage other potential acquisition targets in talks, said Mr. Dhingra.