Ista Shares Rise Past Valeant’s Bid as Investors Expect Higher Offer

Ista Pharmaceuticals Inc. (ISTA), a maker of eye medications, rose higher than the $327 million hostile bid by Valeant Pharmaceuticals International Inc. (VRX), indicating investors expect more.

Ista climbed 72 percent to $6.68, more than the $6.50 a share offered by Valeant. The surge was the most since the Irvine, California-based drugmaker became publicly traded in August 2000.

Valeant, which has announced 10 acquisitions this year, made its bid public today after Ista rebuffed three approaches, the Mississauga, Ontario-based company said in a statement. The price includes debt. Ista again rejected the offer, calling it “grossly inadequate,” and said the company will explore strategic options. Valeant said the offer may be raised if Ista allowed the company to conduct due diligence that revealed a reason to pay more.

“It’s not surprising that Valeant saw Ista as a great target,” Corey Davis, an analyst with Jefferies & Co. in New York, wrote in an e-mail. “But equally not as surprising why Ista management wasn’t interested in $6.50, if they can really hit their 2013 target revenue of $300 million.”

Davis estimated Valeant may pay as much as $8 a share if due diligence is allowed.

Ophthalmology Expansion

Valeant, which has been building its dermatology business this year with acquisitions of units from Johnson & Johnson and Sanofi, wants to similarly expand in ophthalmology, Chief Executive Officer Mike Pearson said today. Adding Ista would boost Valeant’s annual eye-medication U.S. sales to more than $200 million from less than $50 million now, he said.

“This will create a new growth platform for us,” Pearson said in a telephone interview. “Our preferred approach is obviously not to have this type of transaction where we have to go hostile, but we do think it’s in shareholders’ best interest to hear directly from us.”

The bid is 67 percent higher than Ista’s $3.89 closing price yesterday.

Valeant rose 1 percent to $45.32. The shares had gained 59 percent this year before today.

Valeant approached Ista on Oct. 5 and made a written proposal at the end of November, before affirming the offer on Dec. 12, the company said. Ista declined to engage in discussions and rejected the bid on Dec. 14, according to the statement.

Ista Decline

Ista, which sells Istalol for intraocular pressure and Bromday for problems associated with cataract extraction, had fallen 24 percent this year before today. The company reported in July that a late-stage trial showed its experimental drug Remura didn’t fight dry eyes better than a placebo.

The offer “appears conservative at first blush given our valuation scenarios,” Adnan Butt and Jason Kantor, analysts with RBC Capital Markets, wrote in a research note. Valeant’s offer values Ista at 1.4 times estimated 2012 revenue, compared with an average 2.8 times multiple for other specialty pharmaceutical companies, they wrote.

There have been 965 acquisitions this year of pharmaceutical and biotechnology companies under $1 billion, with an average disclosed size of $49 million and average premium of 23 percent, according to data compiled by Bloomberg.

“Under our upside scenario, current products could be worth $16 based on life-cycle extensions and patent grants,” Butt and Kantor wrote about Ista. “Our ‘base’ case valuation for the marketed product franchise is $10.”

Valeant’s offer expires Jan. 31, the company said.

“This is interesting, but we’re not going to spend the next eight months dealing with it,” Chief Financial Officer Howard Schiller said in an interview.

Valeant made a $5.7 billion hostile bid for Cephalon Inc. in March that was trumped by Teva Pharmaceutical Industries Ltd. (TEVA) in May, with a deal for $6.2 billion.

Valeant is being advised on the Ista transaction by Morgan Stanley & Co. LLC and Skadden, Arps, Slate, Meagher & Flom LLP. Ista’s financial adviser is Greenhill & Co. (GHL), with Stradling Yocca Carlson & Rauth and WilmerHale LLP as legal counsel.

To contact the reporter on this story: Molly Peterson in Washington at mpeterson9@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net

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