Valeant Pharmaceuticals International Inc. (VRX) offered to buy Allergan Inc. (AGN), maker of the Botox wrinkle treatment, in a cash-and-stock deal valued at $45.7 billion in the latest step of the Canadian company’s plan to become one of the world’s largest drugmakers.
Under the deal, which came to light in broad terms yesterday, Allergan investors would receive $48.30 in cash and 0.83 of a Valeant stock for each share they own, Valeant said today in a statement. Pershing Square Capital Management LP, the fund run by Bill Ackman, Allergan’s largest shareholder, supports the offer, Valeant said.
Valeant Chief Executive Officer Mike Pearson, 54, took the helm in 2008 and has spent at least $19 billion buying more than 35 companies as part of Laval, Quebec-based Valeant’s goal to join the ranks of the world’s five biggest drugmakers by the end of 2016. The Allergan deal would be his biggest acquisition, eclipsing the $8.7 billion purchase of eyecare company Bausch & Lomb Inc. last year.
Only a handful of health-care companies have the “durability” of the combined product portfolio of Valeant and Allergan, Ackman said today at an investor meeting. He called the deal a “great transaction.”
The bid is a “substantial premium” on Allergan’s unaffected price of $116.63 on April 10, the day before Pershing crossed the 5 percent ownership level and commenced its rapid accumulation program, Valeant said.
Valeant and Pershing Square’s Ackman, 47, think Allergan is undervalued and an attractive investment, according to a filing yesterday with the U.S. Securities and Exchange Commission. Pershing Square amassed 9.7 percent of Allergan after reaching an agreement with Valeant to jointly pursue a hostile takeover of the company, the filing showed.
Allergan’s board will review the unsolicited bid in consultation with financial and legal advisers and “pursue the course of action that it believes is in the best interests of the company’s shareholders,” the Irvine, California-based company said today in a statement.
Allergan shares rose 15 percent to $163.65 at 4 p.m. New York time, which may mean some investors expect a higher bid. Based on yesterday’s closing price, today’s offer is valued at about $45.7 billion. Valeant rose 7.4 percent to $135.31.
Ackman structured the Valeant-Allergan deal and approached Valeant with the idea, said Jeff Ubben, chief executive officer of ValueAct Holdings LP, Valeant’s third-largest shareholder. Making the bid with Ackman’s support gives Valeant “a running start on the vote, and a bit of a block position,” Ubben said today at a conference in New York. ValueAct’s Mason Morfit is leaving Valeant’s board, Ubben added.
Valeant has been expanding from its major emphasis in generic drugs into specialty medicines and areas where it had a smaller presence such as opthalmology, dermatology and dentistry. The company’s market value at yesterday’s close was $42 billion, meaning an acquisition of Allergan would likely more than double its worth and put it about halfway to its goal.
Valeant has been trying to interest Allergan in a friendly deal for more than a year, Ubben said.
“We approached Pershing with the idea and they decided to do it,” Pearson said.
Allergan, in a statement yesterday after the outline of the acquisition bid was made public, said it “has had no discussions with Valeant or Pershing Square with respect to this matter.”
A combination of Valeant and Allergan “would make a lot of sense,” Timothy Chiang, an analyst at CRT Capital Group LLC in Stamford, Connecticut, said yesterday in a telephone interview. “The question has always been, it’s not whether Valeant would be interested in buying Allergan, it’s a question of would Allergan sell to Valeant.”
Allergan’s shares had increased 25 percent in the last 12 months through yesterday, outpacing a 16 percent gain in the Standard & Poor’s 500 Pharmaceutical Index.
Allergan makes a tempting target for buyers looking for growth. The company’s sales are projected to grow every year to $10.2 billion in 2020 from $6.3 billion last year, according to the average of analysts’ estimates compiled by Bloomberg, with Botox the crown jewel.
Botox, an injection used for cosmetic procedures and migraines sold $1.98 billion last year, 32 percent of the company’s sales. Allergan also sells Restasis, a treatment for dry eye syndrome, which generated $940 million.
Generic-drug companies have been buying up the makers of specialty medicines as they seek to diversify their product lines and improve margins. Actavis Plc in February agreed to buy Forest Laboratories Inc. for $25 billion, expanding its brand-drug business, and Mylan Inc. bought the injectable drugs unit of India’s Strides Arcolab Ltd for $1.6 billion.
Valeant’s strategy has been to aggressively acquire health-care companies that it views as having expenses that are too high, then lowering overhead, rapidly integrating and moving on to the next deal. Pearson called drugmakers “bloated” in an interview with Bloomberg last month.
Rather than spend what he says can be billions of dollars developing drugs from scratch, Pearson buys companies with existing products such as Bausch & Lomb.
Not all of Valeant’s acquisition efforts have worked out. In April 2013, Valeant made an offer to buy Actavis, which was rejected because the price was too low, Bloomberg reported at the time.
Valeant was interested in the unusual arrangement with Ackman because the hedge fund could buy about 10 percent of Allergan’s shares before making a public disclosure, said a person familiar with the matter. Valeant would likely have had to disclose any stake earlier, said the person who asked not to be identified because the discussions were private.
Barclays Plc and Royal Bank of Canada will help provide financing, Valeant said in the filing. Pershing Square can terminate the agreement if there’s no offer made by May 2, according to the filing.
Goldman Sachs Group Inc. and Bank of America Merrill Lynch are providing financial advice to Allergan, the company said, while Latham & Watkins LLP is serving as legal counsel.