Valeant’s “Merger of Equals” Revealed With Allergan Interest

After the markets closed Valeant Pharmaceuticals announced its intent to pursue an acquisition of Allergan; there were reports that the company was working with activist fund Pershing Square, a fund that recently confirmed a 9.7% stake in the company.

Although the exact size of the bid has yet to be confirmed and Allergan has denied any discussions with Valeant, Valeant announced a cash component of $15 billion in a 13-D filing, as well as its intent to make an offer prior to May 2. After hours, Allergan shares were trading up significantly, suggesting a $51.9 billion opening at $172 per share.

Given Valeant’s aspirations to become a global top-5 pharmaceutical company, we understand that only so many assets will allow the company to execute such an ambitious goal and adding Allergan would push Valeant, which closed at a market cap of $42 billion, into that next level of large pharmaceutical companies.

However, given the quality of Allergan—we view Allergan as holding one of the most attractive profiles in specialty pharma/pharmaceuticals—and the lack of a clear heir to the CEO role beyond David Pyott, we would not be surprised if other suitors emerge during this process. In the past, GlaxoSmithKline (GSK $53.12)—with its market cap of $127 billion, cash of $9.29 billion in cash, $15.5 billion in debt, and $8.76 billion in EBITDA in 2013—has been discussed as holding interest in the company, although these reports have not been confirmed publicly. Key factors would include how aggressive other companies would be with increasing debt levels, and how Valeant’s 5% tax rate might allow the company to outbid larger competitors.

Through its acquisitions earlier this year of Solta Medical for $236 million and PreCision Dermatology, Inc. for $475 million in cash, as well as its year end 2012 acquisition of Medicis in a deal valuing the company at $2.6 billion, Valeant has previously made a push to expand its medical dermatology portfolio. For synergies, we note that Valeant’s aesthetics business is at a run-rate of $400 million, while its neurology franchise (which could overlap with Botox migraine) is a $1 billion business.

In ophthalmology, the company acquired Bausch + Lomb during 2013 for $8.7 billion, a company which at the time estimated its 2013 revenue at more than $760 million. In addition, Valeant has for some time discussed expanding in dermatology. Some products, such as Dysport and select ophthalmology assets, would need to be divested if the acquisition were to go through; however, it is unclear if the extent of the divested products would be material to the transaction value.


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