Quebec-based Valeant (TSX:VRX) (NYSE:VRX), already one of Canada's largest specialty pharmaceutical companies, says a combination with California-based Allergan would be good for shareholders of both companies.
It's proposing to exchange US$48.30 in cash and 0.83 shares of Valeant for each of Allergan's more than 299 million shares — making the deal worth about US$48 billion based on Valeants closing price of US$135.41 in New York. Allergan Inc. stockholders would own 43 per cent of the combined company. In Toronto, Valeant stock closed at C$149.30, up $10.62 or 7.65 per cent.
Allergan shares (NYSE:AGN) closed up $21.65 or 15.25 per cent at US$163.65 in New York, giving the company a market cap of US$48.,95 billion.
Ackman's Pershing Square Capital Management LP — Allergan's biggest stockholder at 9.7 per cent — has agreed to take only stock in the transaction. The company is the driver behind the Canadian Pacific Railway's (TSX:CP) executive overhaul.
"This is the most synergistic combination of any kind I've seen as an investor in 20-something years in the business and I want to be a part of it," Ackman, an investor activist and hedge fund manager, said during a three-hour investor conference in New York City on Tuesday.
In addition to promoting the transaction, he spent much of the meeting vaunting Valeant's growth strategy, focus on controlling costs and rewarding shareholders.
He said Valeant's competitive strength is its low research and development spending, strong free-cash flow and decentralized business model. Its lack of reliance on patent drugs and government purchases makes its revenues "more durable" and its margins very strong, he said.
If an acquisition happens, it would give Valeant an array of other cosmetic and eye drugs and add to a string of more than 50 acquisitions that have made it one of Canada's largest drugmakers.
Valeant chairman and CEO Michael Pearson said Allergan CEO David Pyott and the company's board have said they do not want to discuss a merger but said in a statement they would evaluate an offer if received.
But Pearson said Valeant won't revise its proposal into an all-cash offer or increase its price to any level to declare victory.
"That's not the way we work and, if someone wants to come and pay some ridiculous cash price, that's their choice and we'll just go back to doing what we're doing and we'll find the next one," he said.
Ackman said he expects Allergan's board will realize the long-term potential of joining with Valeant and the benefits of the proposal's equity component.
"The market is telling you that the company is going to sell itself based on where Allergan's stock is trading. It's not the stock price of an independent company so no board wants to preside over a just-say-no strategy that causes the stock price to go down $50 tomorrow. That's lawsuits, it's a disaster," he said.
Valeant, which is based in Laval, Que., near Montreal, said Tuesday that it anticipates the proposed Allergan deal resulting in more than $2.7 billion in annual cost savings, 80 per cent of which would be achieved in the first six months.
A company spokeswoman said there are no plans to move Valeant's headquarters. Laurie Little also said job cuts would affect less than 20 per cent of the workforce of the combined company but no locations have been identified.
"But with (Allergan's) corporate headquarters in California, that location would be disproportionately affected," Laurie Little said in an email.
The combined company would have about $17 billion of revenues. Valeant said it has already begun discussions on divesting some $300 million to $400 million of overlapping product lines to address anti-trust concerns.
Allergan has long been considered one of the star performers in the specialty pharmaceutical sector. "Specialty pharmaceutical" is an industry term that differentiates smaller drugmakers from much bigger companies that sell a wide array of drugs, such as Pfizer and Merck.
Allergan reported revenue of US$6.3 billion last year, up 12 per cent from 2012. The company's growth has been driven by expanding use of its blockbuster product, Botox, combined with a broad offering of eye care drugs, skin care formulas and breast implants.
Last year Botox sales rose 12 per cent to nearly US$2 billion. First introduced in 1989, the injectable drug is most famous for its ability to smooth wrinkle lines on aging foreheads. But over the years Allergan has racked up more than a half-dozen other approved uses for Botox, including treatment for neck spasms, eye muscle disorders and migraine headaches.
Valeant also announced Tuesday that it is raising its full-year earnings forecast to $8.55 to $8.80 per share, up from $8.25 to $8.75 per share. It's also boosting its revenue guidance to a range of $8.3 billion to $8.7 billion. Previously the company predicted revenue of $8.2 billion to $8.6 billion.
Canaccord Genuity analyst Neil Maruoka reiterated his "buy" rating for Valeant, with a stock price target of US$168 per share.
However, he cited two key uncertainties about whether a deal can be done — an anti-trust review that would look at the impact on competition and whether Allergan shareholders have an appetite for Valeant stock. He also wrote that higher debt levels for the enlarged Valeant could offset some of the cost-savings foreseen by the company.
— With files from The Associated Press