MONTREAL - Botox-maker Allergan Inc. launched a new assault Tuesday on Valeant Pharmaceuticals International Inc., which has made a hostile takeover offer for the company, raising questions about its business model and stock value.
The California-based company said Valeant's growth is overstated and questioned its ability to cut US$2.7 billion of expenses if it is successful in acquiring the company.
The broadside, developed with the help of a financial consultant and a forensic accountant, came ahead of what is expected to be an improved offer from Valeant on Wednesday.
Among the issues Allergan raised were Valeant's organic growth, the performance of its two largest acquisitions — Bausch & Lomb and Medicis, the stability of its management team and sustainability of its low tax rate.
Overall, Allergan said Valeant's serial acquisition model will become harder to pull off as interest rates rise.
"Valeant's limited experience with large, global scale products represents a material execution risk attempting to grow Allergan's categories and launching significant new large products through existing channels," Allergan said in a statement.
"Allergan would be Valeant's largest acquisition and the synergies proposed by Valeant are the most aggressive to date. Botox's annual sales are more than seven times greater than each of Valeant's largest products, Zovirax and Wellbutrin, which are declining or stagnant."
A key area for dispute is the calculation of Valeant's organic growth. Valeant insists it was positive last year despite losing patent protection on three of its top 10 products. But Allergan said on a pro-forma revenue basis including acquisitions it declined by 0.5 per cent last fiscal year, and by 1.4 per cent in the first quarter.
Allergan also said its rival is underestimating research and development spending required for product line extensions and late stage projects by about US$350 million.
Valeant (TSX:VRX) said it will address the objections Allergan raised at a presentation Wednesday when it is expected to improve its US$46.5-billion stock-and-cash offer.
"Valeant's business leaders will provide further clarity on our historic, current and future operating performance and address Allergan's inaccurate assertions about our business model at our event," spokeswoman Laurie Little wrote in an email Tuesday.
Under its current offer worth about US$156.16 per share, Valeant would pay US$48.30 in cash and 0.83 of a Valeant share for each Allergan share, giving Allergan shareholders control of about 43 per cent of new combined company.
Allergan (NYSE:AGN) shares closed down US$1.90 at $165.02 in trading on the New York Stock Exchange on Tuesday.
Analysts believe Valeant will have to substantially boost its offer to as much as US$200 per share including a larger cash portion because Allergan is "well-positioned" to grow as an independent company.
David Buck of Buckingham Research Group upgraded Allergan's shares to buy and raised his price target 15 per cent to US$207 on anticipated growth over the next six to 12 months as a stand-alone company and anticipation of moves to enhance shareholder value.
"The fundamental debate is whether business could sustain double-digit top-line growth with significant cost cuts. We believe growth would slow. Since 70 per cent of Valeant's bid is stock-based, growth sustainability matters," Buck wrote.
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