Valeant Eyes Allergan - Analyst Blog

Shares of Allergan, Inc. AGN gained 15.2% after Valeant Pharmaceuticals International, Inc. VRX and Pershing Square Capital Management, L.P made a formal proposal to acquire the former.

Valeant proposed that each Allergan share would be exchanged for $48.30 in cash and 0.83 shares of Valeant common stock. Shares of Valeant were up 7.5% on the proposal. The proposal allows shareholders to elect a mix of cash and shares.

The offer will allow Allergan shareholders to own approximately 43% of the combined company.

We note that Pershing Square Capital Management is the largest shareholder at Allergan with a 9.7% stake. Pershing Square Capital Management is in favor of the acquisition and has agreed to elect for only stock consideration in the transaction.

Details of the Transaction

Valeant targets operational synergies of $2.7 billion from costs, with 80% targeted in the first six months while the remaining 20% is targeted in the following 12 months.

Post completion of the transaction, Valeant expects to initiate an annual dividend of $0.20 per share, in line with the current dividend at Allergan.

Guidance Update

Concurrent with the acquisition proposal, Valeant updated its guidance for 2014. Valeant increased its revenue guidance for 2014. The company now expects revenues to come between $8.3 billion and $8.7 billion in 2014, up from the earlier estimate of $8.2–$8.6 billion. Earnings per share, on a cash basis, is now projected between $8.55 and $8.80, up from $8.25–$8.75.

Our Take

Allergan, a global multi-specialty pharmaceutical company, develops and commercializes innovative products for eye care, neurological, medical aesthetics, medical dermatology, breast aesthetics, urological and other specialty markets.

Allergan's key product is Botox which generated revenues of $1.98 billion in 2013, thereby representing almost 32% of net product sales. Botox is approved for certain therapeutic and aesthetic indications.

Meanwhile, Valeant, a Canada-based specialty pharmaceutical company, has been quite aggressive on the acquisition front in the last two years contributing to its solid growth. Dermatology is the key focal area for Valeant.

In Apr 2013, Valeant acquired Obagi Medical Products. Obagi Medical Products sold products to prevent or improve the most common and visible skin disorders. In Dec 2012, Valeant acquired all of the outstanding common stock of Medicis Pharmaceutical Corporation, which focused on the development and marketing of products for the treatment of dermatological and aesthetic conditions in the U.S.

Apart from dermatology, Valeant is also keen on developing its portfolio in the ophthalmology arena as well. In Aug 2013, Valeant acquired Bausch + Lomb Holdings Inc. for $8.7 billion in cash.

We believe the combined company will have a stronger presence in ophthalmology, dermatology, and aesthetics.

Valeant expects to generate 75% of the total revenue from durable products. As per Valeant, 90% of the revenue of the combined company is not expected to face any patent cliffs over the next decade.

However, Allergan has made it clear that it is reluctant to accept Valeant's offer.

We expect investor focus to remain on further updates from Valeant and Allergan on the acquisition proposal.

Allergan currently carries a Zacks Rank #2 (Buy) while Valeant is a Rank #3 (Hold) stock. Right now, stocks like Johnson & Johnson JNJ and Ironwood Pharmaceuticals IRWD look attractive with a Zacks Rank #2.