The Canadian Press - ONLINE EDITION

Allergan rejects Valeant offer, challenges rival's business model

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MONTREAL - Allergan came out swinging Monday against a takeover bid from Valeant Pharmaceuticals, with the Botox maker saying it can do a better job growing the company alone while also criticizing its Canadian rival's business model.

"Our model works, whereas Valeant's model of cutting and slashing really doesn't work for more than a very short period of time," Allergan chairman and CEO David Pyott said during a conference call after his company's board unanimously rejected Valeant's offer.

Pyott said the unsolicited cash-and-share bid worth nearly US$47 billion undervalues the company and carries significant risk.

Under the proposed deal, Valeant said that it would exchange each Allergan share for $48.30 in cash and a large portion of Valeant (NYSE:VRX, TSX:VRX) shares.

California-based Allergan (NYSE:AGN) said that its heavy investments in research and development have built a strong pipeline of products that will generate double-digit annual revenue and earnings growth for at least six years.

Pyott said spending to date has enabled Allergan to transform anti-wrinkle Botox from a $100-million a year product in 1989 to one that generates $2 billion for both its aesthetic and therapeutic uses.

Overall, US$7 billion invested by Allergan in various products between 1992 and 2013 has generated more than US$50 billion in sales to date and about US$120 billion in potential sales over the next decade.

"Some would argue that early-stage R&D outdrives profitability. However, we think that's a short-sighted approach," he said in a shot at Valeant.

Valeant contends Allergan spends too much on early R&D, saying the proposed takeover will result in more than US$2.7 billion in annual cost savings, 80 per cent of which would be achieved in the first six months. It said last year's acquisition of eyecare company Bausch & Lomb is an example for removing layers of management while driving higher sales.

However, Allergan said Valeant's estimates don't seem to include some $200 million needed just to maintain products currently on the market.

Pyott told analysts that Valeant's approach generates low organic growth as it focuses primarily on acquisitions of late-stage pharmaceutical companies, while also relying on "eye-popping" price increases to boost revenues.

In a letter to Valeant CEO Michael Pearson, Allergan said Valeant's strategy "runs counter to Allergan's customer-focused approach."

"In particular, we question how Valeant would achieve the level of cost cuts it is proposing without harming the long-term viability and growth trajectory of our business."

Allergan said it plans to meet with its shareholders over the coming week to explain the company's growth plan and "listen loudly" to their views on the proposed transaction that would see them own 43 per cent of the combined company under the takeover bid.

Valeant has said it plans to initiate a "shareholder referendum" of investors and may pursue a special meeting to remove some or all of the U.S. company's board of directors.

Valeant spokeswoman Laurie Little wrote in an email that her company was disappointed that Allergan made its decision without "engaging in any substantive discussions" with Valeant or Allergan's largest stockholder, Bill Ackman's Pershing Square Capital Management LP. She added that they remain committed to pursuing the takeover.

Pyott said Ackman's views and interests may not be completely aligned with other stockholders, but wouldn't say if the company would be open to an increased Valeant offer or one that was all cash.

Industry analysts said Allergan's formal response to Valeant's bid isn't surprising and would put pressure on the prospective buyer to increase its bid.

"The fun is just getting started," wrote Marc Goodman of UBS. "Given the strong case made by Allergan today, we believe that investors will be incrementally concerned that the Valeant deal would not take place."

David Maris of BMO Capital Markets said investors are growing skeptical about "Frankenpharma" deals in which companies are relying on tax inefficiencies and R&D cuts as the main reasons for deals.

"We think Allergan is in a great spot," he wrote in a report, pegging the chances of this deal being completed at less than 50 per cent.

"We base that on cost cuts that seem both unachievable and damaging to the Allergan business."

Shibani Malhotra of Sterne Agee said he believes Allergan will ultimately be open for negotiations with Valeant if feedback from its shareholders supports a merger. However, he said most investors he's spoken with believe Allergan is likely more valuable as an independent company.

Vicki Bryan of Gimme Credit says a deal is far from assured.

"Valeant also seems excessively stretched to finance even its current bid, so it might face considerable headwinds trying to back a higher bid," she wrote.

Shares of Allergan, which hit an all-time high this month, closed down $1.58 at US$159.72 Monday on the New York Stock Exchange. Valeant's shares were off $1.01 at US$130.16 in New York and down 98 cents at C$141.98 in Toronto.

Follow @RossMarowits on Twitter.

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