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Valeant bid for Allergan takes new twists with SEC complaint, deep restructuring

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MONTREAL - Valeant's battle to acquire Botox-maker Allergan took some new twists Monday, with the Quebec pharmaceutical company complaining to securities regulators about alleged misleading statements by Allergan and the U.S. company announcing major layoffs as it continues to fend off the hostile takeover bid.

Valeant (TSX:VRX) said Monday that it had contacted the Autorite des marches financiers in Quebec and the U.S. Securities and Exchange Commission to air its complaints.

The Quebec-based company — which is offering more than US$50 billion for the California-based maker of anti-wrinkle treatments and other products — accused Allergan of making misleading statements in an SEC filing on Friday when it said Bausch + Lomb's pharmaceutical sales were stagnant or declining.

Valeant bought the eye care company last year for $8.7 billion and has argued that the integration of Bausch + Lomb is a "blueprint" for the proposed merger with Allergan. It said the eye care company's non-U.S. prescription pharmaceutical sales grew approximately six per cent in the second quarter of 2014, while its U.S. prescription pharmaceutical business grew 17 per cent compared with the prior year.

"Allergan's continued disparagement of Valeant and repeated questioning of Bausch + Lomb's performance demonstrate their fundamental lack of knowledge about Valeant's business," chairman and CEO Michael Pearson said in a statement.

"Valeant has owned Bausch + Lomb for 11 months and the business has performed extremely well, delivering total organic growth of 11 per cent since the acquisition, with over 90 per cent of that growth attributable to volume."

Meanwhile on Monday, Allergan (NYSE:AGN) said it will cut about 13 per cent of its workforce, or roughly 1,500 employees and not fill 250 vacant positions, as part of a push to become more efficient and productive. Allergan announced the cuts the same day it also said second-quarter earnings grew 16 per cent to $417.2 million, or $1.37 per share, and revenue jumped 17 per cent to $1.86 billion.

The company reconfirmed its goal to deliver more than 20 per cent in compounded annual earnings per share growth through 2019.

"Allergan enjoyed the strongest increase in absolute dollars sales in any quarter in our history, with strong contributions from nearly all of our businesses and major products," chairman and CEO David Pyott said during a conference call.

The move to improve Allergan's efficiency and productivity is expected to generate about US$475 million in pre-tax savings in 2015 and drive improved shareholder value through higher earnings.

David Maris of BMO Capital Markets said the cost-cutting raises investor expectations about Allergan's future profits as an independent company and makes it harder for Valeant to achieve more than US$2.7 billion in annual cost savings it has promised, 80 per cent of which would be achieved in the first six months.

"This makes a hostile bidder's cost extraction model and goals much more difficult to achieve," he wrote in a report.

Ronny Gal of Bernstein Research warned not to count Valeant out from raising its bid yet again to remain "a credible buyer."

"We see no reason why they will not and, frankly, given the sophistication of the bidders, would expect they contemplated such move and will be ready to counter bid," he wrote. "Allergan shareholders thus stand to gain regardless of the outcome."

Allergan told analysts it continues to seek a major strategic acquisition but would also consider buying back its shares or issuing a special dividend as "fallbacks" if no suitable deal can be reached.

Pyott said it would likely pursue new "pillars" for growth because finding a large strategic acquisition that fits in its existing offering is difficult because of its very large market positions.

Valeant said its decision to contact the regulators also reflected concerns raised by several Canadian Valeant shareholders about comments made by Allergan's management during recent meetings with investors in Canada.

Faced with Allergan's persistent refusal to meet with Valeant, activist shareholder Bill Ackman and his Pershing Square Capital Management are seeking the support of at least 25 per cent of Allergan's shareholders to call a special meeting to replace six board directors.

The activist investment firm controls a 9.7 per cent stake in Allergan.

Analysts welcomed the Allergan results and restructuring efforts that most said exceeded expectations.

"Who says shareholder activism doesn't work," analyst Marc Goodman of UBS wrote in a report.

David Buck, an analyst with the Buckingham Research Group, said he expected Allergan to be bold with the restructuring, adding that the cost-cutting effort stems mainly from the hostile takeover bid.

"We do not expect a truce in a war of words between Valeant and Allergan near term," he added.

Shares in Valeant closed up $3.85 or 2.94 per cent at $134.67 on the Toronto Stock Exchange. They were up $3.57 or 2.93 per cent at $125.54 in New York, while Allergan's shares gained $3.74 or 2.23 per cent to $171.14.

Follow @RossMarowits on Twitter

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