Wednesday is a day of reckoning coming for Valeant to 'splain' itself to Allergan sharholders as to why its takeover offer should be considered compelling and sustainable. As you know, Valeant's CEO J. Michael Pearson has pledged to acquire his way to a new company that is worth more than $150 B and among the fifth largest pharmas in the world by 2017. To that end, Valeant has offered to buy Allergan for $47B.
Allergan turned it down flat and says that Valeant's business model (i.e. acquiring more and more sales to grow) is not sustainable. Indeed, Valeant will have to borrow at least $15 B to make the Allergan acquisition, and add that to its current $17.4 B in debt. I was not aware that Valeant's current debt is equivalent to 6.1x EBITDA which is higher than any company in the industry worth at least $10 B. Valeant also spent more than $844 M to service its interest on debt last year on its way to a loss of $1.3 B pre-tax. Yikes!
These numbers have some analysts questioning whether the Valeant model is sustainable. It should have Allergan shareholders questioning this too --- especially if their payoff in a Valeant acquisition is greater part Valeant stock and lesser part cash. Plus, you have the spectre of Valeant coming in with sweeping cost cutting to Allergan's R&D resources which could further rob the combined company of a future growth engine. Please note in the story late last week about ranking pharma's R&D departments, that Allergan's ranked 5th (of 22). So a big R&D cut could really reduce the worth of this asset longer term.
Wednesday is the big day. We should have a good read as to whether Valeant is able to convince Allergan shareholders that it will be a new worthy owner. Moreover, other analysts are saying that Valeant must increase its offer to $180-$200 per share -- up from $159 -- to make this deal worth while. Good luck with that given some of the debt numbers mentioned above. See Fierce Pharma and Bloomberg.
Posted by Bruce Lehr May 27th 2014.