Allergan Strikes Back at Valeant

Allergan Strikes Back at Valeant

Let the argument between the bean counters at Valeant Pharmaceuticals Intl Inc (NYSE:VRX) (TSE:VRX) and research and development scientists at Allergan, Inc. (NYSE:AGN) begin!

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Questioning research and development cuts

After Valeant Pharmaceuticals Intl Inc (NYSE:VRX) (TSE:VRX) launched a $46 billion cash and stock bid to roll-up Allergan, Inc. (NYSE:AGN) , today Allergan struck back, attacking Valeant’s core business model. Valeant has acquired other research and development heavy medical related firms with a strategy to cut expenses, notably in research and new product development.  Allergan, on the other hand, defends scientific research at the firm, saying in a press release cutting the firm’s research and development could not be done “without destroying Allergan’s near-term and long-term value.”

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The Allergan release notes that while Valeant Pharmaceuticals Intl Inc (NYSE:VRX) (TSE:VRX)  talks about retaining R&D for post-approval and maintenance, product line extensions and late phase projects, but Valeant “drastically underestimates the spend required by approximately $350 million.” The release called certain Valeant cuts “unrealistic.”

Retains two nationally-recognized financial consultants and forensic accountants

In developing their counter attack, Allergan hired Alvarez and Marsal and FTI consulting to evaluate “certain concerns about the inherent value of Valeant’s business model and stock.”  The deal for Allergan is based in large part on the value of Valeant stock and pushing down Valeant’s stock price could be one tactic used to defend against an unwanted acquisition bid.

In their analysis, the Allergan, Inc. (NYSE:AGN) release questioned Valeant’s organic growth, which they said was primarily driven by price increases, and said claims by Valeant are “overstated based on changing definitions and classifications with no disclosure of key products. The pro-forma revenue growth from Valeant’s SEC filings paints a picture far different from what is communicated to investors.”

Allergan says that based on study of Valeant’s two largest acquisitions, Bausch & Lomb and Medicis, substantial sales erosion has occurred and market share has been lost.  Valeant has compensated for the loss of sales by increasing prices, the press release noted, saying that Valeant doesn’t have experience promoting products of Allergan’s scale.

Critique of management staying power

The Allergan, Inc. (NYSE:AGN) release questioned the stability of Valeant Pharmaceuticals Intl Inc (NYSE:VRX) (TSE:VRX)’s management, noting high turnover among executive officers.  “The only executive officers continuing to serve at Valeant since 2011 are J. Michael Pearson and Robert R. Chai-Onn,” the release noted, while saying seven executive officers have departed during that period of time.

Allergan questioning accounting practices

Allergan, Inc. (NYSE:AGN) made strong charges that Valeant’s accounting practices are not consistent with industry standards. Allergan, Inc. (NYSE:AGN) stated that Valeant’s management team “seems to change reporting methodology when convenient,” and has altered accounting standards three times in three years.  The firm also questioned Valeant’s low tax rate, where the firm dodges paying US tax in favor of foreign domiciled jurisdictions, calling the practice “abnormally aggressive.”

For its part, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) (TSE:VRX) indicated it would respond to Allergan, Inc. (NYSE:AGN)’s claims on Wednesday.  “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 Wednesday’s event, company representative Laurie Little said in a Wall Street Journal report.

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Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)
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