Is B+L being run well? Valeant foe says no
A seedy bum of a guy, with no good job and no prospects, asks for permission to marry your daughter.
That protective dad, arms folded across his chest, is how one of the world’s largest pharmaceutical companies says it sees itself in spurring overtures from another pharma giant, the parent company of Bausch + Lomb Inc.
Valeant Pharmaceuticals International Inc.’s bid to buy Allergan Inc. — whose product lineup ranges from breast implants and Botox to anti-glaucoma medication and the Refresh line of eye drops — has become a referendum on the very integrity of Valeant’s business, including what’s happening to B+L.
Allergan’s board more than rejected the offer last week, saying it undervalued what Allergan’s worth: it slammed Valeant. Allergan Chairman CEO David Pyott told Wall Street investors, “Our model works, whereas Valeant’s model of cutting and slashing really doesn’t work for more than a very short period of time.”
In turn, Valeant has rented out a Midtown Manhattan auditorium for a meeting of Allergan and Valeant shareholders on Wednesday. The meeting begins at 8 a.m. and will be webcast live at valeant.com.
According to Valeant, it plans to rebut the assertions that its business model “is not sustainable, that the Bausch + Lomb portfolio is not growing, that Valeant slashes R&D and is not committed to innovation, and that it will be impossible to capture $2.7 billion of synergies without impacting top-line growth.” It also plans to sweeten its offer for Allergan.
Scheduled to speak and take questions are a parade of Valeant executives from various aspects of the business. Company spokeswoman Laurie Little said the intent is to go through a number of Valeant’s past acquisitions and explain how that has worked out well, as well as discuss the state of the B+L business.
“We believe the combination of Allergan and Valeant offers a compelling opportunity to drive tremendous value for all stakeholders,” Little said. “We would, of course, prefer to pursue the transaction under friendly terms, but we believe the value of the combined company is so compelling that the shareholders should be the ones to decide.”
Montreal-based Valeant in April suddenly came out with a big offer for Allergan: $4,830 and 83 shares of Valeant stock for every 100 shares of Allergan — a deal valued at roughly $47 billion for Allergan and a premium 31 percent higher than Allergan’s stock was going for in early April. The offer dwarfs the $8.7 billion B+L takeover, which was finalized in August.
In a letter to Allergan employees explaining why the board — of which he is chairman — shot down the Valeant offer, Pyott wrote that while Allergan has just started a new strategy that should promise big sales and earnings growth in coming years, “Valeant’s business model with low organic sales growth, serial acquisitions, and cutting of R&D, sales and marketing, and overheads is not sustainable.”
Valeant’s track record with B+L is arguably mixed. The company has moved B+L’s corporate headquarters from Rochester to New Jersey and cut roughly 400 local positions. In U.S. Securities and Exchange Commission paperwork, Valeant indicated earlier this year it expects to ultimately spend upwards of $400 million on various integration costs, such as severance packages to roughly 2,500 people. That integration of B+L is expected to be done by year’s end.
However, B+L’s R&D efforts — much of which traditionally were done at its North Goodman Street complex — have almost surely taken a big hit under Valeant. It spent, on average, roughly $222 million a year on R&D under its previous owner, private equity giant Warburg Pincus. This year, Valeant expects to spend $250 million R&D companywide — part of its strategy as it frequently buys new products and technologies more than develops them in-house.
The company also is looking at relocating some of its contact lens solution manufacturing out of North America and Western Europe to other parts of the globe, Chief Financial Officer Howard Schiller said. “We’re basically shipping water around the world,” he told Wall Street analysts.
At the same time, under Valeant, B+L has been growing. For the fourth quarter of 2013, the most recent numbers available, B+L sales were up 10 percent, according to Valeant. The company launched the Ultra monthly disposable contact lens earlier this month, though that product already was in the works when B+L was bought. And Valeant said it expects to put out new B+L products every quarter, leading to more sales growth. Valeant told investors earlier this week that at the Manhattan event, it will show B+L growth has accelerated under it.
At least as of the third quarter of 2013, B+L had roughly 10 percent of the worldwide contact lens market — about the same as at the beginning of the year — according to data from wealth management firm Robert W. Baird & Co.
Allergan spent slightly more than $1 billion last year on R&D, and Valeant CEO J. Michael Pearson has said, “That current and expected R&D spend is much too high.”
In a conference call earlier this month, Pearson said B+L “will serve as a model for what we hope to achieve with Allergan.”
MDANEMAN@DemocratandChronicle.com
Allergan and a Valeant ally
Backing Valeant Pharmaceuticals in its bid to take over Allergan Inc. is one of Allergan’s biggest shareholders.
In an open letter to Allergan this week, Pershing Square Capital Management LP CEO William A. Ackman wrote, “The combined company will benefit from enormous cost and strategic synergies by virtue of both companies’ presence in dermatology, ophthalmology and aesthetics. Valeant also has a best-in-class, low-cost operating model, industry-leading and cost-effective R&D productivity, and a demonstrated superior track record of capital allocation and shareholder-oriented corporate governance. We believe that Valeant’s ‘shareholder first’ approach has contributed to its extraordinary performance.”
New York hedge fund Pershing Square owns close to 10 percent of Allergan, with much of that purchased in recent weeks.