Industry Gets Much- Needed Facelift
The $ 66b Actavis- Allergan deal could be one for the greater good — it’s a fierce battle for the soul of modern pharmaceuticals, with two competing visions of what 21st century drug- making is all about
The sale of Allergan to Actavis for about $ 66 billion ( Dh242 billion) is set to be the biggest takeover in a frantic year of pharmaceutical deal- making. The $ 219- a- share cash- and- stock offer from Actavis eclipses the $ 185- a- share that was offered by rival bidder Valeant, which has spent much of the year pursuing a hostile takeover of Allergan. But this deal was always about more than price.
It was a fierce battle for the soul of modern pharmaceuticals, with two competing visions of what 21st century drug- making is all about.
On one side was Allergan, owner of the blockbuster wrinkle treatment Botox. Since becoming chief executive in 1998, David Pyott has turned the company from a niche eye- care business with a market capitalisation of about $ 2 billion into a widely respected speciality pharma group. Although best known as a cosmetic drug, Botox is used to treat everything from bladder disorders to migraines and muscle spasticity. On the other side was its suitor Valeant, a pharma deal- making machine. Since it was created out of a merger with Canada’s Biovail in 2010 — one of the very first “tax inversions” — the company has announced more than 15 acquisitions, including last year’s $ 8.7 billion ( Dh32 billion) purchase of eye- care group Bausch & Lomb. Valeant’s strategy has been simple: extract higher profits by slashing costs.
After seven months of unwanted takeover advances, public criticisms and even legal action, it is hard to overstate the degree of personal animosity between the Allergan and Valeant chief executives. Pyott, like many in the life sciences industry, is mistrustful of Valeant and its chief executive Michael Pearson, a self- styled outsider who took the helm in 2008 after spending 23 years at McKinsey. Critics in the pharmaceutical community view Valeant as a short- termist asset- stripper with little interest in research and development, and argue that it can only grow through perpetual, highly- leveraged deal- making. For Pearson, modern drug- making is stuck in the past, clinging to a postwar business model where armies of white- coated scientists toil away in laboratories.
He thinks innovation is best left to lean biotech start- ups, while the job of large groups such as Valeant is to buy those companies up at a later stage and extract more value. Valeant had said it planned to cut Allergan’s costs by $ 2.7 billion a year, with $ 900 million of those coming from reductions in its budget for research and development. Yet Actavis is also a well- known cost- cutter: it is planning to extract annual savings of $ 1.8 billion with a $ 400 million cut to research and development spend.
Brent Saunders, Actavis chief executive, said any cuts would be “smart, intelligent and thoughtful”, but analysts say they will be hard to achieve given that Allergan’s management already runs the business in a lean fashion.
Adding to the intrigue of the takeover saga was the presence of two of the bestknown activist investors in the US. Bill Ackman amassed a ten per cent stake in Allergan before teaming up with Valeant to launch its bid, one of the first instances of a big company working in concert with an activist on a takeover battle. Jeffrey Ubben, whose Value Act owns six per cent of Valeant, also supported the takeover.
By working in concert with a big company such as Valeant, Ackman had hoped to pioneer a new type of activist- driven dealmaking. But there were persistent rumours of splits between Ackman and Valeant and its advisers, especially after someone leaked that the pair were planning to raise their offer for Allergan. Valeant’s bankers were caught unawares by the leak. “Do we always agree on every tactic? No,” Pearson said last month.
Allergan’s defence strategy initially focused on discrediting Valeant’s business model. It set up a rapid rebuttal team to respond to every earnings release with a list of questions casting doubt on the company’s performance. It even released emails from Rob Kindler of Morgan Stanley, Valeant’s banker, describing the group’s business model as a “house of cards”. Kindler had sent the emails before working for Valeant, when he was trying to win the mandate from Allergan.
The Botox maker also explored its own potential acquisitions, designed to deplete its cash and make it too large for Valeant to swallow. It held talks with Salix, a gastro- intestinal specialist, about buying the company for as much as $ 12 billion but walked away after uncovering accounting issues that resulted in the departure of the group’s chief financial officer.
Its willingness to pursue such a large and risky deal without securing shareholder approval — a tall order given the positions held by Ackman and his supporters — prompted a chorus of criticism. Institutional Shareholder Services, one of the most influential voices in corporate governance, called on the group to hold a vote, a position that was backed by some of its largest investors, such as T. Rowe Price.
An attempt to get the courts to stop Ackman from voting his 9.7 per cent stake at a meeting in December, where he intended to oust Allergan’s board and replace them with directors more amenable to a deal, also failed. At this point, as one of Allergan’s advisers put it, the strategy became “anyone but Valeant”.
‘ White knight’
Talks with Actavis, a potential “white knight”, had been bubbling away in the background but gathered new momentum as the December meeting got closer. If Actavis’s takeover of Allergan is completed, it would have big implications for the rest of the pharmaceuticals sector. Many of the biggest deals, such as Abbvie’s £ 35 billion ( Dh201 billion) takeover of Shire and Pfizer’s abortive £ 69 billion bid for Astra Zeneca, have been torpedoed by the US government’s crackdown on tax inversions.
Yet Pfizer has said it is still considering a tax inversion, and had been linked to Actavis before the latest announcement. A combined Actavis- Allergan may now be too large and complex to swallow. Pfizer announced its own $ 850 million deal to acquire rights to a cancer drug in a move designed to burnish its credentials as a standalone company.
Nor is the Valeant juggernaut going to stop. In a presentation to investors earlier this year, Ackman listed 58 companies as potential acquisitions. Among them was Zoetis, the animal health group in which he recently amassed a stake and suggested as a Plan B target.
The battle for Allergan may be entering its final act, but the themes raised by the deal — from the future of modern pharma to the limits of activist deal- making — are certain to be revisited very soon.