Valeant says it will improve its hostile takeover bid for Botox-maker Allergan

LAVAL, Que. - Valeant Pharmaceuticals vowed Tuesday to improve its bid of almost US$47 billion for Botox-maker Allergan after the U.S. company rejected its hostile takeover offer.

Valeant CEO Michael Pearson said the company is prepared to pay a fair price, but will remain financially disciplined when it makes its new offer later this month.

Under the current proposal, Valeant, which has teamed up with activist investor Bill Ackman, has offered US$48.30 in cash and 0.83 of a Valeant share for each Allergan share. Valeant did not say Tuesday how it would improve the bid.

Pearson said he will tell Allergan shareholders during a presentation on May 28 why Valeant's offer is better than Allergan's "go it alone" strategy and improve the offer "to demonstrate our commitment to getting this deal done."

He is also expected to provide details about Valeant's (TSX:VRX) business strategy and costs savings from its recent transactions and address concerns that Allergan has raised about Valeant's acquisition strategy.

"We are prepared to pay a full and fair price but, consistent with our track record, we will remain financially disciplined," Pearson said in a letter to Allergan shareholders.

"We will not stop our pursuit of this combination until we hear directly from Allergan shareholders that you prefer Allergan's 'stay the course plan' to a combination with Valeant," Pearson said.

Ackman's Pershing Square Capital Management LP — Allergan's biggest shareholder at 9.7 per cent — has agreed to take only stock in the transaction.

The investment firm, best known in Canada for its successful fight for change at Canadian Pacific Railway Ltd. (TSX:CP), is seeking a meeting of Allergan shareholders to vote on a motion asking the company's board to begin negotiations with Valeant.

"The proposed resolution provides a means for the company’s shareholders to demonstrate, in a co-ordinated and powerful manner, their support for the company to engage in a meaningful dialogue with Valeant," Pershing Square said in a filing with the U.S. Securities and Exchange Commission.

Allergan called it a "self-serving exercise by Pershing Square to further Valeant's attempt to acquire Allergan."

"This is nothing more than an attempt by co-bidders Pershing Square and Valeant to transfer the value inherent in Allergan to Pershing Square and Valeant at a price that substantially undervalues Allergan," a company spokesperson said.

"Rather than use the mechanism approved by the Allergan shareholders to call a special meeting, they are dictating their own process."

Industry analysts say Allergan's bullish growth outlook will pressure Valeant to substantially increase its bid, which equal US$155.90 based on Valeant's closing trading price of US$129.64 in New York (or C$141.42 on the TSX. Allergan's shares closed up US$1.56 to US$161.28.

"We believe Valeant's offer no longer appears to fully value Allergan's earnings growth prospects and management can, at a minimum, argue for a price of $180 per share or more from any potential acquirer," wrote analyst Seamus Fernandez, who covers Allergan for Leerink.

"In fact, we estimate that Allergan's guidance implies a price of more than $190 per share in the next 12 months."

However, Fernandez added that Allergan must beef up its capital allocation to shareholders to make a strong case for continued independence.

Allergan has adopted a "poison pill" defence that will allow it time to consider alternatives and potentially block the bid.

The company has said it can do a better job growing the company alone while also criticizing its Canadian rival's business model.

California-based Allergan (NYSE:AGN) has said that its investments in research and development have built a strong pipeline of products that will generate double-digit annual revenue and earnings growth for at least six years.

Allergan noted that it has transformed anti-wrinkle Botox from a $100-million a year product in 1989 to one that generates $2 billion for both its aesthetic and therapeutic uses.

Valeant contends Allergan spends too much on early research and development, saying the proposed takeover will result in more than US$2.7 billion in annual cost savings, 80 per cent of which would be achieved in the first six months.

It said last year's acquisition of eyecare company Bausch & Lomb is an example of removing layers of management while driving higher sales.

However, Allergan said Valeant's estimates don't seem to include some $200 million needed just to maintain products currently on the market.

— With files from Ross Marowits in Montreal