Is Valeant a Takeover Target?
The pharmaceutical giant Pfizer Inc. (NYSE:PFE) has formally given up on acquiring Allergan plc (NYSE:AGN), due to changes in U.S. tax laws. The deal was potentially worth some $160.0 billion, which would have been the biggest deal in the pharmaceutical sector ever. Pfizer stock lost 14.8% as a result, but Pfizer will have to pay Allergan $400.0 million in break fees. The Pfizer-Allergan deal may have vaporized but not the appetite for a deal. Indeed, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is a prime acquisition target as Valeant stock has gained over seven percent.
Valeant stock has started to rebuild value this week. The drug maker said the ad hoc committee studying its relationship with Philidor Rx Services did not find any reason to force it to revise its financial statements. This means that Valeant can file its financial statements in 10-K in the United States by next April 29 or earlier. By doing so, Valeant would eliminate the risk of a default on its debt, according to analysts at BMO Capital Markets. (Source: “Valeant says accounting review finds no new issues, shares jump,” The Globe and Mail, April 5, 2016.)
Valeant stock will continue to build bullish momentum. Activist investor Bill Ackman told his clients that Valeant’s board would choose a new CEO in a matter of weeks rather than months, as many feared. Last month, the company said that the CEO Mike Pearson would remain in office until the selection of a substitute. (Source: “Valeant may identify new CEO in ‘a matter of weeks,’ Ackman says,” April 6, 2016.)
BMO has a $66.00 price target on Valeant stock. Investors should be cautious before buying Valeant. The full financial statements will offer a better base from which to evaluate the risk. But the fact that Valeant’s accounting practices have been cleared has vastly improved the company’s credibility. This should whet the appetite of companies in acquisition mode.
So far, Allergan CEO Brenton Saunders has denied any plans to pair with Valeant. Still, Saunders has a good relationship with Ackman, who recently joined Valeant’s board to help find a new CEO for the company. Ackman may certainly put pressure on Allergan, skipping the Valeant CEO issue altogether.
Valeant has something Allergan wants: Bausch & Lomb, the eye care specialist. Saunders clearly expressed interest in buying Bausch & Lomb, which Valeant acquired in 2013. (Source: “Allergan Chief All But Dismisses an All-Out Valeant Merger,” The Wall Street Journal, April 6, 2016.) Ackman had suggested selling Bausch & Lomb when Valeant was collapsing under its suspected accounting issues just weeks ago. Now that Valeant’s accounting has been cleared, there is no need to sell Valeant assets piece by piece. The company as a whole is fit for sale.
Saunders is acting cautiously, even responsibly, probably preferring to wait to see Valeant’s statements before picking up its assets. Certainly, all the vultures waiting for Valeant to declare bankruptcy or a fire sale will have to revise their plans and be ready to pay more. Valeant is different from Allergan in that the former prefers to buy assets for growth while the latter engages in good old-fashioned research and development.
However, Ackman could persuade Allergan’s CEO that it would be a nice complement for the more R&D-focused Allergan to branch out into “lifestyle” products, which represent Valeant’s main business. GFI Group Inc.’s John Spallanzani sees the collapse of the Pfizer-Allergan merger as favorable for Valeant. (Source: “Is it Time to Buy Valeant?” CNBC, April 6, 2016.)