Allergan: Here's Why Ackman and Valeant Want the Botox Maker

Weeks after Johnson & Johnson shelved plans to launch a Botox competitor, Allergan (NYSE: AGN.DL  ) is in the news again.

Hedge fund manager Bill Ackman's Pershing Square has built a nearly 10% stake in Allergan in advance of a potential $45 billion bid by Valeant (NYSE: VRX  ) to buy the company.

Allergan's shares have jumped since reports of the potential acquisition, pushing Allergan's value above the rumored takeover price. So, let's take a closer look at Allergan and why Valeant is interested in buying it.

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Synergies, synergies, synergies
Allergan has a diverse product line that stretches from breast implants to eye drops, but its biggest and best known drug is the wrinkle-reducer Botox.

Allergan sold just shy of $2 billion worth of Botox in 2013, up 12% from 2012, which means Botox represents more than a third of Allergan's total sales.

Botox success has led drugmakers to develop to a wave of competing drugs, including PurTox from Johnson & Johnson's Mentor unit. However, despite previous hopes to launch PurTox, Mentor shuttered the drug's development earlier this month.

While Johnson's abandoned its potential Botox competitor, Valeant continues to battle for Botox market share with Dysport and Restylane. Valeant acquired these Botox alternatives in its $2.6 billion buyout of Medicis Pharma in 2012. That deal also gave Valeant the acne-drug Solodyne.

But consolidating its skin care business with Allergan's isn't the only reason Valeant is interested in owning Allergan.

Allergan's Lumigan, Restasis, and Refresh helped Allergan's opthamology segment post sales of nearly $2.9 billion in 2013, up 7.4% from 2012. That works out to 54% of Allergan's full-year sales last year.

That size and global reach is likely very intriguing to Valeant given it also operates a huge eye care business, thanks in part to its $8.7 billion acquisition of Bausch & Lomb last year.

Sales of Bausch & Lomb products grew 10% year over year in the fourth quarter for Valeant, helping drive Valeant's total 2013 revenue to $5.8 billion and its adjusted earnings per share to $6.24.

Given Valeant's success with Bausch & Lomb, integrating Allergan's significant eye care business offers substantial cost savings and cross-selling opportunity. Valeant will be able to reduce marketing and sales personnel in overlapping markets, and provide its remaining sales team with more products to pitch to accounts.

Fool-worthy final thoughts
Acquiring Allergan would allow Valeant significant cost savings both in its dermatologic and eye care product lines, but additional bottom-line benefits could come from reducing Allergan's R&D budget and leveraging Valeant's friendly tax structure.

Allergan had expected to spend 16.5% of its net sales on R&D this year, and for taxes to account for between 26% and 27% of non-GAAP earnings. Combined, those two line items represented nearly $1.5 billion in expenses during 2013. Valeant would cut that R&D spending to about $300 million, and it expects the effective tax rate on the newly combined company would only be in the high single digits.

Valeant already expects sales of $8.3 to $8.7 billion this year, producing cash EPS of $8.55 to $8.80. And Allergan is guiding for 2014 sales of $6.65 to $6.95 billion, generating $5.36 to $5.48 in EPS. If Valeant is able to close this deal, it expects Allergan will be accretive to its EPS forecast by 25% to 30% this year, and 15% to 20% per year thereafter.

Given all the potential synergies, Valeant could become a far bigger and more profitable company, but it will have to convince Allergan's other shareholders to sell first.

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Read/Post Comments (3) | Recommend This Article (2)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 22, 2014, at 12:25 PM, Bob4567 wrote:

    Valeant and Allergan have way too many overlapping products for this to work out: Botox and Dysport neurotoxins; Resytlane/Perlane and Juvederm/Voluma dermal fillers; SkinMedica and Obagi cosmoceuticals, eye care… Regulators will kill this deal- as they should.

    Valeant, a foreign company, with their hostile takeovers puts Americans out of work.

    That is their ‘business model’. They dismantle and shut down the rest of the company they took over. Their cost savings??? Firing the employees of Allergan who provide jobs in Southern California. Valeant has already done this multiple times in the past couple of years to other pharma companies taking away American jobs and providing no value and coming up with no new drugs- they eliminate R&D and just run the current drugs till their patents run out.

    Think of what could be next if these type of hostile takeovers are continually allowed that kills competition. Chinese/Russian government backed companies (not at full disclosure) could systematically do the same. This is providing no value and taking away what American’s need most- local jobs to support their families. Keep people off of unemployment, help the economy to recover and grow, keep industries stable and filled with healthy competition and innovation. U.S. regulators should protect their citizens and block this hostile takeover attempt. Allergan should reject this offer.

  • Report this Comment On April 23, 2014, at 2:32 PM, uniclick wrote:

    A new medical device developed by STA HEALTHCARE AND PHARMACEUTICAL ENGINEERING T/A SHAPE (PTY) LTD called Uniclick syringe will revolutionize the aesthetic industry.

    Allergans BOTOX competitors are looking at buying licences to this technology.




    PurTox from Johnson & Johnson's Mentor unit should persevere for market share using Uniclick neurotoxin preloaded syringes.

  • Report this Comment On April 24, 2014, at 1:17 PM, Melayna wrote:

    Johnson & Johnson's badly damaged image from the bladder market with Gynecare's mesh could be used to try and restored that market with Botox which has the indication for bladder control. That would be the only logical reason JNJ would abandon PurTox. Sounds like Ackerman got wind and made a bid. Should be interesting to watch.

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Todd Campbell

Todd has been helping buy side portfolio managers as an independent researcher for over a decade. In 2003, Todd founded E.B. Capital Markets, LLC, a research firm providing action oriented ideas to professional investors. Todd has provided insight to a variety of publications, including SmartMoney, Barron's, and CNN/fn.

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Related Tickers

12/31/1969 7:00 PM
AGN.DL $0.00 Down +0.00 +0.00%
Allergan, Inc. CAPS Rating: ****
VRX $229.53 Up +1.06 +0.46%
Valeant Pharmaceut… CAPS Rating: ***