Can Allergan Remain Independent of Valeant?

Good earnings don't make a strong enough case for Allergan to stay independent

May 8, 2014 at 6:30PM

Thanks to the now-public interest of Valeant (NYSE:VRX) in making Allergan (NYSE:AGN) its own, not to mention the vocal and financial support of Pershing Square and Bill Ackman, the status quo is gone for good at Allergan. Good first quarter results and improved guidance for the year were both nice to see, but Allergan is going to have to do a lot more to convince its shareholders that a plan for the future that excludes selling out to Valeant has their best interests at heart.

Good results help a little
I suppose Valeant would be able to crow a little louder about the need for sweeping cost cuts if Allergan had posted an expense-driven miss, but first quarter results were pretty good.

Revenue rose 13% as reported, good for a modest beat versus sell-side expectations. Allergan's outperformance was spread fairly evenly across the business, as pharmaceutical revenue rose 10% on 9% growth in eye care, 10% growth in Botox (slightly weak), and 10% growth in skin care. Devices were up 23%, with 11% growth in breast implants and 33% growth in facial aesthetics.

Allergan extended its outperformance down the income statement. Gross margin improved more than half a point from last year, beating expectations for flat performance. Operating income rose 31%, beating expectations by 6% as the company slightly underspent expectations as a percentage of sales.

And now what?
While Valeant has been trying to drum up shareholder support for its bid for Allergan, the target has been relatively quiet beyond its initial rejection and poison pill efforts. Rumors are flying all over the place that Allergan is beating the bushes, looking for either a target of its own or a "white knight" bidder that would acquire the company without the slash-and-burn cost cuts proposed by Valeant.

A key focus of these discussions has been Shire (NASDAQ:SHPG). Several sources, led I believe by Reuters, have reported that Allergan approached Shire earlier this year regarding a merger/acquisition.

Shire would hold some obvious appeal. Acquiring Shire would facilitate a tax inversion that would lower Allergan's income tax rate (a key benefit of the Valeant offer) and as both companies have sizable SG&A and R&D spends, there could be some real cost-cutting opportunities here (however ironic that may be). There are also good top-line reasons for a deal – Shire would complement Allergan's ophthalmology business and its rare disease drug business would generate the sort of above-average growth that Allergan needs to sell any alternative proposals to its shareholders.

Other acquisition targets for Allergan could include Teva or Alkermes, with Merck KGaA and UCB as even bigger longshots.

Will a white knight show up?
If Allergan cannot swallow another company and make itself indigestible to Valeant in the process, it may be possible to find an alternative bidder – one that would preserve more of the company, it's R&D, and its employees' jobs. Given the advantages that Valeant stands to reap, though, it's going to be hard to find a superior deal.

Perhaps Pfizer would be interested if it couldn't consummate its bid for AstraZeneca, as Allergan would offer some modest synergies in dermatology and Allergan's products could be leveraged through Pfizer's global sales force. I continue to believe, though, that Johnson & Johnson and AstraZeneca would be more probable alternative bidders, though I'd hardly describe either company's involvement as "likely".

The bottom line
Allergan's near-term financial performance is almost trivial in the context of its value today. The dominant question now is whether Allergan can find an acquisition of its own, an alternative bidder, or secure a higher price from Valeant. Much as Allergan may not like Valeant or its proposed changes to Allergan's business, management has an obligation to do right by shareholders (the owners of the company). Unless Allergan can court Shire on attractive terms, swallowing hard and extracting more from Valeant may be the best option left on the table.

Will this stock be your next multi-bagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Stephen D. Simpson, CFA has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson, Valeant Pharmaceuticals, and Teva Pharmaceutical Industries. The Motley Fool owns shares of Johnson & Johnson and Valeant Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers