$53 Billion Offer: 3rd Time the Charm for Valeant?

Canadian drug-maker Valeant Pharmaceuticals (NYSE: VRX  ) , known for being the drug-industry's busiest dealmaker since 2010, upped its bid to buy Allergan (NYSE: AGN.DL  ) on Friday. While it's certainly not a done deal yet, shares in Allergan jumped nearly 6% Friday, while Valeant shares added 1.5%.

Valeant's latest offer for Botox-maker Allergan is worth more than $53 billion, but it's contingent on Allergan entering into good faith negotiations without delay. J. Michael Pearson, CEO of Valeant, made it clear he would not raise the bid again unless Allergan committed to talks, saying, "We are not going to keep offering against ourselves."

Allergan has steadily rebuffed Valeant up to this point, not liking Valeant's cost-slashing way of doing business. With no love lost between these two companies, Valeant hinted it may go fully hostile by encouraging shareholders to call a special meeting to throw out Allergan's board, according to the New York Times. Wells Fargo Securities senior analyst Larry Biegelsen said he believes the latest offer is "at least sufficient to get Allergan to the negotiation table."

The lure for Valeant is Botox, which is one of the few drugs out there Valeant believes is worth a significant R&D investment. For reference, Valeant spends less than 3% of its revenue on R&D, compared to an average 16% in the industry.

Valeant has acquired 75 companies since 2008, but Botox-maker Allergan may be its juiciest prize. Once (and perhaps still) known mostly as a wrinkle-fighter, Botox is now being used for a variety of treatments, and more still to come -- Allergan is developing Botox in a series of new indications, including phase 2 trials for indications as diverse as depression, osteoarthritis pain, and premature ejaculation.

Whether Valeant will get its hands on Botox is still up for grabs. Earlier this month, Allergan rejected an offer of $46 billion, claiming it undervalued the company. On Wednesday last week, Valeant increased that bid, and two days later, they increased it again--surprising analysts. The latest deal offers cash of $72 per share and 0.83 shares of Valeant stock. That's up substantially from the $58.30 (and 0.83 shares) that Valeant offered on Wednesday.

Another new development is that Allergan's largest shareholder, Pershing Square Capital Management, is furthering Valeant's latest bid. Billionaire hedge fund manager, Bill Ackman, CEO of Pershing Square, agreed to receive no cash if the latest deal goes through, according to Forbes magazine. "Early this morning, I called Mike and offered to give up $600 million of value to the other Allergan shareholders and exchange our shares for Valeant stock if Valeant were prepared to increase its offer to the other Allergan shareholders," Ackman said in a statement.

Allergan has repeatedly complained that Valeant's threat to cut R&D to the bone would throttle future sales growth. For its part, Valeant believes Allergan's management spends far too much, and has promised investors it will extend Allergan's reach into developing markets as well as speed up growth for Allergan products.

The new bid includes a right for Allergan shareholders to receive an additional $25 a share, tied to the future revenue of Allergan's developmental eye-treatment. An additional inducement is that Pearson is promising that the combined company will have $2.7 billion in synergies (much of it coming from slashing administrative and R&D costs), as well as a single-digit tax rate.

The merger, if it goes through, would double the size of Valeant, making it one of the largest specialty pharmaceutical companies in the world. Allergan's board unanimously rejected the previous bid, but both Sanofi and Johnson & Johnson refused to swoop in and play the white knight, and Allergan is running out of options. About $141 billion in corporate takeovers in the pharmaceutical industry were announced or proposed in the past twelve months, according to Bloomberg, an amount that is four times the volume of the previous year.

At the very least, this latest deal is going to be hard for Allergan to walk away from.

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Cheryl Swanson

Cheryl has six books published, and currently resides in Kauai with her husband, her daughter and two dozen surfboards. With a 20-year background as a former medical technology and management consultant, as well as a cancer survivor, Cheryl has a unique perspective on health care. Follow her on Twitter at @uthorcdswanson

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