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

Here's what you need to know about Valeant's (VRX) planned $45 billion acquisition of Allergan (AGN),

Todd Campbell
Todd Campbell
Apr 22, 2014 at 12:00PM
Health Care

Weeks after Johnson & Johnson shelved plans to launch a Botox competitor, Allergan (UNKNOWN: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:BHC) 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.

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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.