Allergan Files Investor Presentation Detailing Concerns About the Sustainability of Valeant's Business Model
Presentation Raises Significant Issues to be Considered When Evaluating the Value of Valeant's Equity
The presentation raises a number of important issues about Valeant's business model and stock value that Allergan's stockholders need to be aware of.
What is Valeant's real organic growth?
Allerganbelieves that Valeant's organic sales growth, which is primarily driven by price increases, is overstated based on changing definitions and classifications with no disclosure of key products. The pro-forma revenue growth from Valeant's SECfilings paints a picture far different from what is communicated to investors. Valeant's pro-forma revenue growth including acquisitions for fiscal year 2013 was -0.5%. In the first quarter of 2014, the growth rate declined to -1.4%.
How have the two largest Valeant acquisitions (Bausch & Lomb and
Medicis) performed under Valeant's ownership? How have other
Analysis based upon data acquired from IMS FIRST, a provider of top-line information about pharmaceutical companies and the largest vendor of U.S. physician prescribing data, raises concerns about the source of Bausch & Lomb's growth. This analysis indicates substantial erosion in units sold for three out of four of Bausch & Lomb's largest prescription ophthalmic products, for which Valeant compensates with significant list price increases.
The Medicis business is losing market share and increasing prices at, we believe, an unsustainable pace. Since Valeant acquired Medicis,
Allerganhas rapidly accelerated its capture of market share. Over this same timeframe, Valeant increased prices for Medicis' six largest products by a significant and, we believe, unsustainable amount.
Does Valeant have any experience promoting products of Allergan's
Valeant's limited experience with large, global scale products represents a material execution risk attempting to grow Allergan's categories and launching significant new large products through existing channels.
Allerganwould be Valeant's largest acquisition and the synergies proposed by Valeant are the most aggressive to date. Botox's annual sales are more than seven times greater than each of Valeant's largest products, Zovirax and Wellbutrin, which are declining or stagnant.
How stable is Valeant's management team?
The only executive officers continuing to serve at Valeant since 2011 are J.
Michael Pearsonand Robert R. Chai-Onn. Seven executive officers have departed over this period. In addition, three Board members, Fred Hassan, G. Mason Morfitand Lloyd M. Segal, recently resigned, with two citing "potential conflicts" - one of whom withdrew after a tenure of less than a year.
Can Valeantcut $2.7bnof Allergan's expenses without disrupting the performance of the business?
Valeant will only be able to achieve a fraction of its stated SG&A and R&D synergies without destroying Allergan's near-term and long-term value. Valeant has indicated it will maintain R&D required for post-approval and maintenance, product line extensions and late phase projects, but drastically underestimates the spend required by approximately
$350 million. Moreover, Valeant's purported SG&A synergies are unrealistic given Valeant's goals, as communicated in numerous letters to its customers: "I want to reassure all of you that we remain committed to investing in you and in the fields of Dermatology, Aesthetics and Eye Care."1
What is the relative distribution strength of
Allerganvs. Valeant in important emerging markets (BRICs)?
In the BRIC Countries, Allergan's sales are approximately 4 times larger than Bausch & Lomb's prescription ophthalmic sales. While Valeant boasts market growth in emerging markets, it is important to clarify that these are smaller markets with less revenue potential.
Is Valeant's low tax rate sustainable?
Valeant's multiple off-shore tax deferral structures are aggressive, difficult to sustain and compound risk in multiple jurisdictions. No other pharmaceutical or healthcare peers that have recently re-domiciled outside the U.S. have achieved tax rates nearly as low as Valeant, which suggests that Valeant's tax strategies are abnormally aggressive.
Are Valeant's accounting practices clearly consistent with others
in the industry?
Valeant's management team, which seems to change reporting methodology when convenient, has realigned Valeant's segment reporting structure three times in the past three years, decreasing the level of disaggregation each time. Furthermore, in a survey conducted by an independent consultant, Valeant was the only company that organizes segments on a geographic basis.
Is a business model centered on a serial acquisition and cost
cutting strategy sustainable?
Valeant's model of taking on debt to serially acquire companies will become incrementally harder to do as interest rates move higher. While appearing on
CNBCon May 15, 2014, Jim Chanos, president and founder of Kynikos Associates, noted many of the same issues other Allerganstockholders expressed, stating, "Roll ups are generally accounting-driven, and we certainly think that's the case in [Valeant]. We think [Valeant] is playing some very aggressive accounting games when they buy companies, write down the assets, and also engaged in what we call spring-loading."1 Allerganexpressed these concerns as well.
Goldman, Sachs & Co. and BofA Merrill Lynch are serving as financial
advisors to the Company and Latham &
Information contained in this press release regarding Valeant is taken
directly from the information publicly disclosed by Valeant and we do
not make any representations or warranties, either express or implied,
with respect to such information's accuracy or completeness. In
addition, certain other information contained in this press release is
based on publicly available sources as of the date of this press
release, and while we have no reason to believe that such information is
not accurate, we can provide no such assurances with respect thereto.
IMS data used in this press release has been purchased from IMS Health,
a provider of healthcare information. The information in this press
release represents the opinions of
1 Permission to use quotations was neither sought nor obtained.
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