Allergan Inc. (NYSE: AGN) Targeted in Unusual Takeover Bid

Investors were happy Tuesday with the titanic $45.7 billion bid for Botox maker Allergan Inc. (NYSE: AGN) - and the stock soared up to 17% in response.
News that activist investor Bill Ackman has teamed up with Valeant Pharmaceuticals International Inc. (NYSE: VRX) to take over Allergan sent shares of both companies soaring. Allergan shares surged some 17% to a 52-week high of $165.39 intraday. Meanwhile, Valeant shares jumped more than 7% to $134.42.

Under proposed terms, each Allergan share would be exchanged for $48.30 in cash and 0.83 shares of Valeant. That's a healthy 7% premium to Allergan's closing price on Monday.

Ackman's Pershing Square Capital Management LP, which amassed a 9.7% stake in less than two months, making it Allergan's biggest shareholder, has agreed to take all stock. Valued at around $4 billion, it is said to be Ackman's biggest investment ever.

Moreover, in a nod of confidence about the deal, Pershing plans to remain a long-term shareholder of the combined company.

While an unusual arrangement, Valeant was keen to work with Ackman on the deal because his hedge fund could stockpile Allergan's shares (as much as 10%) without raising too many eyebrows or making a public disclosure. Valeant would have been required to disclose such a stake, according to Bloomberg.

It's not yet clear if Ackman and Valeant will succeed. But, if they did, the two pharmaceutical giants would nicely complement each other...

Why Valeant Sees Allergan (NYSE: AGN) as Attractive

Both companies have similar product portfolios and each sport a more than $40 billion stock-market cap. Combined they would create a global giant in the eye and skincare industries.

Valeant's aim is threefold: to realize substantial savings by joining the companies' skin and eye care businesses, to save on research and development costs, and to create an international pharmaceutical behemoth.

Here's how Allergan would help achieve that goal...

While Irvine, Calif.- based Allergan is best known as a Botox maker, the company has a full product pipeline and operates in two segments: specialty pharmaceuticals and medical devices.

The specialty pharmaceutical unit produces ophthalmic products for dry eye, glaucoma, inflammation, infection, allergies, and retinal diseases. In addition to Botox (used both therapeutically and aesthetically), Allergan offers a line of skincare products, sold both over-the-counter and by prescription, for acne, psoriasis, and eyelash growth. The medical device segment supplies medical devices for breast implants and reconstructive surgery.

Its Botox sales rose 12% to nearly $2 billion last year. Debuting in 1989, the injectable drug is widely acclaimed for its ability to smooth lines on aging faces. Over the years, however, Botox has been approved to treat neck spasms, eye muscle disorders, and migraine headaches.

Driven by growing Botox uses, Allergan posted revenue of $6.3 billion in 2013, a 12% increase year over year.

Meanwhile, Valeant's portfolio includes a plethora of products for eye health, dermatology, and neurology therapeutic classes (pain relief). Well-known brands include the antidepressant drug Wellbutrin and the OTC remedy Cold-FX.

Since Valeant Chief Executive Officer J. Michael Pearson took over in 2008, he has shelled out some $19 billion for more than 35 companies. But he knows what he's doing. Before manning the helm at the Laval, Quebec-based company, Pearson spent 23 years at McKinsey, working together with CEOs on turnarounds and acquisitions.

His goal at Valeant, through acquisitions, is to become one of the world's five largest drug makers.

In getting there, Pearson's strategy involves buying companies with established drugs instead of developing them, thus saving research and development (R&D) costs and setbacks.

In a 2012 interview with The Wall Street Journal, Pearson said Valeant spends less than 5% on R&D: "Instead, our innovation comes from acquiring companies and products that are already approved in the market, so we avoid the risk associated with R&D."

In his biggest acquisition to date, Pearson bought Bausch & Lomb for $8.7 billion in 2013.

Valeant isn't always successful in its buyout attempts. Last year, it tried and failed to acquire privately held Actavis Plc. In February, Actavis bought Forest Labs Inc. for $25 billion.

With or without Allergan, Valeant looks attractive.

Tuesday, Valeant raised its full-year earnings per share (EPS) forecast to between $8.55 and $8.80. That's up from its prior EPS guidance of $8.25 to $8.75. It also hiked its revenue guidance to $8.3 billion to $8.7 billion, up from $8.2 billion to $8.6 billion.

The company's guidance is likely modest.

Analysts surveyed by FactSet project FY2014 EPS of $9.63 on revenue of $9.35 billion.

Allergan (NYSE: AGN) stock was up 15% to $163.73 at 3 p.m. Tuesday.

Our Chief Investment Strategist Keith Fitz-Gerald saw this "earnings beat" coming and put readers out in front of it. And it's perfect for the type of market we're in now...

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