Case study 6: The Allergan Board Under Fire

EPGP-303-13A- SM Group 10

Contributors:

EPGP-13A-007 ADITI VATSA

EPGP-13A-003 ABHIRAJ SINGH

EPGP-13A-019 ANKIT MITTAL

EPGP-13A-010 AKSHAY NANGIA

EPGP-13A-073 NITHUL K P NARAYANAN

1(a). Why does Valeant wish to acquire or merge with Allergan?

● Valeant could have easily attained the top position in terms of the world market share after adding Allergan’s
products, neuromodulators and dermal fillers into their account.
● Allergan’s ophthalmic products and breast implants contributed highly to the pharmaceutical share market and this
acquisition could lead to Valeant achieving the second largest market share in these fields.
● Allergan’s eye and skin-care products and therapeutic drugs, mainly Botox and Restasis eye drops were approved
by the FDA and attaining this approval could make Valeant a medical aesthetics powerhouse and give it a supreme
position in the therapeutic market.
● Valeant’s CEO Pearson focused on the mass production of products with minimal competition and by mid-2014, the
company had secured the 5 th position in terms of market value among the world’s top pharmaceutical companies,
Pearson was aiming to triple the Valent market capitalization by acquiring large firms like Allergan.
● By using the Allergan’s high growth products, Valeant would continue its strategic emphasis by focusing on
physician as primary customer rather than end consumers or health-care systems.
● Pearson believed in sales and marketing techniques to raise prices of acquired products. Ex: For the heart drugs
Isuprel and Nitropress, Valeant’s initial price increase was as high as 212% and 525% respectively and Pearson
could use the same tactics for Allergan’s products to attain maximum profit.
1(b). Is it possible for Valeant to create value by acquiring/ merging with Allergan?

Yes it was possible for Valeant to create value by acquiring Allergan due to the following reasons:

● Allergan was a highly growing company in last 15 years the share price has increased 10 times. By the acquisition of
Allergan, Valeant’s market share would increase globally.
● Valeant’s CEO had already planned to cut Allergen’s R&D budget by about 90%($1 billion), which would have increased
Valeant’s revenue, thereby generating free cash flow in company’s balance sheet.
● The company was listed in CANADA, so low tax zone will lead to increase in profit margins.
● Allergan’s products were fully qualified as per the safety standards (FDA approved) and had developed market trust over the
years. Hence, a good market strategy and promotions would have enhanced the demand and increased its revenue
exponentially.
● Both companies have different products, the merger/acquisition would lead to a portfolio expansion and the company will be
able to assert and maintain a larger market share.
2. How well did Allergan’s board handle the Valeant offer?

Allergan’s board managed the negotiation really well by following the following procedures:

● They conducted separate one on one discussions with their stakeholders, board members, managers and portfolio
managers to evaluate.
● Due diligence was performed by Allergan’s board, they did not simply spill market news.
● They were aware of the business performance of Valeant as they did thorough research of the market and also
referred the balance sheet to understand what was being offered to them.
● They had dropped supermajority voting for director removal, requiring all directors to stand for election annually and
also introduced a process of allowing stakeholders to call a special meeting with the written consent of at least 25%
of companies outstanding shares.
● Allergan always kept hunting for other bidders like Actavis who had a better reputation and business model than
Valeant to prioritize their R&D division at all stages.
3(a). What was the role played by William Ackman and his firm Pershing Square in this?

● William Ackman founded the Pershing Square firm in 2004 and was an active investor, hedge fund activist in limited
number of large firms, and typically sought to influence their governance and management. That’s exactly what he
did in case of Allergan pharmaceuticals.
● William Ackman strongly believed in Valeant’s business strategy and was strong supporter of the company’s
business philosophy. Ackman and Pershing square entered into a confidentiality agreement to form Joint Venture PS
Fund 1 for the acquisition of Allergan Pharmaceuticals, and it was providing higher capital for the same.
● Ackman and Pershing Square secretly began purchasing shares in Allergan, initially through multitude of call options
to avoid reaching the threshold of 5% and stay below the security filing requirements.
● Gradually days before the formal offer was made to Allergan, Pershing Square crossed the 5% threshold and
eventually became Allergan’s largest single shareholder with a total share of 9.7%.
● Being the largest shareholder, Ackman pushed for a special shareholder meeting to have their opinion on
proceeding for merger talks. Subsequently he also met with number of large Allergan shareholders to gain their
support for the proposed merger.
● Further, Ackman criticized Allergan’s governance record and characterized its special meeting bylaw as excessively
onerous in order to turn the tables in their favour.
3(b). Can Ackman’s actions be considered insider trading?

Pershing Square headed by Ackman didn’t held any fiduciary relationship with Allergan. Insider is a term describing a
director or senior officer of a company, as well as any person or entity that beneficially owns more than 10% of a
company's voting shares. So, Ackman was not an insider according to the definition. They have cleverly maintained their
position in the firm. According to section 10b and section 14e of Securities and Exchange Act 1934, Ackman and Valeant
were not in possession of non-public information about Allergan. Also, as per Rule 14e-3 which prohibited trading when a
substantial step has been taken stated that the non-public information should involve a tender offer, not a simple board-
approved merger. Since there was no intention of a tender offer as early as 2014 when Valeant and Pershing Square
entered into a joint venture rather there was only a proposal sent to the CEO of Allergan Pharmaceuticals for the ownership
and control of Allergan before the intention for a tender offer was made public.

As both Valeant and Ackman were working within the laws of Insider trading, Ackman’s actions cannot be
considered as Insider trading.
 4. Which one out of these four options will you recommend to the management of Allergan: (a)
stay single, (b) go with Valeant, (c) go with Actavis, or (d) acquire Salix.

(a) Stay Single:

● If Allergan decides to stay single, it will be able to save its own identity and would continue to focus on innovation
and R&D, which may or may not change once a merger takes place.
● This choice would help Allergan to survive in the long-term
● Allegan can focus on growth by acquiring companies having enhanced core-competencies unlike Valeant and
Actavis.
● Allergan and its various brands are generating good cash flows, which could be used for R&D purposes and benefit
the company.

(b) Go with Valeant:

● A merger with Valeant would result in low cash investments in the R&D (a core competency for Allergan) division as
per the indication by Valeant’s past track records.
● Low R&D will lead to low innovations and less investment in new products.
● Valeant is a company with little underlying growth due to a series of acquisitions, hence a merger could impact
Allergan market position and performance.
 4. Which one out of these four options will you recommend to the management of Allergan: (a)
stay single, (b) go with Valeant, (c) go with Actavis, or (d) acquire Salix.

(c) Go with Actavis:

● This move would save it from getting acquired by Valeant and would keep them away from their unlawful
approaches for acquisition.
● This merger would benefit Allergan in terms of achieving faster growth and becoming a global Pharmaceutical
industry leader.
● Both the companies together can invest and achieve benefits in terms of R&D which they were not able to
successfully achieve individually.
● A merger with Actavis would help Allergan to maintain its strong portfolio in terms of investment and would ultimately
result in stronger balance sheet for the company.

(d) Acquire Salix:

● No revenue for initial 9 months if the Salix deal is successful

● Would give a new therapeutic market to acquire for Allegan.
● Ackman will sue Allergan with a lawsuit incase Allergan decide to go ahead with the Salix deal
● Reduction R&D costs in the future, since both companies can utilize each other’s R&D expertise.

As per our recommendation, for a company like Allergan, a merger with Actavis would be highly beneficial.