`
`Valeant Business Model Business Insider
`
`VALEANT: How A Canadian Pharmaceutical
`Company Could Destroy The Industry As We
`Know It
`
`MYLES UDLAND
`JUN. 12, 2014, 8:51 AM
`
`REUTERS/Stefan Wermuth
`
`Valeant Pharmaceuticals is trying to acquire Allergan, the maker of Botox.
`
`The tactics it's using to do so might end up killing the pharmaceutical industry.
`
`Valeant first approached Allergan in April 2014. It has twice raised its bid, which it is making with hedgefund
`manager Bill Ackman. Allergan has so far rejected each of Valeant's three overtures. Valeant's most recent offer
`
`http://www.businessinsider.com/valeantbusinessmodel20146
`
`1/5
`
`
`
`3/14/2016
`was made on May 30.
`
`Valeant Business Model Business Insider
`
`But Allergan says it isn't rejecting Valeant's bid because of price.
`
`It's rejecting Valeant's business model.
`
`Valeant's Business Model
`
`Valeant is a pharmaceuticals company now domiciled in Canada. In 2010, Valeant acquired Canadian
`pharmaceutical company Biovail, and following the acquisition moved its headquarters to Montreal.
`
`As of February, Canada's corporate tax rate was about 26.5% compared to about 40% in the U.S., according to
`data from KPMG.
`
`Under CEO Michael Pearson, the company
`has executed more than 100 deals as part
`of a strategy to grow through acquisitions,
`according to The Wall Street Journal.
`
`On Valeant's firstquarter conference call,
`Pearson said that in the first quarter alone,
`the company completed 10 transactions.
`
`Pearson elaborated on what Valeant looks
`for in an acquisition, saying it looks at cash
`flow and what he called a "certain return
`to our shareholders."
`
`When Pearson refers to a "certain return"
`for shareholders, he walks into a central
`criticism of Valeant's business
`model: Namely that Valeant strips costs,
`including research, development and staff, from the companies it acquires and just sells their finished products.
`
`Bloomberg TV
`
`But is low R&D spending sustainable?
`
`Allergan's SelfDefense Strategy
`
`In a letter to Pearson, Allergan CEO David Pyott said Valeant's latest offer does not include enough "sufficient or
`certain value to warrant discussions between Allergan and Valeant."
`
`In a May 12 letter rejecting Valeant's first increased offer, Pyott said:
`
`Valeant's strategy runs counter to Allergan's customer focused approach. In particular, we question how
`Valeant would achieve the level of cost cuts it is proposing without harming the longterm viability and
`growth trajectory of our business. For those reasons and others, we do not believe that the Valeant
`business model is sustainable.
`
`One of Allergan's main problems with Valeant's business model is that the company does not invest in research and
`development.
`
`In its latest presentation rejecting Valeant's offer, Allergan said its 2013 R&D costs were equal to about 17% of its
`revenue, while Valeant's R&D spending was equal to about 2% of revenue.
`
`On Valeant's firstquarterearnings conference call, Pearson said he expects the company to exit 2014 with R&D
`spending at about a $200 million a year.
`
`http://www.businessinsider.com/valeantbusinessmodel20146
`
`2/5
`
`Page 2
`
`
`
`Valeant Business Model Business Insider
`3/14/2016
`Allergan argues that its R&D spending doesn't result in a bunch of wasted money. The $7 billion it spent on R&D
`between 1992 and 2013 resulted in about $50 billion in cumulative sales, the firm said.
`
`The company also said additional R&D spending will result in $120 billion in additional sales over the next 10
`years.
`
`This chart of R&D spending as a percentage of revenue drives home how much less Valeant
`spends on R&D than some of its biggest pharmaceutical rivals.
`
`The Companies / Business Insider
`
`Other Skeptics
`
`Valeant's aggressiveness has gotten significant attention in the market. Jeremy Levin, former CEO of Teva
`Pharmaceuticals, told The Wall Street Journal that "Valeant will eventually run out of things to buy ... a company
`without R&D short term and midterm can be viable, but long term is not."
`
`John Hempton, a noted finance blogger at Bronte Capital, has also expressed concerns about Valeant and is short
`the stock. He has promised a series of posts analyzing Valeant's financials.
`
`Business Insider's Linette Lopez detailed some of the problems with Valeant's ploy, writing that Ackman and
`Valeant aren't seeking to buy Allergan but swallow it whole and digest it quickly.
`
`Also following Valeant's first offer for Allergan, The Financial Times' John Gapper argued that if the entire
`pharmaceutical industry adopted Valeant's approach, drug discovery would grind to a halt.
`
`Gapper outlined two visions for the pharmaceutical industry, one where companies invest heavily in new drugs
`and another where R&D spending is cut "to save cash and please Wall Street."
`
`Gapper called it a "moral choice."
`http://www.businessinsider.com/valeantbusinessmodel20146
`
`3/5
`
`Page 3
`
`
`
`Valeant Business Model Business Insider
`
`3/14/2016
`What Now?
`
`Following Valeant and
`Ackman's latest offer, Ackman
`disclosed in an SEC filing that
`his Pershing Square fund is
`preparing a hostile bid for
`Allergan.
`
`A hostile bid is when a
`potential acquirer engages
`directly with the shareholders
`of the company, rather than
`the company's board,
`regarding its takeover
`proposal.
`
`A hostile bid now seems likely
`given that Allergan's CEO said
`Valeant's latest deal isn't
`worth discussing.
`
`Mike Nudelman/Business Insider
`
`Ackman owns nearly 10% of Allergan's stock, and the company has already adopted a socalled poisonpill
`provision preventing any shareholder from acquiring more than 10% of the company, so his voting sway over
`Allergan's decision will not increase.
`
`This story is unlikely to reach a conclusion soon: Citing analysts at BMO Capital, the FT said the fight could last
`"well into" 2015.
`
`The Death Of Pharma?
`
`Just this week, Merck purchased pharmaceutical company Idenix Pharmaceuticals for $3.85 billion; in its first
`quarter, Idenix recorded no revenues. And while Merck is certainly betting that Idenix's hepatitisC drugs in
`development will be approved, the deal essentially amounts to a onetime R&D expense.
`
`R&D spending is not dead.
`
`But others have started to imitate Valeant's methods for boosting their stock price. The Wall Street Journal
`notes that Endo Pharmaceuticals has begun to adopt an acquisition strategy similar to Valeant's.
`
`Shares of Endo are up more than 77% over the last year.
`
`Valeant's strategy has also been a boon for shareholders, who have seen the stock gain more than eight times
`since Pearson joined the company as CEO in February 2008.
`
`Whether or not Valeant and Ackman are successful in acquiring Allergan, this deal has raised eyebrows among
`investors and executives in both the pharmaceutical space and the broader market.
`
`Expect pharmaceuticals companies to start taking closer looks at their strategies before someone else does.
`
`http://www.businessinsider.com/valeantbusinessmodel20146
`
`4/5
`
`Page 4
`
`
`
`3/14/2016
`
`Valeant Business Model Business Insider
`
`http://www.businessinsider.com/valeantbusinessmodel20146
`
`5/5
`
`Page 5