Allergan in the Crosshairs

 | Apr 22, 2014 | 1:48 PM EDT  | Comments
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I don't want Valeant Pharmaceuticals (VRX) to get Allergan (AGN). Right now Valeant, with the help of hedge-fund manager Bill Ackman, he of "Destroy Herbalife (HLF)" fame, are raiding one of my favorite companies with a hostile bid potentially worth $45 billion. That would move Allergan's stock, which is already up some 47% year to date, up at least five points from this $165 level.

Now I say every day that this game isn't about making friends, it's about making money, and Allergan has given you a stellar return this year, in part because of this hostile bid. But also because David Pyott, the mild-mannered but brilliant CEO, and his team have put together a pharmaceutical powerhouse -- even though it is frequently just labeled the Botox company, as if it is some sort of cosmetic concern.

In truth, Allegan has built amazing franchises in eye care, migraine headaches, incontinence and even sweat glands. It has developed these incredible drugs by spending a huge amount of its revenues, up to 16%, on research, far more than all of the old-line pharmas and more like a biotech. In the business it is known as a research machine.

That's not the only reason I like this company. Do you know what? When this stock was trading at almost half of its current price last August, Pyott came on "Mad Money" and made an impassioned plea to buy his own stock. He did so because a bunch of analysts questioned whether there wouldn't soon be a generic challenge to one of its key eye-care franchises. No one was listening to Pyott at the time. The analyst community had almost completely turned against him.

But we thought he made cogent points, was sincere and made a ton of sense. Going all in on Pyott and Allergan would have given you an almost 100% gain. I think it took great guts to come on and say that so many analysts were wrong and not to worry about the patent problem, even as the deck seemed stacked against Allergan.

But now two rapacious forces have entered the fray: Bill Ackman, who has spent much of this last year blasting Herbalife for being a pyramid scheme, and Valeant, a company that constantly needs to do deals to maintain its high growth rate. They are trying to grab the company. I am all in favor of shareholder making money, but the chief reasons for this takeover are sadly synergistic. First, Valeant can slash that R&D budget that has created so much worth for Allergan and help for patients. Second, Valeant's domiciled overseas, which means it pays a lower tax rate than Allergan, so the earnings are immediately accretive when the deal closes.

It makes sense for Valeant. The company bought Medicis and Bausch & Lomb not long ago to cement good dermatological and eye care franchises. Medicis made Restylane, which is the derma filler for the lower half of the face that complements Botox for the upper part. You can immediately fire all of the sales force of one of these two companies, Medicis or Allergan, if you combine the companies. The Bausch business would dovetail nicely with the eye doctor relationships that Allergan has cultivated over the years.

Still, I think Pyott deserves better. I hope his company isn't dismantled. But with an Ackman-Valeant team, I have to believe that's precisely what happens.

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