In refusing to overpay for Allergan, Valeant Pharmaceuticals (TSX:VRX) exhibited exactly the kind of discipline that investors should admire in the company, says Paradigm Capital analyst Alan Ridgeway.
Yesterday, a saga that began in April ended for Valeant when Dublin-based Actavis Plc’s offer of $219 a share in cash and stock was accepted by the board of Botox-maker Allergan. The deal valued the company at $66-billion.
“We have seen the announcement that Allergan and Actavis have made, and while we will review any such agreement in determining our course of action, Valeant cannot justify to its own shareholders paying a price of $219 or more per share for Allergan,” said Valeant CEO J. Michael Pearson. “Our business is performing extremely well as evidenced by our third quarter results, our expected strong fourth quarter, and our robust outlook for 2015, and I am confident in our continued ability to generate exceptional shareholder value. We will remain focused on delivering strong organic results and evaluating acquisition opportunities as we always have: prudently, in a disciplined manner, and in the best interests of our shareholders.”
Ridgeway says that despite the fact that Allergan was an attractive target, the result underlines the financial discipline that is inherent to Valeant’s culture. He believes that justifying the price that Actavis paid would mean that Valeant would have to place material value on Allergan’s pipeline. This, says the analyst would be “…an exercise that would run counter to its core beliefs and unique strategy”.
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The analyst notes that in the seven months since announcing interest in Allergan, Valeant has been busy paying down debt to the tune of more than $1.1-billion. Ridgeway says this puts the company in an even better position to make accretive acquisitions.
In a research update to clients this morning, Ridgeway maintained his “Buy” rating on Valeant Pharmaceuticals, but raised his one-year target on the stock from $170 to $180, implying a return of 32% at the time of publication. He explains that his new target is in-line with the company’s peer group average, which has increased to 18.3x 2015 earnings.