Botox treatment
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By Stephen Gandel
June 2, 2014

The battle over Botox has pitted the doctors against the dealmakers. It’s the medicine men vs. the money men. It’s barbituates vs. barbarians, perhaps. You get the picture.

Valeant (VRX), the company bidding to buy the maker of wrinkle reducer Allergan (AGN), is headed by Michael Pearson, who spent two decades as a management consultant at McKinsey & Co. His chief lieutenant is Howard Schiller, a veteran Goldman Sachs dealmaker who once led M&A at that bank. Together, they have done 10 acquisitions in a little over three years, including last year’s nearly $9 billion acquisition of eye care company Bausch & Lomb.

Last week at an investing conference, Pearson told an audience that his company doesn’t claim to have the best scientists in the world. Indeed, in some ways he said Valeant is more like a professional services firm — like an investment bank or a law firm — than a pharma company. “We have a very good commercial organization that is very good at capital allocation,” Pearson said.

On the other side is Allergan, which is fighting the acquisition bid. Its CEO, David Pyott, comes from the drug industry. The company spent a little over $1 billion on R&D in 2013, much more than most other pharma companies its size. (Valeant, characteristically, says this is a negative.) It developed Botox almost from scratch and plans to launch 13 products developed by the company next year.

Allergan has a nice slide in a recent presentation that says it puts patients and doctors first. Allergan claims that nearly all of Valeant’s sales growth comes from price increases.

Lining up with Allergan is the hedge funder Jim Chanos, who says Valeant is running a business based on risky dealmaking and faulty accounting that will soon blow up. So, Wall Street as usual.

As the battle heated up between the two companies last week, Allergan released its own presentation questioning Valeant’s accounting and whether the company’s maneuvers to lower its taxes are sustainable. Valeant’s executives work out of New Jersey, but the company says it’s Canadian and holds its patents in off-shore subsidiaries. One slide in Allergan’s presentation asks whether Valeant is just like Tyco, the scandal-ridden, acquisition-hungry company that blew up in the early 2000s. Is it? Allergan is just asking.

But the battle lines are not as clear cut as it may seem. Valeant has two doctors among its top executives. Allergan only has one. And Allergan is no stranger to deals. Last year, it spent nearly $1 billion to buy a company working on an inhaled treatment for migraines. And Allergan is reportedly considering buying a company just to fend off the bid from Valeant.

Allergan has its own accounting gimmicks. Like Valeant, when Allergan reports its earnings, it points investors to a homegrown figure of how much the company made, not the one that follows all the SEC-required accounting rules. There’s an entire page in Allergan’s most recent earnings release devoted to all the accounting adjustments it made to get to its preferred measure of earnings, which was up 20% in the first quarter. Allergan’s actual, by-the-rules earnings fell 5%.

Valeant’s defense against Allergan’s claims is not, “no, our accounting is strictly by the book.” It’s, “well they are doing it too.” Allergan says Valeant frequently switches the way it reports its number to hide its lack of growth. Valeant says Allergan has done that, too–three times in the past decade and a half. (Still, for Valeant, it’s four switches in the past five years.)

Both companies declined to comment for this story.

The rest of the argument seems to be about inches. Allergan says when you take out adjustments Valeant makes for generic drug sales, the company’s actual sales fell in 2013. Valeant says that’s not true. Sales were up 2%. Why are we having this argument?

So, you can see the Valeant-Allergan fight as a referendum on the recent boom in M&A, and the return to aggressive accounting on Wall Street, but it’s not really what’s going on. It’s a battle between the acquisition-hungry and the merely acquisitive. The battle line is not whether M&A is good, but how much is too much.

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