(B)(N) Valeant Pharmaceuticals International Incorporated

How much do you think?

Deal Book. Valeant Pharmaceuticals doesn’t make any money and has lost about $1 billion in the last five years but has made a bid for Allergan Incorporated which does make money and has earned about $3 billion in the last five years and also pays a small dividend of about $60 million per year (Reuters, April 22 2014, Valeant, Ackman offer to buy Botox maker Allergan for $47 billion).

The “taste of money” has driven up the stock prices of both companies and they’ve both been in the Perpetual Bond™ since much lower prices (please see Exhibit 3 below); nor do we need the alleged synergistic benefits of the combination to know that the taste of money now is not the same as the taste of money later which might take a lot longer to make and as we’ve found below, might never arrive.

Although the deal is expressed in dollars and stocks, stocks are not the same as money and the price of the stock of one company can’t be compared to the price of the stock of another without a “common currency” that evaluates them both on the same terms; for example, it’s not the difference in colour that suggests that one orange is worth three apples or five bananas.

For investments, the “common currency” is the price of risk because that is the stock price at which our money is “as good as cash and better than money (as cash)” because that is the price at which we have a reasonable and justifiable certainty that we will get our money back – 100% capital safety” – and that we might obtain a hopeful but not necessarily guaranteed return above the rate of inflation which makes it better than “money as cash”; and that would be the minimal expectation of any investment that we might make.

To buy the “price of risk” we need to pay $134 (SP) to get $98 (SF) of it in the case of Allergan and $126 (SP) to get $123 (SF) of it in the case of Valeant (please see Exhibit 1 below) and it looks like Valeant might be the better deal but that’s not the whole story; the reverse is true because the market has demonstrated that it would rather hold $98 (SF) in Allergan stock than $134 (SP) as cash but that it is only willing pay $126 (SP) for $123 (SF) in Valeant stock which is nearly pro rata; to put it yet another way, $100 (SF) realized or held as Allergan stock fetches $137 ($134×100/98) whereas $100 (SF) realized or held as Valeant stock fetches only $102 ($126×100/123) and there are many examples in these Posts of the market price behaviour of stocks that are trading either above or below the price of risk.

It’s natural to ask whether this deal is “fair” to both the Allergan and Valeant shareholders and, of course, the “lawyers-without-portfolio” (LWPs) are already on it; for example, Businesswire, April 22 2014, SHAREHOLDER ALERT: Brower Piven Announces the Investigation of Allergan Inc. over the Proposed Takeover of the Company; please see Exhibit 1 below.

Exhibit 1: Valeant Allergan Deal Book – April 2014

Valeant Allergan Deal Book

The stock prices (SP) are changing every day and the shareholders could “vote” with their feet at any time until the deal closes; but the Risk Price (SF) remains the same absent some new balance sheet information.

With reference to the table, Allergan has a total risk price value of $29.3 billion and Valeant $41.1 billion so that the combined risk price value of the two companies is $70.4 billion for which the investors will pay $45.7 billion today to close the deal as $48.30 in cash and 0.83 VRX shares for each Allergan share; if the deal closes, then the expected stock float of VRX  will increase to 581.7 million shares as compared to the current 333.4 million shares and the Risk Price (SF) of $120.97 ($70.4 billion/581.7 million shares) will also be the Stock Price (SP) on that day (but maybe not the next day for the reasons that we explained above).

Some Allergan shareholders might elect an “all stock deal” which would increase the float even further but reduce the cash payment from $14.5 billion to something less; if all the Allergan shareholders accepted that deal then the Risk Price (SF) would be reduced to $111.25 ($70.4 billion/632.5 million shares) because Valeant would not have to acquire an additional $14.5 billion of new “bond” debt for which it has no security to offer; in other words, unsecured “debt” is an asset to the shareholders as long as it doesn’t take the company under and Valeant already has a current debt of $23 billion which is more than four times its net worth of $5.1 billion.

However, the theory of firm indicates that both of these companies are “winding-down” rather than up and that at the current stock prices investors are paying $67 for $1 of the Coase Dividend which is more than twice the going rate of $25 for the Dow Jones Industrial Companies; please Exhibit 2 below.

Exhibit 2: Valeant Allergan Deal Book – Fundamentals – April 2014

Valeant Allergan Deal – Fundamentals – April 2014

Such “shareholder value” that there is has been created by the shareholders themselves for whom pay-day is getting paid a higher price for the stock that they own than what they paid for it; and therefore, they rely on and hope for ever more “blockbuster” events and local colour for a bright future which will never arrive because it’s already here; the future of the current combined net worth of the two companies ($11.6 billion now) is (N*) $6.3 billion if they keep on doing what they’re doing.

It works!

The problem is that what these companies actually own, their inventories and fixed assets at $3.4 billion, is negligible compared to their combined debt of $27 billion and borrowing another $14.5 billion unsecured isn’t going to help that situation or increase future dividends beyond the current miniscule yield of 0.1%; the shareholders are still paying for the development of intangibles such as research & development, patents and process, sales, marketing and administration benefits and the development of the production line, all of which are measured by the Coase Dividend for which they are paying more than twice the going rate.

Nevertheless, we should not expect that the mere facts will discourage the belles lettres and entrepreneurial enterprise of the stock promoters.

Exhibit 3: (B)(N) Allergan & Valeant – Risk Price Chart – April 2014

(B)(N) AGN Allergan Incorporated

Allergan Incorporated is a multi-specialty health care company which develops and commercializes pharmaceuticals, biologics and medical devices.

From the Company: Allergan Incorporated operates as a multi-specialty health care company primarily in the United States, Europe, Latin America, and the Asia Pacific. The company discovers, develops, and commercializes pharmaceutical, biological, medical device, and over-the-counter products for the ophthalmic, neurological, medical aesthetics, medical dermatology, breast aesthetics, urological, and other specialty markets. It operates in two segments, Specialty Pharmaceuticals and Medical Devices. The Specialty Pharmaceuticals segment produces a range of pharmaceutical products, including ophthalmic products for dry eye, glaucoma, inflammation, infection, allergy, and retinal disease; Botox for certain therapeutic and aesthetic indications; skin care products for acne, psoriasis, eyelash growth, and other prescription and physician-dispensed skin care products; and urologics products. The Medical Devices segment offers a range of medical devices, such as breast implants for augmentation, revision, and reconstructive surgery, as well as tissue expanders; and facial aesthetics products. The company sells its products to drug wholesalers, independent and chain drug stores, pharmacies, commercial optical chains, opticians, mass merchandisers, food stores, hospitals, group purchasing organizations, integrated direct hospital networks, ambulatory surgery centers, government purchasing agencies, and medical practitioners. It focuses on eye care professionals, neurologists, physiatrists, dermatologists, plastic and reconstructive surgeons, aesthetic specialty physicians, urologists, urogynecologists, and general practitioners. The company has collaboration agreements with Molecular Partners AG; Spectrum Pharmaceuticals, Inc.; and Serenity Pharmaceuticals, LLC. Allergan, Inc. was founded in 1948, has 11,000 employees and is head-quartered in Irvine, California.

(B)(N) VRX Valeant Pharmaceuticals International Incorporated

Valeant Pharmaceuticals International Incorporated is a specialty pharmaceutical and medical device company which develops, manufactures, and markets a range of generic and branded generic pharmaceuticals, over-the-counter products and medical devices.

From the Company: Valeant Pharmaceuticals International, Inc. develops, manufactures, and markets pharmaceuticals, over-the-counter (OTC) products, and medical devices in the areas of eye health, dermatology, and neurology therapeutic classes worldwide. Its pharmaceutical products include Solodyn, an oral antibiotic that treats red and pus-filled pimples, as well as Ziana, Acanya, and Atralin; Wellbutrin XL, a formulation used for the treatment of major depressive disorder in adults; Xenazine for the treatment of chorea; Zovirax Cream for herpes labialis; Zovirax ointment for initial genital herpes; The Lotemax gel for post-operative inflammation and pain; Arestin, a subgingival sustained-release antibiotic; and Prolensa, a non-steroidal anti-inflammatory ophthalmic solution. The company also provides OTC products, such as PreserVision, an antioxidant eye vitamin and mineral supplement; ReNu Multiplus, a sterile that is used to lubricate and rewet soft contact lenses; Ocuvite, a lutein eye vitamin and mineral supplement; Artelac, an eye drops to treat dry eyes; and CeraVe products for skin. In addition, it offers device products, including SofLens daily disposable contact lenses; Restylane, an injectable implant dermal fillers; PureVision, a contact lens; Dysport, an injection neurotoxin; ophthalmic surgical products, such as Akreos and Crystalens; surgical equipment comprising the VICTUS femtosecond laser and the Stellaris PC, a vitreoretinal and cataract surgery system; and medical device systems for aesthetic applications. Further, it provides generic products comprising Retin-A Micro, a tretinoin gel; tobramycin and dexamethasone ophthalmic suspensions for steroid responsive inflammatory ocular conditions; and latanoprost to treat glaucoma. The company was formerly known as Biovail Corporation and changed its name to Valeant Pharmaceuticals International, Inc. in September 2010. Valeant Pharmaceuticals International, Inc. was founded in 1983, has 17,000 employees and is headquartered in Laval, Canada.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the societal norms of risk aversion and bargaining practice.

And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
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Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.