Highlights of Paulson & Co.'s important positions in 2Q14 (Part 2 of 7)
Paulson & Co. and Allergan
John Paulson’s hedge fund has specialized in merger arbitrage. Its new positions include companies currently involved in M&A deals, namely Allergan (AGN), DIRECTV (DTV), Covidien Plc (COV), and Hillshire Brands (HSH). Notable positions sold were American Airlines Group (AAL) and Pioneer Natural Resources (PXD).
Paulson took a large new position in Allergan (AGN) last quarter. The position accounts for 4.11% of Paulson’s $23 billion portfolio.
Allergan is a multi-specialty healthcare company that develops and commercializes pharmaceuticals, biologics, medical devices, and over-the-counter products for the ophthalmic, medical aesthetics, medical dermatology, and other specialty markets globally. The main portion of its revenue is generated by the sale of specialty pharmaceutical products (primarily eye care pharmaceuticals and skin care and other products) to wholesalers within the United States.
The company has two reportable segments—specialty pharmaceuticals and medical devices.
- The specialty pharmaceuticals segment produces a broad 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 urological products.
- The medical devices segment produces a broad range of medical devices, including: breast implants for augmentation, revision, and reconstructive surgery and tissue expanders; and facial aesthetics products.
Allergan involved in a hostile takeover battle
Allergan is locked in a $53 billion hostile takeover battle with Canadian drugmaker Valeant Pharmaceuticals and activist investor William Ackman of Pershing Square.
Pershing Square amassed a 9.7% stake in Allergan from February to April, valued at about $4 billion. The stake was disclosed on April 21, and both Pershing Square and Valeant announced an offer for Allergan on April 22. Allergan has continued to rebuff the offer, saying it “is grossly inadequate, substantially undervalues Allergan, and is not in the best interests of Allergan and its stockholders.” It also adopted a poison pill defense and a one-year stockholder rights plan in April to provide its board with adequate time to fully assess any proposal.
Earlier in August, Allergan filed a lawsuit in California against Valeant and Pershing Square, alleging that “Valeant, Pershing Square and Ackman violated federal securities laws prohibiting insider trading, engaged in other fraudulent practices, and failed to disclose legally required information.”
Botox-maker Allergan noted in its lawsuit that “Valeant has reported a compounded annual revenue growth rate of over 42% in the past six years, by acquiring more than one hundred companies since 2008 – resulting in a staggering debt load of $17.3 billion. Valeant’s business model depends on constantly making new and larger acquisitions of companies with successful products and strong cash flows and balance sheets, using these acquired assets to offset the debt burdens of the previous acquisitions, and then cutting research and development efforts in order to reap the profits of the acquired companies’ revenue streams without incurring expenses for the research and development – before Valeant’s entire enterprise eventually collapses for lack of the next acquisition.”
Allergan has also alleged that Valeant has failed to provide complete, fully transparent information and relevant supporting data for its performance.
Valeant and Pershing Square have also filed a lawsuit to push Allergan to quickly schedule a special meeting of shareholders. At the special meeting, Allergan shareholders would be asked to remove a majority of the company’s existing directors in connection with Valeant Pharmaceuticals’ unsolicited exchange offer, under which each Allergan share is to be exchanged for $72 in cash and 0.83 of a Valeant share.
Pershing Square has claimed that Allergan is postponing the special meeting to buy more time for an alternative deal. It added that it has written requests from shareholders owning 31% of Allergan’s shares to compel Allergan to call a special meeting no later than December 20, 2014. Reports have noted that Allergan was in talks with Salix Pharmaceuticals (SLXP) over an acquisition.
Allergan reports an increase in profits and revenue
For 2Q 2014, Allergan reported a 23.8% increase in non-GAAP diluted earnings per share to $1.51 from $1.22 non-GAAP diluted earnings per share in the corresponding quarter a year ago. It posted a 15.9% increase in total product net sales to $1.82 billion. Total specialty pharmaceuticals net sales increased 13.2%, while core medical devices net sales increased 25.8%.
The increase in specialty pharmaceuticals product net sales was due to increases in product net sales of eye care pharmaceuticals, Botox, and skin care and other product lines. The increase in core medical devices product net sales reflects an increase in product net sales of facial aesthetics and breast aesthetics product lines.
Allergan has initiated a restructuring plan that it believes will significantly reduce costs in 2015 by approximately $475 million annually relative to its prior strategic plan while preserving the company’s ability to deliver double-digit sales growth across the next five years.
Over the same five-year period, Allergan expects to generate compounded annual adjusted EPS growth of more than 20%. It also expects to generate approximately $14 billion in additional free cash flow over the next five years.
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