Allergan and Valeant are both hypocrites

Allergan and Valeant are both hypocrites

Stephen Gandel

JUNE 2, 2014, 5:23 AM EDT

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 0.65% , the company bidding to buy the maker of wrinkle reducer Allergan  AGN 1.79% , 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.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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