Good cop, bad cop, market share

Valeant shows both its amiable and hostile sides with an agreement to acquire Australia’s iNova and a hostile bid to take over U.S. company ISTA Pharmaceuticals

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MISSISSAUGA, Ontario—One could say that the end of 2011 hadValeant Pharmaceuticals International Inc. showing multiple personalities, witha late-November announcement that it will acquire Australian company iNova fornearly $700 million and a December announcement of a hostile takeover attemptof Irvine, Calif.-based ISTA Pharmaceuticals Inc. in a proposed transactionwith a total equity value of approximately $314 million.
These actions are distinct from other very recent Valeantactivity in that they don't involve further entrenching the company's alreadystrong presence in the dermatology market. Specifically, Dec. 19 saw news thatValeant had completed its acquisition of Dermik, a dermatology unit of Sanofiin the United States and Canada, and Dec. 12 saw news that Valeant had beengranted approval from the U.S. Federal Trade Commission to go forward with theacquisition of Ortho Dermatologics, a dermatology unit of Johnson &Johnson, for $345 million in cash.
Instead, the iNova and ISTA announcements are more in linestrategically with the company's move in late October to buy 81.6 percent ofthe outstanding common shares of another Canadian company, Afexa Life SciencesInc., to bolster Valeant's Canadian over-the-counter (OTC) franchise and themid-August 2011 acquisition of Lithuania-based specialty pharmaceuticalscompany Kaunasto to boost Valeant Pharma's European branded generic portfolio.
iNova, a private pharmaceutical group which sells anddistributes a range of prescription and OTC products, brings what Valeant callsa "diversified portfolio of well-established and innovative prescriptionproducts," including leading therapeutic weight management brands such asDuromine, as well as leading OTC brands in the cold and cough area, such asDifflam and Duro Tuss.
"This transaction not only transforms our operations in theAustralian market, but provides us with a beachhead in both Southeast Asia andSouth Africa," said Valeant Chairman and CEO J. Michael Pearson, who expectsthe addition of iNova to the Valeant fold to be immediately accretive. iNova'stotal 2011 revenues are expected to be approximately $200 million and thecompany has an operating margin of approximately 40 percent. Revenues havegrown at a rate of approximately 10 percent per annum over the last four years. 
Looking at that deal in an investor note, Zacks InvestmentResearch provided a "Buy" rating for Valeant, noting that since the merger withBiovail in September 2010, Valeant "is a unique company as it offers globalreach, a diversified revenue base, a favorable tax structure and limited patentexposure. Moreover, accretive acquisitions add to the company's investmentthesis."
On the less-friendly side that Valeant has shown severaltimes in its ongoing buying spree, there is the more recent mid-December newsthat Valeant has made a proposal to the board of directors of ISTAPharmaceuticals Inc. to acquire the company for $6.50 per share in cash—anoffer that Valeant is now taking directly to shareholders. If successful, thatacquisition would bring to Valeant four marketed products for ocularinflammation and pain post-cataract surgery, glaucoma and ocular itchingassociated with allergic conjunctivitis, as well as a development pipeline thatcontains candidates in various stages of development to treat dry eye, nasalallergies and ocular inflammation and pain.
Although Valeant's ophthalmology market share isn't at thelevel of its dermatology presence, it is an area in which Pearson seeks togrow, noting that it is a $10 billion market and that acquiring ISTA wouldallow Valeant to expand its annual U.S. sales to more than $200 million from acurrent level of less than $50 million. In addition, it would be a springboardto offering ophthalmology products in Canada, Asia and Australia within a yearor so. 
"[Ophthalmology is] a specialized area a mid-sized companylike ours can compete effectively in," Pearson said in an interview with TheCanadian Post.
The proposed price of $6.50, unanimously supported byValeant's board, represents a premium of approximately 68 percent over ISTA's60-day volume weighted trading average of $3.87 and a premium of approximately67 percent over ISTA's closing price of $3.89 on Dec. 15. One of the reasonsValeant may have decided to move on the company is that ISTA's shares have seena serious drop in the past seven months after sales of one of its key eyetreatments for inflammation and pain suffered in the wake of Mylan Inc.launching a generic version of the drug.
Saying that it had been "preferring a consensual process,"Valeant reports that it first approached ISTA on Oct. 5. After ISTA reportedly"refused to enter into a customary confidentiality agreement," Valeant made aformal written proposal to ISTA's management on Nov. 23. ISTA responded to thisletter on Dec. 2, stating it needed more time to review Valeant's proposal.Valeant reaffirmed its proposal to ISTA on Dec. 12 in writing, and ISTArejected that proposal two days later.
Pearson has said Valeant is "disappointed by ISTA'srejection of its proposal and ISTA's unwillingness to engage in discussions." 
"The proposed $6.50 per share price represents a meaningfulpremium to ISTA's recent trading performance, and we believe it represents acompelling opportunity for ISTA's shareholders in light of the continuingchallenges facing ISTA," Pearson noted in a news release about the deal. "Wewould be willing to consider improving our offer price if we were allowed toconduct due diligence and found additional value. Given the importance of theproposed transaction to shareholders of both companies, we have decided to makeour proposal public. We believe ISTA stockholders should not be denied theopportunity to determine for themselves whether their board and managementshould engage with Valeant in a meaningful and productive dialogue regardingour proposal. We have already devoted significant time and resources to pursingthis potential transaction. Therefore, consistent with our past disciplinedapproach to acquisitions, our $6.50 offer will only remain in effect until Jan.31."
The response of ISTA's board of directors to Valeant'sovertures, expressed via a letter sent by ISTA President and CEO Vicente AnidoJr., said after careful deliberation, with the assistance of its financial andlegal advisors, ISTA determined on Dec. 13 that the non-binding proposal was"grossly inadequate and not in the best interests of ISTA shareholders."
ISTA further reports in its official statement to thehostile takeover move, "Due to the fact that Valeant has attempted to reviveits previously rejected proposal, ISTA's board announced that it will commencea review of all strategic options available to ISTA in the context of itsfiduciary responsibilities and the company's strategic plans."
In the end, ISTA may not have to do much to protect itselfif Valeant stands firm on its offer, given what Pearson reportedly told TheCanadian Post, when he said that Valeantwill walk away if shareholders don't like the $6.50-per-share offer rather thanengage in a protracted bid for a hostile acquisition.
Analyst Adnan Butt of RBC Capital Markets wrote in aninvestor report right after the hostile bid announcement that Valeant's bidappears "conservative at first blush given our valuation scenarios," addingthat "while we expect that many holders could accept a 67 percent premium overyesterday's close, we believe it is possible that the bid could go higher." Infact, he estimates ISTA could go for as low as Valeant's offer to as much as$16 per share.

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