Besieged by an unlikely alliance between Valeant Pharmaceuticals and Bill Ackman earlier in the year, Allergan refused to surrender and dug in, enduring a long campaign and an uncertain summer. Enough time has passed in Valeant and Mr. Ackman’s pursuit of Allergan to allow another suitor to emerge, a company called Actavis . Curiously, Actavis recently acquired Forrest Labs, one of Carl Icahn’s companies. Here’s one last splinter: Carl Icahn has an interest in a company called Herbalife that has been assailed by Bill Ackman.
Ah, the thrill of biotech investing!
Incidentally, I wrote an article a few months ago in Forbes about both the Actavis/Forrest Labs acquisition driven by Carl Icahn and the Valeant-Ackman/Allergan story. In it I argued that there is a component to biotech investing that is missing from other sectors. The narrative is in constant flux as companies sell investors science and expectation as they maneuver from one binary event to the next. Sometimes these companies may even have revenue, like Valeant and Allergan. Investment banking is sometimes as much about the narrative as it is the numbers, so much so that bankers have appropriated titles for our tactics and strategies rooted in history and pop culture.
Black Knights vs. White Knights
In the Valeant-Ackman/Allergan deal, Valeant and Ackman are the prototypical Black Knights attempting to acquire a corporation. They are Black Knights because the corporation being pursued, in this case Allergan, views the would-be acquirer unfavorably. Dropping Mr. Ackman from the equation for a moment, the air between Valeant and Allergan became especially acrimonious in the weeks after the potential deal became public, making a transaction all but difficult. In addition to clear philosophical differences, there are intractable differences in the business models between the two companies. As the story goes, Allergan has portrayed itself as an R&D focused company and cast Valeant as a pharma marauder in pursuit of innovation through acquisition. Allergan has alleged that Valeant’s model is to acquire cash generating companies and then slash and burn its overhead, including R&D programs, in order to make the acquisition as accretive as possible.
Various strategies can be employed to fend off hostile acquisitions. Allergan has enacted poison pill tactics that Valeant-Ackman are attempting to disarm through time consuming counter strategies. While Allergan defies its Black Knight suitors thwarting any plans for an easy takeover, its leadership and investment bankers have been in search of a White Knight. Traditionally the White Knight is another group or corporation that rides in to save the day with a higher bid. In this case, Allergan’s champion appears to be Actavis.
The White Knight’s interests can be many, but they emerge as saviors. There’s usually a relationship or past history between the parties, but it isn’t necessary if a combination makes sense as White Knights are opportunistic. In this case, Actavis and Allergan contemplated a combination earlier in the year, but a deal was never consummated. Now providence has reignited the opportunity, illuminating a new path to a deal without the previous barriers.
It has yet to be seen whether Actavis truly arrives as a White Knight before Valeant-Ackman are able to complete their campaign successfully. Valeant-Ackman seem to be setting up a pivot as they begin discussing other potential targets like animal healthcare company Zoetis, as if they suspect their siege of Allergan will ultimately be rebuffed.
So far 2014 has been an exciting year in biotech with a roaring IPO and M&A market. Deals beget more deals as they foster confidence and inspire others to follow suit. With JP Morgan’s high-powered healthcare conference right around the corner, the landscape is now populated by a spate of new, smaller companies with exciting technologies and compelling narratives. While it will be fascinating to see where the drama leads us next in the Valeant/Allergan saga, the war between the kingdoms surely won’t end here.
By Steve Brozak