Allergan issues concerns about viability of Valeant’s business model

Allergan filed an investor presentation with the Securities and Exchange Commission outlining its concerns about the fiscal and operational stability of Valeant Pharmaceuticals, the company announced in a press release.

According to the release, Allergan retained the financial consultant Alvarez & Marsal and the forensic accounting firm FTI Consulting to analyze issues surrounding the intrinsic value of Valeant’s business model and stock.

“With the assistance of these two independent firms, and in response to feedback from numerous Allergan stockholders and analysts, Allergan and its legal and financial advisors carefully analyzed publicly available data on Valeant and the opaque nature of Valeant’s pro forma-driven financial reporting,” the release said.

Questions posed in Allergan’s presentation included:

What is Valeant’s real organic growth?
How have the two largest Valeant acquisitions (Bausch+Lomb and Medicis) performed under Valeant’s ownership? How have other acquisitions performed?
Does Valeant have any experience promoting products of Allergan’s scale?
How stable is Valeant’s management team?
Can Valeant cut $2.7 billion of Allergan’s expenses without disrupting the performance of the business?
What is the relative distribution strength of Allergan vs. Valeant in important emerging markets?
Is Valeant’s low tax rate sustainable?
Are Allergan’s accounting practices clearly consistent with others in the industry?
Is a business model centered on a serial acquisition and cost-cutting strategy sustainable?

Valeant’s organic growth for the first quarter of 2014, excluding generics, was 8%. Organic growth, including generics, was 1%, according to a PDF of Allergan’s presentation.

“Valeant’s limited experience with large, global-scale products represents a material execution risk attempting to grow Allergan’s categories and launching significant new large products through existing channels,” the document said.

The document also cited significant management turnover at Valeant.

By acquiring Allergan, Valeant would take on thin sales coverage, significant debt, a high-yield credit rating and a lower tax regime with questionable sustainability, according to the document.