Replies to post #178429 on Biotech Values

[DewDiligence]

(AGN/VRX)—Good piece on Tyco that still rings true for roll-up companies in general. Another risk of this business model (aside from the likelihood of accounting irregularities) is that the growth in EPS relies to a large degree on the roll-up company’s having a higher P/E ratio than the companies it acquires, so that each acquired company’s earnings become capitalized at a higher price than they were before the acquisition.

Thus, as soon as something untoward occurs to the roll-up company that lowers its P/E ratio, the business model itself becomes unworkable.

[DewDiligence]

AGN acknowledges VRX’s sweetened offer of $58.30 in cash plus 0.83 shares of VRX (an additional $10 in cash relative to the original offer):

http://finance.yahoo.com/news/allergan-confirms-receipt-revised-unsolicited-125200707.html

That roughly 2/3 of the new offer’s value consists of VRX stock is going to be a problem, IMO, because AGN doesn’t think much of VRX’s roll-up business model (and neither do I).

[DewDiligence]

AGN continues publicity campaign to discredit VRX business model:

http://www.marketwatch.com/story/allergan-reiterates-its-belief-that-valeants-business-model-is-unsustainable-2014-06-16

I agree with everything AGN is saying, and I maintain that it would be foolhardy for AGN to acquiesce to acquisition by VRX in which a sizable proportion of the deal consideration is in stock.