Replies to post #178499 on Biotech Values

[DewDiligence]

Re: Definition of a “roll-up” company

There was some confusion on Twitter about this, so let’s clear that up. A roll-up company is not simply any company that makes serial acquisitions; rather, a roll-up company is a company whose EPS growth utterly and completely depends on making serial acquisitions to exploit the “P/E step-up.”

The P/E step-up occurs as long as the roll-up company trades at 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.

However, as soon as something untoward occurs to the roll-up company that materially lowers its P/E ratio, the P/E step-up doesn’t occur and the roll-up business model becomes unworkable.

[DewDiligence]

Skepticism abounds re VRX’s new $25/sh CVR pertaining to AGN’s DARPin for AMD:

http://www.forbes.com/sites/matthewherper/2014/05/28/why-valeants-new-bid-for-allergans-rd-doesnt-make-sense/

[DewDiligence]

AGN +6% as VRX raises cash component of offer again:

http://online.wsj.com/articles/valeant-again-boosts-bid-for-allergan-1401475551

Valeant Pharmaceuticals…on Friday boosted its takeover bid for…Allergan Inc. for the second time in a week [actually in two days], offering about $52.7 billion in cash and stock, partly thanks to its partner in the bid, William Ackman, who agreed to take less for his own Allergan shares.

The Canadian pharmaceutical conglomerate has so far been rebuffed by Allergan since it made its first public offer last month. A sweetened bid on Wednesday, which Allergan said it was considering, didn't excite Wall Street.

Friday's bid gives most Allergan shareholders an additional $13.70 a share in cash [i.e. $72 in cash + 0.83 VRX shares + the DARPin CVR], bringing the total offer to $179.25 a share [excluding the CVR], based on Thursday's close.

…Mr. Ackman's Pershing Square Capital Management LP, the largest Allergan shareholder with a 9.7% stake, is now offering to take less per share, giving up about $600 million to help Valeant fund an increased bid. Pershing Square agreed to accept Valeant stock worth $158.50 a share as of Thursday's closing price [how magnanimous, LOL]. Pershing Square, which originally spent about $3.2 billion on its Allergan investment, would be getting $4.6 billion worth of Valeant stock if a deal were sealed.

…The revised offer came before Allergan had even responded to Valeant's standing offer [i.e. the one made two days ago] and after Valeant Chairman and Chief Executive J. Michael Pearson said he wouldn't boost the bid until Allergan agreed to negotiate.

…The new bid still includes a right, introduced Wednesday, for Allergan shareholders to get up to an additional $25 a share, tied to the future revenue of Allergan's developmental eye-treatment [see #msg-102591353].

At some point, AGN may have to accept; however, it’s going to be tough to convince AGN’s BoD that VRX’s stock, which comprises 60% of the sweetened offer (excluding the DARPin CVR), is a worthy currency.