Cramer: Valeant Is Hard to Stop

NEW YORK (Real Money) -- I have to rethink my concerns about what happens if Valeant (VRX) walks away from Allergan (AGN). In preparation for my interview with David Pyott, the CEO of Allergan, I took a look at what all of the other drug companies' stocks have done since the bid, and the answer is pretty much a big fat zero. So I figured the stock would go back to where it was while Ackman's Pershing fund was buying it up but before the offering was announced.

After listening to Pyott last night, I now think it can be higher; not necessarily as much as it is now, because you will always have disappointed arbitrageurs, but up enough that the risk reward is better than I thought.

Pyott is saying that he can do a huge restructuring to bring out value or undertake a value-creating acquisition. I don't know whether the market will like the latter, unless it is an inversion. The former could be well-received.

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Nevertheless, it is hard to think about how you can stop Valeant-Ackman, given that the egos on the line here, both Bill Ackman's and Mike Pearson's, are so huge and the desire so incredible and the need to win Allergan so important, that there doesn't seem to be a price that Valeant won't pay.

The question for me is: Will David Pyott be this year's Peter McCausland? The former CEO of Airgas (ARG) was able to use Pennsylvania takeover law to just say no to a hostile bid from Air Products (APD), while promising that the company could create much more value than the acquirer could.

Peter was right, as it turned out that Air Products truly had launched a low-ball bid, taking advantage of a momentary dip in the numbers from the Great Recession, and Airgas' stock soon soared well above the failed bid price.

Peter was the founder and a 10% holder of stock, so his pleas were well-heeded because he seemed totally aligned with the shareholder base. I think, despite Ackman's charges to the contrary, Pyott is too, although he doesn't have that kind of stake in the enterprise. Unfortunately for Pyott, this isn't a Pennsylvania "just-say-no" situation, so the comparison may be moot anyway. 

The numbers have gone up of late at Allergan, and the analyst community is now confident that the stock is not all that expensive.

There are four ways to stay away from the clutches of Valeant-Ackman:

  1. an acquisition by another company, something I regard as unlikely, given the lofty levels of Allergan vs. most of the group 
  2. a buyback and restructuring that would, I think, keep the stock at these levels without Valeant 
  3. an inversion acquisition, which would raise numbers and again keep the stock up here
  4. a big win from the pipeline, which I regard as a long shot because while there is a hopeful macular degeneration drug in the pipe, I don't know if it will be as effective as Regeneron's (REGN) Eyela, and a second potential blockbuster for glaucoma may be too far away to matter.

Can Allergan stir enough seeds of doubt about Valeant to drive that stock down to make its currency worth less? I think that Valeant will just go borrow more money to be able to pay up, because money is so cheap. I believe Pyott when he says that the combined company won't do that well because of a potential loss of customers but I also think, in the end, that's not an issue unless you believe that the world is binary and you either own Allergan or you own Valeant and can't own anything else.

So, my bottom line: I am more optimistic about the Allergan stock price without Valeant, but I also think it will be very difficult to keep Valeant from winning because of cheap money and raw need and greed from the acquirer's side.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, has no positions in the stocks mentioned.

This article was originally published on Real Money at 5:35 a.m. on July 10.


Now let's look at TheStreet Ratings' take on some of these stocks.

TheStreet Ratings team rates ALLERGAN INC as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:

"We rate ALLERGAN INC (AGN) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, compelling growth in net income, good cash flow from operations and solid stock price performance. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 5.6%. Since the same quarter one year prior, revenues rose by 12.8%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • The current debt-to-equity ratio, 0.33, is low and is below the industry average, implying that there has been successful management of debt levels. Along with this, the company maintains a quick ratio of 3.69, which clearly demonstrates the ability to cover short-term cash needs.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Pharmaceuticals industry. The net income increased by 1958.4% when compared to the same quarter one year prior, rising from $12.50 million to $257.30 million.
  • Net operating cash flow has increased to $165.80 million or 38.62% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 10.55%.
  • ALLERGAN INC' earnings per share from the most recent quarter came in slightly below the year earlier quarter. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, ALLERGAN INC increased its bottom line by earning $4.20 versus $3.57 in the prior year. This year, the market expects an improvement in earnings ($5.70 versus $4.20).

TheStreet Ratings team rates VALEANT PHARMACEUTICALS INTL as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

"We rate VALEANT PHARMACEUTICALS INTL (VRX) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including generally higher debt management risk and disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • VRX's very impressive revenue growth greatly exceeded the industry average of 5.6%. Since the same quarter one year prior, revenues leaped by 76.5%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 40.01% over the past year, a rise that has exceeded that of the S&P 500 Index. Regarding the stock's future course, our hold rating indicates that we do not recommend additional investment in this stock despite its gains in the past year.
  • The net income growth from the same quarter one year ago has exceeded that of the Pharmaceuticals industry average, but is less than that of the S&P 500. The net income increased by 17.9% when compared to the same quarter one year prior, going from -$27.53 million to -$22.60 million.
  • The debt-to-equity ratio is very high at 3.42 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. Along with the unfavorable debt-to-equity ratio, VRX maintains a poor quick ratio of 0.89, which illustrates the inability to avoid short-term cash problems.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Pharmaceuticals industry and the overall market, VALEANT PHARMACEUTICALS INTL's return on equity significantly trails that of both the industry average and the S&P 500.

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