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ISTA rejects unsolicited Valeant bid

by Ben Fidler | Published December 16, 2011 at 1:22 PM

Valeant Pharmaceuticals International Inc. is eyeing another takeover target in ISTA Pharmaceuticals Inc., but it may have to go the hostile route to win the rights to the ophthalmic drugmaker.

The Mississauga, Ontario, specialty pharmaceutical company, one of the most acquisitive entities in the sector this year, attempted to continue its buying spree Friday by taking public a $6.50 per share in cash, or $327 million in total (including net debt), bid for ISTA.

ISTA's board has rejected the offer, leading Valeant to release not only the offer itself, but letters between Valeant and the target regarding deal talks. ISTA promptly responded Friday by calling the unsolicited, non-binding offer "grossly inadequate" and not in the best interests of its shareholders.

Valeant's bid has a total equity value of $314 million and includes $13 million in net debt. The proposed purchase price represents a 67% premium over ISTA's $3.89 per share closing price on Thursday, Dec. 15, and a 68% premium over ISTA's 60-day volume weighted trading average of $3.87.

ISTA's stock shot up more than 70% early Friday, trading at $6.75 per share.

Valeant, which is no stranger to hostile bids -- it made a $5.7 billion unsolicited offer for Cephalon Inc. in May that was later trumped by Teva Pharmaceutical Industries Ltd. -- said that it preferred a consensual process and approached ISTA on friendly terms on Oct. 5. According to Valeant, ISTA refused to enter into a confidentiality agreement. Valeant then made a formal written proposal on Nov. 23, to which ISTA responded nine days later, claiming that it needed more time to review the bid. Valeant reaffirmed its offer on Monday, Dec. 12, but was rebuffed by ISTA's board via a letter from president and CEO Vicente Anido Jr. two days later. The letter concluded: "We have handled your proposal in a confidential manner and trust that you will do the same."

"Given the importance of the proposed transaction to shareholders of both companies, we have decided to make our proposal public," Valeant chairman and CEO Michael J. Pearson said in a statement published two days after Anido's letter. "We believe ISTA stockholders should not be denied the opportunity to determine for themselves whether their board and management should engage with Valeant in a meaningful and productive dialogue regarding our proposal."

Pearson added that Valeant would be willing to increase its bid if it were given the ability to conduct due diligence and find additional value. He said that Valeant's $6.50 offer will remain in effect until Jan. 31.

Immediately following Valeant's statement, ISTA responded by making Anido's letter public and noting that it found the bid to significantly undervalue the company.

While Anido said that the board recognized that "volatile markets" since July 11 have put pressure on its stock, ISTA executives believe the company is "poised to demonstrate significant revenue growth in 2012 and beyond" from core products that are gaining market share.

Anido highlighted market share growth for Bepreve, which are drops for itchy eyes caused by allergies. Bepreve brought in $5.4 million in revenue during the three-month period ending on Sept. 30, up from $3.9 million during the same period a year prior, and has nearly doubled its sales over the first nine months of 2011 ($21.8 million) when compared to the same timeframe in 2010 ($10.6 million).

Even so, ISTA posted an $5.30 million net loss on $156.53 million in revenue in 2010 and followed it up by reporting a $40.7 million net loss on $115.2 million in net revenue over the first nine months of this year.

Irvine, Calif.-based ISTA has four products for sale in the U.S. and Puerto Rico: Bepreve, Istalol (glaucoma), Bromday (postoperative inflammation and pain reliever for patients who have undergone cataract extractions) and Vitrase (a spreading agent). The company also claims to have several eye and allergy product candidates in various stages of development, including treatments for dry eye, ocular inflammation and pain, and nasal allergies.

Valeant, meanwhile, has been on a buying spree in 2011, acquiring no less than five different middle market companies. Most recently, in November, it paid A$635 million ($627.1 million) up front and potentially another A$75 million more for iNova Pharmaceuticals (Australia) Pty. Ltd., an Australia-based company that produces both prescription and over-the-counter medications for a variety of ailments including pain and colds. That deal came just a month after it edged out Paladin Labs Inc. in a battle for Canada-based Cold-FX cold remedy maker Afexa Life Sciences Inc. with a C$78.2 million ($75.5 million) bid.

Valeant has also acquired Lithuanian drugmaker Sanitas AB (for $447 million), Sanofi's dermatology business, Dermik Laboratories Inc. ($425 million) and the Ortho Dermatologics division of Janssen Pharmaceuticals Inc. ($345 million) in 2011.

Marie Gibson and Stephen Arcano of Skadden Arps Slate Meagher & Flom LLP are providing Valeant with legal advice. Morgan Stanley is its financial adviser.

Stradling Yocca Carlson & Rauth and WilmerHale LLP are ISTA's legal advisers. Greenhill & Co. is its financial adviser.

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Tags: healthcare | ISTA Pharmaceuticals Inc. | M&A | Pharmaceuticals | Valeant Pharmaceuticals International Inc.

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ISTA rejects unsolicited Valeant bid

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