Valeant makes offer for Zoetis, sources tell WSJ

Valeant CEO J. Michael Pearson

If you want to run with the big dogs of pharma, then you can't just sit on the porch and bark about being in animal health. That is what rapidly expanding Valeant ($VRX) apparently decided, having approached Zoetis ($ZTS) about a buyout, sources told the Wall Street Journal. Rumors of a possible deal, which have been bouncing back and forth between Wall Street and the industry for weeks, set off buying, with Zoetis shares closing up 11% Thursday at an all-time high of $55.38.

Shares then fell about 10% on Friday when a CNBC commentator claimed the offer was made but is unlikely to be pursued.

No price was mentioned, but Zoetis has a market cap of about $25 billion. The timing of the reported offer is also pivotal, the newspaper said. Zoetis was spun off from Pfizer ($PFE) in 2013, and Wednesday was the first day that the animal health company could strike a deal without incurring a big tax hit tied to the spinoff.

Earlier this year, Valeant CEO J. Michael Pearson tried to quash rumors he was going to make a run at the world's largest animal health company, but a lot of folks weren't buying it. He has an indirect line to the business through activist investor Bill Ackman, who owns 5.7% of Valeant and 8% of Zoetis. Ackman helped Pearson and Valeant last year in its failed effort to buy out Botox maker Allergan ($AGN). Since Valeant got outbid for Allergan by Actavis, Zoetis has repeatedly been raised as a good fallback play.

And Ackman has been priming Zoetis for a buyer, pushing it to trim down and get its costs down. Last month the company rolled over for his demands, saying it would lay off 25% of its workforce, about 2,500 employees, and close 10 manufacturing plants. The effort would cut $300 million in operating costs and raise its adjusted operating margin to 34% from 25% in 2017, the company said.

Pearson has kept his buyout skills sharpened since Valeant's failed run at Allergan. In February, Valeant nailed two deals valued at $10.5 billion. It first picked up prostate cancer vaccine Provenge from bankrupt Dendreon for $400 million to expand its position in oncology, then turned around and offered Salix Pharmaceuticals $10.1 billion to get into the rapidly growing GI market.

- here's the WSJ story (sub. req.)

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