I did not front-run Allergan stock, Ackman says

April 23, 2014 | Matthew J. Belvedere & Maneet Ahuja, NBR, CNBC.com

Activist investor Bill Ackman told CNBC on Wednesday his partnership with Valeant Pharmaceuticals to try to buy Allergan for $46 billion does not violate securities law.

This arrangement, in which Ackman bought a 9.7 percent stake in the Botox maker at the behest of Valeant, was not front-running and not insider trading, Ackman said in a “Squawk Box” interview.

He said his lawyer—Robert Khuzami, former director of enforcement at the SEC—vetted the Valeant partnership and deemed it legal.

“The way the rules work is you’re actually permitted to trade on inside information … as long as you didn’t receive the information from someone who breached … fiduciary duty or duty of confidentiality, et cetera,” Ackman said.

“Valeant basically came to us and said, ‘Look, if you can help us buy Allergan we can work with you.’ We said, ‘Great,’ and we formed a partnership,” he said. “The partnership has various terms. It gives us the right and permission from the company to go buy a stake in Allergan.”

The founder of the Pershing Square Capital Management hedge fund—with $13 billion in assets under management—said he was not in the market buying Allergan stock before that.

Allergan’s poison pill

Late Tuesday, Allergan adopted a poison pill—officially known as a shareholder rights plan—designed to prevent Ackman from acquiring more than his already-disclosed stake. In a statement, Allergan said it’s trying to buy time as it considers whether accept, reject or negotiate the Ackman-Valeant bid.

Ackman told CNBC that Allergan’s defensive move does not necessarily make the takeover more difficult. “If I were a director on this board, I would not immediately accept Valeant’s proposal. They’ve hired Goldman Sachs and, I think, BofA. Those banks are going to reach out to other big pharma companies and potential buyers of the business.”

Read More Hostile Allergan bid: Cramer hopes Ackman whiffs

Also appearing on CNBC, Valeant Chairman and CEO J. Michael Pearson said he’s “disappointed” Allergan adopted the poison pill, but he believes the deal will get done. “Having Bill out there in the public, he doesn’t give up. We don’t give up either. This helps the probability.”

Ackman said his partnership with Valeant stipulates that Pershing will keep Allergan stock. “The reason Mike was willing to share with us the opportunity of Allergan is to help him buy Allergan. He doesn’t need help our help buying Valeant,” he said. “We put almost $4 billion in here.”

Why this deal makes sense

Ackman said Valeant is more of a P&G than a Merck, and he likes Valeant’s orientation toward consumer products, with brands like Bausch & Lomb contact lenses, rather toward health care.

Valeant first approached Allergan 18 months ago because Allergan has assets that will last a long time, said Pearson. “They have a great set of assets. What we look for in our business is durable assets … that don’t have big patent cliffs.”

Early-stage science is not a good investment, said Pearson. “Most drugs get discovered by universities and entrepreneurs, not by large drug companies.”