Okay, ISTA Management, It's Time To Step Up

| About: Valeant Pharmaceuticals (VRX)

Successfully repelling an unsolicited bid is, and should be, a mixed blessing for any company. In the case of ISTA Pharmaceuticals (ISTA) and Valeant (NYSE:VRX), it's pretty clear that Valeant was attempting to exploit investor fatigue and pessimism with a low-ball bid. Now that Valeant has retreated, it falls on management to show that they can deliver on that value that they claim Valeant (and, by implication, the broader stock market prior to the bid) failed to recognize.

Valeant Steps Away

Valeant had always said that its $7.50/sh bid for ISTA had a lit fuse attached (an expiration date of January 31), and management decided to pull it a day early. Management at Valeant claimed that this was due to a "lack of progress." But the reality is that ISTA was doing exactly what it said it would do - shopping around for a better offer.

If ISTA investors wonder about the motivations of Valeant, consider the company's own words in the press release, "...we were not interested in participating in a lengthy evaluation process...". Now, I don't know about you, but just about any time someone has tried to force me to agree to a quick deal, it's never been a deal that was really in my best interests. Moreover, look at Valeant's corporate history and you'll see a succession of low-ball bids - sometimes desperate companies say yes, sometimes, they negotiate a higher deal, or sometimes they find a better bidder (as Cephalon did with Teva (NYSE:TEVA)).

Now, for those Valeant longs out there, let me make one thing clear. I'm not actually criticizing Valeant's approach. There's no shame in their game. They find companies that fit their profile (often companies that have been beaten down due to missteps) and they make a bid that makes sense for their shareholders. If the target accepts, great. If not, they move on.

Now The Pressure Is On

As I have written previously on ISTA, there are definitely some reasons why the stock was so weak in 2011 and the company was vulnerable to a hostile bid.

Clinical studies of Remura failed (not really the company's fault), and ISTA will have to try to slug it out with Allergan (NYSE:AGN) and Novartis (NYSE:NVS) in the OTC dry eye market instead of challenging Restasis in the prescription market. Beyond this (and in the realm of "management's fault), Bromday and Bepreve have disappointed vis a vis management guidance over and over again. Both drugs still have quite a lot of potential, but the Street is slow to reward potential after multiple disappointments.

Ever since word of a Valeant bid came out, ISTA management has been adamant that they have their own strategic plans to build and deliver value for shareholders. Without the Valeant bid (or the prospect of a bidding way) to prop up the stock, they had better start delivering fairly soon.

Management has talked about ongoing discussions with "several parties" on so-called strategic transactions. This could mean selling the company - it would make sense as part of many other companies including Allergan, Abbott (NYSE:ABT), Johnson & Johnson (NYSE:JNJ), Mylan (NASDAQ:MYL), or Sanofi (NYSE:SNY) - or perhaps creating marketing partnerships. While there could be some overseas marketing agreements in play, there isn't much to partner at ISTA right now as there isn't enough data on beposone (yet) to get a good partnership.

If ISTA management really wants to add value, it has to come from better execution with Bromday/Bepreve and/or an outright sale of the company at a higher price than Valeant was prepared to offer.

The Bottom Line

If ISTA management gets those two approved drugs to where they need to be in sales, this is a $10 stock. Given that that's not a risk-free proposition, ISTA investors should probably be okay with a bid for the company starting at $8.50 or more. Whether Valeant comes back into the picture or management can turn up another bid, the reality is that there's no more time to lose and little room for excuses - if management can't produce at least as much value as Valeant was prepared to give, there's no reason for them to be in place.

Disclosure: I am long ISTA.