Allergan’s Healthy Price May Come With Side Effects

27 Jul 2015 | Author: | No comments yet »

Allergan May Turn Sights to Amgen or AbbVie With Teva Cash.

The deal with Teva Pharmaceutical Industries Ltd. “gives us a tremendous amount of flexibility to think about transformational M&A as well as continue our pattern of tuck-in acquisitions,” Allergan Chief Executive Officer Brent Saunders said on a conference call today.Allergan, a Dublin-based global pharmaceutical company, will acquire Evanston-based biopharmaceutical company Naurex for $560 million, the companies said.

Naurex, which is developing a fast-acting molecule to treat major depressive disorder among other compounds to treat central nervous system disorders, raised an $80 million Series C round in early December to continue clinical development of its drugs. The acquisition should help Israel-based Teva, already the world’s largest generic drugmaker, boost growth at a time its top drug, multiple sclerosis treatment Coxaprone, is facing competition. The transaction takes this year’s total of announced pharmaceutical and biotech deals to a record $220.72 billion, surpassing last year’s $220.66 billion, according to data compiled by Bloomberg. The company’s lead molecule, GLYX-13, was on track to enter its final testing phase in 2015 and would be administered intravenously and alleviate symptoms of depression within hours, Naurex CEO Norbert Riedel told Blue Sky in December. Allergan’s generic business is generally seen as a better fit than Teva’s previous target Mylan because it will improve Teva’s distribution channels and because Allergan is strong in so-called biosimilar drugs.

With today’s $40 billion sale of Allergan’s generics business to Teva Pharmaceuticals, he caps off one of the most amazing acts of using deals to redefine a company in the drug industry’s history. Teva will pay $33.75 billion in cash and shares of Teva valued at $6.75 billion, representing a 10 percent stake in the Israel-based company, Teva said in a statement. The Teva transaction lets Allergan pay off debt from its $66 billion combination with Actavis Plc, allowing it to build its brand-name medicine business with small deals or to pursue larger acquisitions such as Amgen Inc. or AbbVie Inc., said Ken Cacciatore, an analyst with Cowen & Co. in New York. “If either transaction was pursued by Allergan, it would be well received by both sets of shareholders if the proper vision was articulated and a friendly agreement could be reached,” Cacciatore wrote in a report. Think about it: the Dublin-based company that Saunders is running, along with chairman Paul Bisaro, was just a few years ago a generic drug firm called Watson Pharmaceuticals. At the same time, Teva dropped its $40 billion bid for Mylan, which hit a snag when a Dutch foundation linked to Mylan bought temporary control of half the company in an attempt to block the takeover.

Teva Chief Executive Erez Vigodman said the combined companies will have proforma revenue of $26 billion and earnings before interest, tax, depreciation and amortisation of $9.5 billion in 2016. “Our respective portfolios of generic medicines and applications are highly complementary, providing Teva with high quality growth and earnings visibility, and the scale and resources to expand upon our specialty capabilities,” he said. “This acquisition reinforces our strategy, accelerates growth and diversifies revenues both by product and geographically, supporting our new business model.” Teva said it believes the acquisition will be significantly accretive to adjusted earnings per share, including double-digit accretion in 2016 and more than 20 percent accretion in year two and year three following the close of the deal. For that kind of re-imagination on the go, you probably have to go back to Saunders’ mentor, Fred Hassan, who, as chief executive of Pharmacia, bought Monsanto to get the arthritis drug Celebrex – and then spun the ag-tech company right back out.

It expects cost synergies and tax savings of $1.4 billion annually by the third anniversary, from efficiencies in operations, manufacturing, and sales and marketing. But he also agrees that he’s getting an amazing multiple, and says that two factors led him to the “bittersweet” decision to sell: the great price, and the fact that consolidation among drug purchasers (CVS, Walgreens) and insurers (Aetna buying Humana, Anthem buying Cigna) led Saunders and Bisarro to realize that they had to either bulk up or get out. However, the synergies are more plausible, since Teva’s head of generics used to run the same business at Actavis, which took over Allergan in 2014 and kept its name. Valeant Pharmaceuticals Inc., which lost out to Actavis, may be interested in acquiring Allergan’s remaining branded-drug business, Finkelstein said. “We have really positioned ourselves to be focused, reloaded and ready to move,” Saunders said. “Our main focus is going to be on accretive bolt-on and accretive transformational deals.” Instead, Saunders wants to do what he says Allergan has been doing with all its big deals: “move up the innovation chain.” In other words, don’t sell generics, which are commodities.

What’s more, the deal comes just four months after Allergan, then known as Actavis, assumed more than $20 billion in debt to purchase the branded-drug business that was Allergan. And, while the expected increase in earnings looks lower than the original Mylan bid, Teva could have been forced to pay more, and the deal might have dragged on well into 2016. The company referred to its balance sheet as “reloaded,” and said the deal “accelerates” the possibility of “transformative” mergers and acquisitions. With its large incoming cash pile and advantageous tax rate of 15%, Allergan is in position to swallow some major companies if it chooses, particularly those developing higher-margin branded drugs. For Allergan investors, this is a reminder the company is now most definitely following the hyper-acquisitive strategy of Actavis, which bought Allergan this year and assumed its name.

A decade ago, it looked like he was being groomed by Hassan to potentially take over Schering-Plough before that company ran into problems and got bought by Merck. So, despite protestations so far that basic research doesn’t return its investment, one could imagine him getting into the business of inventing drugs again if he thought he could buy the right lab. Bull markets come and go, and borrowing money to finance big acquisitions can turn sour in a hurry if underlying economic conditions take a turn for the worse. And Biogen just got a huge haircut thanks to disappointments from both its research (on an Alzheimer’s drug) and its marketing (with the best-seller Tecfidera).

But price could prove a hurdle. “If the timing isn’t right, then you move onto the next target,” says Saunders. “If the valuation is too high, you don’t take the deal. Certainly, Allergan investors previously have gained from its deal-making ways-the company’s market value has grown more than 25-fold in the last five years to about $130 billion.

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