A mere four months after Pfizer and Allergan agreed to join forces and create the world’s largest pharmaceutical company, new inversion rules from the U.S. Treasury forced Pfizer to scupper the $160 billion deal.
By tightening the ownership requirements for inversions, the proposed rules significantly reduced the economic benefits Pfizer would have gained from merging and moving its tax residence to Allergan’s home base in Ireland.
Suddenly a standalone company again, Allergan’s options for moving forward are wide open. A $40.5 billion sale of its generics business to Teva Pharmaceuticals is set to deliver a large influx of cash and will give Allergan M&A muscle to pursue other opportunities.
Indeed, Allergan didn't wait long after the decision to nix the merger before announcing a deal with Heptares Therapeutics for development of neurological treatments. While small in size as measured by upfront payment, the deal has the potential to reach $3.3 billion if all milestones are reached.
In a call with investors after the formal termination of the merger, Allergan CEO Brent Saunders emphasized the company’s commitment to “growth pharma”, centered on double digit revenue growth among branded products. All options are on the table, he said. With a reloaded balance sheet and cheaper biopharma valuations across the industry, the question is where that commitment might lead next.
Last July, Teva agreed to buy Allergan’s generics portfolio (Actavis) for $40.5 billion in cash and stock. The divestment has already passed regulatory muster in the E.U. after Teva agreed to shed “certain overlapping molecules” in 24 European countries. But the U.S. Federal Trade Commission has moved slower than expected in its anti-trust review, and Allergan now anticipates the deal to close sometime in June.
“We think Teva has done a very good job at working to clear antitrust authorities around the world. We are very confident they will get this deal closed in the coming weeks,” Saunders said on Wednesday.
When it does close, Allergan will net about $36 billion in cash and equity proceeds after tax. A portion of that will go towards paying down debt, as part of Saunders’ ironclad commitment to maintaining Allergan’s investment grade credit rating.
Speculation on acquisition target
But, Allergan will still have substantial amount of cash to work with, raising interest in potential targets. In the call with investors, Saunders said, “The profile of anything we buy, big or small, has to be growth... The assets within the acquisition…have to have longevity and we have to believe that in the hands of Allergan we can do better with those assets.”
Saunders also indicated interest in R&D assets which complement Allergan’s seven core therapeutic areas: aesthetics (think Botox), eye care, central nervous system, gastrointestinal, women’s health, urology, anti-infectives, and biosimilars.
Orphan drug acquisitions don’t appear to be in the cards, however. Saunders seemed less eager to pursue orphan drugs, saying they didn’t fit with Allergan’s overall strategy at the moment.
Given Saunders prior background as CEO of Bausch & Lomb from 2010 until 2013, the possibility of acquiring the eye care unit from Valeant has been raised as a possible target. Valeant’s current struggles have only fueled speculation.
In early March, Pershing Square CEO and now Valeant board member Bill Ackman suggested selling part of the unit in order to address Valeant’s debt.
But Saunders expressed some doubt over whether Bausch & Lomb represented a growth opportunity. While it would complement Allergan’s eye care portfolio, the CEO said he couldn’t determine if it was worth more than what it had sold for previously.
In an interview with Forbes, he also drew a clear line in the sand between Valeant’s model and Allergan’s strategy, suggesting a buyout of the weakened Canadian drugmaker is unlikely.
Allergan’s hands aren’t tied
One thing Saunders did make clear was that the Treasury’s new rules wouldn’t hinder Allergan in making a deal.
“I can say this with absolute confidence, [the new rule] really doesn’t imperil our ability to do anything. We have tremendous flexibility to use equity in a deal if we decided that was the appropriate thing to do for shareholders and the deal had strong strategic logic,” he said.
The Treasury deal was designed to stop inversions like Pfizer’s attempt to buy Allergan. But as an Ireland-domiciled company, Allergan wouldn’t have its hands tied in making an acquisition of its own as Saunders sees it.
In the acquisition announced late Wednesday, Allergan paid $125 million upfront to acquire rights to a portfolio of developmental treatments in Alzheimer's and other neurological diseases from Heptaries Therapeutics. The deal is structured with an additional $665 million in milestone payments upon successul phase 1, 2, and 3 trials and product launch, along with a further $2.5 billion in sales thresholds.
In the past year, Allergan bought Kythera Biopharmaceuticals for $2.1 billion to gain access to its double-chin treatment Kybella. It has also snapped up the dry eye disease company Oculeve for $125 million plus milestones, and the CNS disorder biopharma Naurex for $560 million and undisclosed milestones.
These deals highlight Allergan's acquisition approach. For earlier stage development assets, options and a more heavily milestone-based structure are favored. This is typical of much of biopharma, but the complementary pattern to Allergan's seven core areas is suggestive of how the company could approach a larger deal.
At the same time, valuations in the biotech world are coming down. Despite a recent bounce, Nasdaq’s Biotechnology index has fallen over 20% from a year ago, and more than 30% from its most recent peak in July. Along with it, companies such as Biogen, Celgene, and Bluebird Bio have seen their stock values drop.
“Asset prices coming down are good for people that have the capability and expertise to do disciplined, smart, strategic deals,” Saunders said. “Our management team is good at doing disciplined, smart, strategic deals. The environment has only improved for us and if it stays this way, it could be an exceptional period for us to look for growth assets.”