Buy The Rumor: Allergan Goes Public On Divestiture, Acquisition Plans

The inside story at Allergan (AGN) is now firmly public, as the company’s plans to divest itself of certain product categories and acquire another firm were confirmed over the weekend.

What was rumored has become fact

This weekend Allergan publicaly confirmed that it will sell its generic-drug business to Teva Pharmaceuticals Inc. (TEVA) for $40.5 billion and the company will purchase Naurex, a developer of antidepressant drugs, for $560 million.

On July 22 ValueWalk reported on a secret meeting that discussed a sales and marketing integration and aggressive acquisition strategy, citing unnamed sources. Then on July 24, Bloomberg reported Allergan was planning on separating its low priced generic business from its patented and higher-priced branded drug portfolio, again citing unnamed sources.

Then over the weekend, it all became public.

Allergan pulls the trigger with Naurex on suicide prevention

Allergan formally announced the acquisition of Evanston-IL based Naurex, a clinical-stage biopharmaceutical company whose two lead products, antidepressants Rapastinel GLyX-13 and NRX-1074, are reported to work in hours rather than weeks and are used in suicide prevention.  The Naurex acquisition adds to Allergan’s existing offerings in the sales category, a point Allergan CEO Brent Saunders made clear.

"The acquisition of Naurex is a great fit for Allergan and a compelling and exciting investment. We expect Naurex will enhance Allergan's mental health portfolio and build on our strategy to lead in this important therapeutic area," Saunders said in a statement, then pointed to the sales pipeline. "Naurex's unique pipeline comprises compounds that utilize a new mechanism to target areas of significant unmet medical need in Major Depressive Disorder (MDD), including severe and/or treatment-resistant depression. These highly differentiated compounds will immediately bolster our exceptional mental health pipeline."

"When you think about it, we weren't going to be a consolidator of the generic business. We've always said that. We weren't going to be a buyer of future generics. We were going to be a buyer of brands," Saunders was quoted as saying, confirming the strategy.

Allergan sheds low-priced generic product category

Jerusalem, Israel-based generic drug manufacturer Teva Pharmaceutical Industries Ltd. Industries today announced it is acquiring Allergan’s generic drug business for $33.75 billion in cash and $6.75 billion in Teva shares. In announcing their Allergan acquisition it also discontinued its plans to engage Mylan Pharmaceuticals Inc. (MYL​) in a hostile takeover.

“This transaction delivers on Teva’s strategic objectives in both generics and specialty,” Erez Vigodman, President and CEO of Teva, said in a statement. “Through our acquisition of Allergan Generics, we will establish a strong foundation for long-term, sustainable growth, anchored by leading generics capabilities and a world-class late-stage pipeline that will accelerate our ability to build an exceptional portfolio of products – both in generics and specialty as well as the intersection of the two. 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.”

Wall Street likes moves

For the most part, Wall Street appears to like the deals. Teva was up near 12 percent and Allergan was up over 7 percent in pre-market trading, but Mylan, who is now losing a buyer, was down over 14 percent in pre-market stock trading, but Wall Street analysts note this might be viewed positively inside Mylan.

In a research piece this morning, JPMorgan Chase & Co. characterized the Teva / Allergan deal as “a win-win transaction,” pointing to a “sum-of-the-parts” strategy that could lead to a $400+ per share upside valuations. The research note points out that Allergan’s branded business, accounting for a majority of the company’s profits, are projected to trade at nearly 19 times 2016 earnings per share, which brings the math to almost $400 per share.

For Allergan to sell its generic business for 17 times earnings is being heralded as a win for Allergan, as the market had under-priced this component of its business.

Teva is also a beneficiary of the deal and puts the firm on a pedestal. “For Teva, a deal with (Allergan) would vault the company back to its global leadership position in generics, while driving a significant step-up in earnings (20-30%+ accretion) and future cash flows to reinvest in branded pipeline opportunities for longer-term growth. Overall, we see continued high levels of consolidation driving sector performance, and see a significant upside case for both AGN and TEVA shares if this deal is confirmed.”

Susquehana Financial Group called the Teva / Allergan deal could “reopen a merger of equals scenarios.” Special Pharma Analyst Andrew Finkelstein noted the sales and product integration issues in research this morning, saying the deal “could reshape not only the generics sector, but branded spec pharma as well. AGN would emerge from its 'roll-up' of branded assets (WCRX, FRX, AGN) with a strong balance sheet to either continue as an acquirer or to provide a partner for a large company seeking a value-enhancing deal. This could increase investor comfort that acquisitive spec pharma companies will be able to manage the debt they have accumulated.”

Although their stock price is down, one analyst said Mylan can now relax to a degree. “For now, though, Mylan can breathe a sigh of relief as it looks likely to evade the potential destructive and destabilizing effects of a Teva rationalization,” Raymond James analyst Elliot Wilbur wrote over the weekend.