While Pfizer and Allergan work to strike a merger deal by the somewhat arbitrary deadline of Thanksgiving, vultures are circling. Or in this case, silver foxes.
Pershing Square's Bill Ackman and Third Point's Dan Loeb reportedly suggested, at the Robin Hood Investor's Conference on Tuesday, that Allergan might be better off uniting with their pet pharma firms: Valeant and Amgen, respectively. This seems like wishful thinking on the part of the hedge-fund gurus -- even a bit desperate, particularly in Ackman's case.
Given Valeant's recent collapse, Ackman would like to hose some of the egg from his face and salvage some kind of return after losing billions on a very large bet (on which he has since doubled down).
Loeb likely wants more from a company that has resisted his calls to break in two, and which would rather shop around in the $10 billion bolt-on-acquisition aisle. That's not exactly the thrift store, but it's not where you go to find a transformative megadeal, either.
It's admittedly a bit hard to judge their rationales, given that they spoke at an event closed to the media, and we only have secondhand reports. But both proposed deals seem like very odd marriages for very different reasons.
Allergan and Valeant have quite a bit in common, as much as Allergan CEO Brent Saunders would like everyone to forget it. The firms went from relative minnows to specialty pharmaceutical giants on the back of foreign tax domiciles, debt, and a series of acquisitions. Valeant's recent fall from grace has made it more snackable, however:
The companies do have history. Saunders' first stint as a CEO, at Bausch & Lomb, ended with a multi-billion dollar sale to Valeant. And Allergan wouldn't be the company it is today if Valeant and Ackman hadn't chased the formerly independent firm into the arms of Saunders' Actavis.
But an Allergan-Valeant deal would create a two-headed beast of relatively R&D-averse firms dependent on acquisitions and price increases, at a time when that business model looks questionable and is politically radioactive. The environment that made Valeant so cheap also makes buying it less appealing. There's a reason Saunders is having a sudden, public conversion to the church of drug development after years of heresy.
There's also no tax-inversion benefit to such a deal. And Valeant is so worried about debt that it's sitting out of the acquisition market for the first time in decades and spending cash to pay it down. Allergan carries a net debt-to-adjusted Ebitda ratio of 5.5, according to data assembled by Bloomberg Intelligence. Valeant's ratio is 6.2, compared to an average among specialty pharma peers of 3.77.
An Amgen-Allergan deal, meanwhile, would be more politically palatable and could net Amgen a lower tax rate. And the firms do have a partnership for developing biosimilars, which are generic forms of complex biologic drugs.
But it seems like a strange fit in business and cultural terms. Amgen is one of the oldest, largest biotechs around, is heavily R&D-focused, and makes its money from innovative treatments for cancer, autoimmune diseases, and high cholesterol. Allergan's biggest seller by far is Botox, and a great deal of the company's relatively meager research budget goes to figuring out new ways to use it.
The idea of the R&D-resistant Saunders running Pfizer likely sends shivers down researchers' spines. The prospect of him having a say over Amgen's pipeline decisions might frighten them even more, and such a thing might be a precondition of a deal. An Amgen-Allergan union would create another big, diversified pharma conglomerate, at a time when the ones that exist are shedding and swapping businesses to become more narrowly focused and dominate particular disease areas to keep pricing power.
These look like deals that would mostly just be good for the guys proposing them.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
(Corrects story to fix leverage data in ninth paragraph.)
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