Deals

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

It's a bit self-serving for a CEO to call weakness in his company's stock price "baffling," as Allergan CEO Brent Saunders did on the company's fourth quarter earnings call Monday. But Saunders may have had a point.  

Allergan is trading at about $283 per share, a 16 percent discount to the implied $337 a share Pfizer plans to pay for it in a complicated tax-inversion deal (Allergan is technically buying Pfizer in a reverse merger). By every indication the deal is still on track to close in the second half of this year. Yet such a gap has been persistent since news of it broke, sometimes hitting 20 percent.

Some spread makes sense for such a politically fraught deal, which Pfizer is using in part to secure a lower tax rate. But this particularly large discount suggests many investors still aren't confident it will happen. It's tough to see why.

Discounted
Allergan shares are trading at a large discount to the price Pfizer plans to pay for them.
Source: Bloomberg

It's not about Allergan's performance: The company beat analysts' revenue and earnings estimates for the quarter, helped by impressive Botox sales. Allergan has met or exceeded EPS estimates 11 quarters in a row and expects continued branded drug sales growth and an active roster of drugs coming up for FDA approval this year. 

There are genuine risks to the deal, particularly on the regulatory front. The biggest is that the U.S. Treasury Department could release more anti-inversion rules. Memories of 2014's unsuccessful AbbVie/Shire deal, a tax inversion that Treasury managed to derail, might make investors understandably skittish. The deal is also contingent on regulatory approval and on Allergan selling its generics business to Teva, which may take longer than expected. 

It's also possible that investors are simply hungry for more information. Right now, all they have is repeated assertions the deal will close some time in the second half of the year. That could mean as soon as this summer, or as late as December. With a deal this size, and that much time to wait, plenty could go wrong.  

Pfizer and Allergan have been upbeat about the deal's prospects, going so far as to announce new division heads for the combined firm

On Monday's call, Saunders said things are moving ahead full steam, with no surprises so far, and that he doesn't believe Treasury plans to or can stop the deal. Treasury has twice changed tax law to make inversions less attractive. The Pfizer deal is structured carefully to avoid those changes, Saunders said, adding that he had heard nothing to suggest the department is working on new rules that could thwart a deal.

As my colleague Brooke Sutherland noted after Treasury issued its latest notice, the department would likely need Congress' help to target features of the deal that might make it truly unattractive. And congressional action is unlikely; Republicans and Democrats disagree about what to do about inversions, and it's an election year. 

Analysts tracked by Bloomberg seem confident the deal will go through. The stock has 19 buy ratings from analysts, no holds, and no sell ratings. The average 12-month price target is $368.62, right near the initial deal price. 

True Believers
Analysts are firmly united in their opinion that Allergan is undervalued.
Source: Bloomberg

Analysts aren't always trustworthy or right, but that kind of consensus is hard to ignore.  

It's understandable that investors are skittish, particularly those still nursing singed fingertips from past inversion implosions. But with a sizable potential return on the table should the deal go through, and no indication that things aren't progressing as planned, investors might not want to sit on their hands for much longer.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net