This Drug Deal May Be On Again

A takeover of Allergan (AGN) was almost in the bag in early May, until Volvo blocked the acquisition--by drugmaker Pharmacia & Upjohn, of which the carmaker owns 14%. Now, it seems this maker of eye-care products and pharmaceuticals is back in play.

Volvo has suddenly announced it is selling the bulk of its P&U holdings. "That removes the impediment to an Allergan buyout," says Bob Willens, managing partner at Lehman Brothers. He expects P&U will try again.

Volvo opposed the deal: It was based on a stock-for-stock pooling of interests, an accounting treatment that does not allow inclusion of goodwill in the deal. If a big stakeholder such as Volvo sold shares up to 30 days before the closing or 90 days thereafter, such a merger would be disallowed. Now that Volvo has registered with the Securities & Exchange Commission to sell 70% of its shares in late July, cutting its stake to less than 5%, the deal can go on, notes Willens, who thinks Allergan is now a good play. The sale should bring Volvo $1.6 billion.

Now trading around 40, Allergan is undervalued, says a manager at a New York firm that invests solely in health-care issues. This pro figures the stock is worth 50 to 60 in a buyout. Volvo's withdrawal "is really the precursor to P&U's takeover of Allergan," he says.

Even with no takeover, Allergan stock is cheap, says Oppenheimer's Steve Gerber. Allergan's "continuing appeal" is its new-product flow, he argues. Allergan has produced new retinoid drugs--including Zorac for the treatment of psoriasis and acne, which Gerber thinks will get the FDA nod this year. "It has the potential to become Allergan's biggest product, with annual sales exceeding $100 million," he says.

Another Allergan product, Alphagan, a topical glaucoma therapy, has a good chance of FDA approval by next year and could "rejuvenate the company's important franchise in the glaucoma market," says Gerber.

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