Botox Gets $10 Billion Cheaper for Acquirers: Real M&A

Allergan Inc. just got $9.6 billion cheaper for buyers looking to get their hands on the Botox wrinkle treatment.

Since peaking in April, Allergan’s market value has tumbled 28 percent to $25 billion as investors became concerned that generic competition to its Restasis eye drops and delayed drug studies would crimp future sales growth. Despite the setbacks, Allergan’s growth prospects from Botox and other products on the market may attract acquirers such as Merck & Co. and GlaxoSmithKline Plc, Bank of Montreal said. Botox sales alone are forecast to climb to $3 billion in 2017, up 67 percent from last year, according to data compiled by Bloomberg.

Nestle SA could merge its skin-care business with Allergan, according to Leerink Swann LLC, which said Allergan’s management probably wouldn’t sell for less than its high of $116 a share. The decline has left the Irvine, California-based company trading near its least expensive multiple of earnings in four years, the data show.

“If you’re large pharma and you’re looking for steady, growing franchises, Allergan has several of them,” David Maris, a New York-based analyst at BMO, said in a phone interview. “You’ve had a series of disappointments, but I think the market has overreacted. Botox is the crown jewel, and I could see Allergan fitting well with a number of companies.”

Pipeline Delays

“As a matter of practice, we do not comment on any business development activity,” Bonnie Jacobs, a spokeswoman at Allergan, said in an e-mail when asked if the company has been approached by acquirers or is weighing a sale.

Allergan fell the most in 13 years on May 1 after saying it would delay final studies for two new drugs after disappointing results. A study of DARPin, designed to treat age-related macular degeneration, didn’t distinguish it from a competing product enough to move on to the next phase yet, and bimatoprost for baldness showed insufficient hair growth.

The shares extended their losses in June after the U.S. Food and Drug Administration said it may not require human testing for generic versions of Allergan’s Restasis eye treatment, which may make it easier for competing products to win approval. Restasis, which accounted for about 14 percent of Allergan’s 2012 sales, loses U.S. patent protection in 2014.

Since the end of April, Allergan’s stock fell 26 percent to $84.35 through the end of last week, the worst performance among health-care companies in the Standard & Poor’s 500 Index. Today, the shares climbed 1.5 percent to $85.65.

Botox Treatment

The FDA’s announcement “was the straw that broke the camel’s back,” J.T. Haresco, a San Francisco-based analyst at JMP Group Inc., said in a phone interview. “The onus is on Allergan to prove that it can withstand the setbacks.”

So far, many analysts project it will. Estimates provided after the FDA’s draft guidance show Allergan’s revenue climbing through at least 2018, according to data compiled by Bloomberg. Sales are also increasing for Botox, a purified form of the poison botulinum used to treat wrinkles, chronic migraines and other neurological conditions, the data show.

“Botox has a little bit of competition, but really it’s the Scotch tape of toxins,” BMO’s Maris said.

While Allergan’s pipeline and patent risk may scare off some buyers, the company would fit well within Merck or Glaxo, and the stock drop could spur bids, he said.

Merck, like Allergan, makes treatments for eye problems, migraines and allergies. Chief Executive Officer Kenneth Frazier said in January that the drugmaker, now with a market value of $142 billion, may be interested in buying eye-care company Bausch & Lomb Holdings Inc. Bausch & Lomb instead agreed to be acquired by Valeant Pharmaceuticals International Inc. in May for $8.7 billion.

Glaxo, Nestle

“Allergan has all the eye-care pharma one could want,” Maris said. “While most people think of Botox as a cosmetic drug, about half of its use is in neurology.”

Glaxo, which also makes neurology drugs, was speculated to be pursuing a merger with Allergan in 2009. The 84 billion pound ($125 billion) company licenses from Allergan the rights to develop and sell Botox in Japan and China.

Steve Cragle, a spokesman for Whitehouse Station, New Jersey-based Merck, and Mary Anne Rhyne of London-based Glaxo said their companies don’t comment on speculation.

Nestle, based in Vevey, Switzerland, could merge Allergan with its skin-care operations, according to Seamus Fernandez, a Boston-based analyst at Leerink Swann. There would be cost savings and synergies, especially because of Nestle’s lower corporate tax rate, he said.

Skin Care

Nestle, which has a market value of 202 billion Swiss francs ($209 billion), owns 50 percent of two dermatology-focused joint ventures with Paris-based L’Oreal SA. The CEO of Galderma SA, one of the partnerships, said in December that he’s scouting for acquisitions. Galderma’s products include Cetaphil skin creams and Restylane, a wrinkle reducer that can be used alone or with Botox.

“Nestle certainly has the size and scale” to acquire Allergan, Fernandez said in a phone interview. While it may come as a surprise, “it’s one of those deals that immediately upon announcement would make sense.”

Robin Tickle, a spokesman for Nestle, declined to comment on whether the company is considering a purchase of Allergan.

Even with Allergan’s shares languishing, the company’s size is still a hurdle, and Chairman and CEO David Pyott may not be a willing seller at the stock’s current level, said Erick Maronak, chief investment officer of Victory Capital Management Inc., which oversaw $22.7 billion as of March 31.

Not ‘Broken’

“There’s a lot to like about the company, but even with the selloff it’s not exactly inexpensive,” Maronak said in a phone interview from New York. While Allergan does merit a look from buyers at some point, it would be more likely “if it were a little smaller and a little less expensive,” he said.

Allergan’s price-earnings ratio slid from more than 28 in March to about 21 last week, according to data compiled by Bloomberg. That still tops the S&P 500 Health Care Index’s multiple of 17.

While David Steinberg, a San Francisco-based analyst at Deutsche Bank AG, doesn’t place a high likelihood on an Allergan takeover, he said it’s still possible because large drugmakers have shown an appetite for major purchases in the past. Allergan reported a profit of $1.1 billion last year on sales of $5.8 billion.

“Allergan does not seem like a broken company whatsoever,” Steinberg said in a phone interview. “It’s certainly among the highest quality -- if not the highest -- management teams in the sector, and the company has consistently delivered strong financial results for years.”

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