September 29, 2014
By Riley McDermid, BioSpace.com Breaking News Sr. Editor
A recent cascade of mergers and acquisitions in the biotech sector poses various scenarios for investors caught up in the maelstrom, and the possibilities are endless, said Cowen Group analysts Ken Cacciatore and Tyler Van Buren in a prescient and thorough at the industry.
Titled “Biotechnology: Our View On The Likely Accelerating Industry Consolidation–Buckle Up,” Van Buren and Cacciatore argue that Wall Street has been far too slow—and much to unimaginative—in envisioning how biotech could look if all these deals are consummated.
“The cascade of events that we believe are set to occur could be rapid, transformative, and if executed correctly, could create tremendous value for a variety of companies,” they wrote. “We provide a very high-level view of multiple potential strategic transactions that could occur, in no particular order, but starting with Allergan. This note is our best attempt to provide a guide to the various possibilities.”
In the first portion of the note, the two take a close look at Allergan Inc. , which has a variety of potential outcomes, all of which appear attractive. Assuming that Allergan buys Salix Pharmaceuticals, Ltd. , the acquisition will likely trigger events that could further transform the specialty pharmaceutical universe, said Cowen.
“We believe the Allergan- Salix combination, which would likely be done at roughly $185 per SLXP share would be nearly 20 percent accretive ($2 per share) by 2016, and bring a leveragable asset, with the ability for Allergan to make additional gastroenterology acquisitions,” wrote Van Buren and Cacciatore.
They posit that the proforma Allergan-Salix asset would have durable low double-digit revenue growth and mid to high-teens earnings growth off of a consolidated $12 EPS in 2016E.
“Although the balance sheet would now be nearly fully levered, we believe the proforma cash flows would be applied to both buying back shares and pursuing further accretive business development,” wrpte Van Buren and Cacciatore. “First generation Allergan was the creation of a global commercial organization with exceedingly value-creating long-duration assets. Second generation Allergan would now seek to maximize cash generation and aggressively allocate capital.”
“The bottom line is that very few growth assets would look like this Allergan-Salix proforma entity, and we believe it will survive the Valeant December 18 shareholder vote as a preferred option compared the Valeant Pharmaceuticals International -Allergan combination,” they continued.
The Cowen analysts noted that it appears that in order to participate in the Dec. 18 vote, shareholders must be on record by Oct. 3--meaning that if Allergan is going to make an acquisition to position an alternative to the Valeant proposal, it will likely be very soon, as Allergan and the potential acquired management could meet with investors and allow sufficient time for an accumulation of shares ahead of October 30 to influence the December 18 vote.
“And to reiterate, we do believe that the proforma Allergan-Salix entity would survive the Valeant bid,” they concluded. We believe that the proforma Allergan-Salix entity would reasonably trade to the $205-215 level per our DCF, and with pipeline success (Darpin, Latisse, others) – and proper capital deployment – could reach $235-240.”
Cowen noted that, interestingly, if Allergan-Salix were to survive the Valeant vote as a standalone entity, AbbVie (ABBV) and Actavis (ACT)-Forest would very much like to approach that asset for a friendly takeover/merger.
“We believe the strategic rationale for both AbbVie/Shire and Actavis-Forest approaching Allergan-Salix would be strong. We find it difficult to believe that Actavis-Forest would be involved in a Salix bidding process now against Allergan as it should be clear to Actavis that if Allergan does not secure Salix, they would likely lose in the vote to Valeant,” they wrote. “Given we believe that Actavis likely would covet Allergan, we find it hard to believe that Actavis would do anything that would allow Valeant to secure Allergan.”
It has been speculated via the Wall Street Journal (September 22) that Actavis approached Allergan to discuss a friendly combination, but that Allergan declined.
“We believe this is likely true, and we don’t believe Actavis will go hostile and involve themselves in this increasingly messy Valeant-Allergan situation,” concluded Van Buren and Cacciatore.
“Therefore, we believe Actavis should allow Allergan to consummate the Salix transaction, which should allow Allergan-Salix to survive the Valeant vote, and then Actavis should re-approach,” they wrote.
“The bottom line is we believe Allergan will purchase Salix, that the proforma entity will survive the Valeant vote, and that there could be even more value creation for Allergan-Salix either standalone or via an acquisition by AbbVie-Shire or Actavis- Forest,” they wrote. “Either way, we would remain aggressive buyers of AGN shares.”
