It’s one of those one-in-a-million biotech buyout stories … the young, unknown company few have even heard of ends up being a diamond in the rough to a giant in the industry. The result is a big triple-digit gain for those traders who had the guts and foresight to stick with the long shot stock. That’s the story of Tobira Therapeutics Inc (NASDAQ:TBRA) on Tuesday morning, as Allergan plc Ordinary Shares (NYSE:AGN) made an offer the smaller biopharma outfit couldn’t refuse.
Allergan offered a minimum of $28.35, in cash, per share of TBRA, and if all goes well with Tobira’s current pipeline, the total compensation could be upped to $49.84 per share.
For perspective, Tobira shares closed at $4.74 on Monday.
While some would argue that Allergan is overpaying for Tobira Therapeutics, the fact that AGN stock has barely budged following the announcement suggests shareholders are fine with the deal. However, the question remains: what exactly is Allergan getting for what could ultimately be a $1.7 billion offer?
Good Deal for Allergan Stock?
Tobira is a clinical stage (read “pre-revenue”) biopharma developer best known for its work in the field of non-alcoholic steatohepatitis, or NASH, treatments.
NASH is a kind of fatty liver disease not caused by alcohol use/abuse. Its symptoms include the buildup of fat in the liver that can eventually cause damage like scarring, cirrhosis and even liver damage or outright liver failure.
To that end, the acquisition by AGN adds NASH drugs Cenicriviroc (CVC) and Evogliptin to Allergan’s pipeline. Cenicriviroc is currently in phase 2 trials as a therapy for NASH. Evogliptin is expected to start its clinical testing before the end of the year. Both drugs are involved in multiple trials, however, and a handful of the nine programs Tobira is currently developing aren’t focused on NASH.
AGN shareholders need not wonder, however … NASH is the focal point for Allergan in this acquisition.
While the value of AGN has held steady on the news, even at the low-end of the bid — $28.35 per share — it’s a generous offer. At that price alone, Allergan will be forking over just a little less than a billion dollars for one phase 2 drug, and one preclinical drug.
Granted, Allergan has it to spare. As of the latest look, AGN has $8.6 billion worth of current assets it can tap into. Even reducing that figure by the $639 million it announced last week it would spend to acquire Vitae Pharmaceuticals Inc (NASDAQ:VTAE) there’s still no cash crunch.
Yet, being able to afford a deal isn’t the same as making a great deal.
The global NASH market is projected to be worth a mere $1.6 billion by 2020. Were Allergan assured it would capture the bulk of that market shortly after Cenicriviroc and/or Evogliptin were brought to the market (assuming either or both are approved), few would disagree with the idea that the money was well spent. No such assurance exists, however.
Aside from the time and money Allergan would need to convince multiple regulatory bodies all over the world that its drugs were safe and effective, rival biopharma companies Intercept Pharmaceuticals Inc (NASDAQ:ICPT) and Conatus Pharmaceuticals Inc (NASDAQ:CNAT) along with a couple others are even further along in their development of NASH therapies.
Bottom Line for AGN Stock
True to his word following the failed attempt to merge with Pfizer Inc. (NYSE:PFE) earlier in the year, Allergan CEO Brent Saunders is clearly looking for — and finding — what he recently referred to as “stepping stone” deals that allow the company to develop treatments that are sorely needed.
His complete comment: “Every one of our acquisitions or deals has been growth-oriented. We look to buy young products that we think we can put into our hands and do better with and really grow, or we buy R&D assets.”
And yet, the longer owners of AGN stock examine the Tobira pipeline and the NASH market, the more difficult it gets to see a significant growth opportunity. (Not so with Vitae Pharmaceuticals, which is developing a pair of very novel dermatology products.)
Giving Allergan a grade on the Tobira acquisition based on a combination cost, impact, opportunity and required maintenance, it would only earn a C+, with the opportunity to raise that grade to a B- if things proceed fortuitously and the other trials in the Tobira pipeline pan out.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
