Since losing in his effort to take out Pfizer Inc. (NYSE:PFE) in a huge tax-inversion deal this past spring, Allergan Plc (NYSE:AGN) CEO Brent Saunders has hatched a new strategy with the same aim, to boost Allergan revenues, earnings, and ultimately its market cap.
So far it’s working with analysts, but investors need to ask hard questions about it before signing on.
Allergan shares were around $280 per share shortly before the Pfizer merger was cancelled on April 6, but quickly lost almost one-third of that value in the month after, and while the shares reached $260 by late July, the stock has since gone into reverse and was trading October 3 around $227.
At their present level Allergan has a price-to-earnings multiple of 18.7, roughly in line with the rest of the market.
But does it have the same prospects as the rest of the market?
Saunders’ new strategy is to buy potential blockbuster drugs, and to charm Washington into favoring his Parsippany, New Jersey company and ignoring the fact it is legally based in Ireland.
The charm offensive includes a “social contract with patients” attacking companies that have engaged in “aggressive or predatory price increases” and committing to finding the broadest-possible market for the company’s drugs.
At the same time, Saunders has sought to reassure Wall Street that his earnings guidance isn’t changing, that he’s just shifting from a focus on generics and toward patent-protected medicines, and that everything will be fine.
But there’s a difference between maximizing prices, maneuvering around tax laws and engaging in deal-making, and the hard work of finding and backing revolutionary medicines. Saunders is like a gambler with a bankroll who wants every hot horse in the paddock, and doesn’t yet understand that a potential star can become worthless with a single step or, in the case of drugs, after one bad study.
Completing the sale of Allergan’s generic businesses to Teva Pharmaceutical Industries Ltd (ADR) (NASDAQ:TEVA) of Israel for $40.5 billion brought a lot of cash onto Allergan’s balance sheet, which is burning a hole in Saunders’ pocket. He wants to put that cash to work as quickly as possible.
Analysts at Goldman Sachs are backing his play and recently reiterated their buy recommendation.
Saunders’ first deal last month was to announce the purchase of Tobira Development Inc (NASDAQ:TBRA), which is fighting liver disease, for 19 times its previous market cap, or $1.7 billion. It’s a deal our James Brumley has questioned. It also bought the maker of a competing compound, privately held Akarna Therapeutics, so we assume that if there’s a cure coming for this disease, Allergan has it covered.
But for how much, patients will ask? Yeah, how much, investors will ask.
In dermatology Allergan is spending $639 million on privately held Vitae Pharmaceuticals. In eye care it bought privately held Retrosense Therapeutics.
The latest deal, announced October 3, is a $1.5 billion purchase of an antibody for Crohn’s Disease from AstraZeneca plc (ADR) (NYSE:AZN), $250 million up front.
Investors were comfortable with Saunders’ ability to keep prices high and deliver profits to shareholders in the company’s previous incarnation. They were happy with Saunders’ ability to make big plays in the boardroom. But his ability to turn mere drug candidates into blockbusters is, frankly, unproven.
Allergan is a classic bet-the-jockey stock, with Saunders as the jockey. The Pfizer deal would have given him a huge portfolio of functional franchises on which to work his price-hiking magic. Now he’s building a collection of potentially profitable candidates and asking to be valued based on their potential.
The jockey is riding a different horse than before and he’s asking a lot of ordinary investors, especially those who prefer sure-things to longshots.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
