Allergan pivots back to dealmaking

Large glass office building

Ireland's Allergan ($AGN) has been quick to shrug off the collapse of its potential megamerger with U.S. giant Pfizer ($PFE) as it points to its own experimental drugs as being more than good enough to lead its future growth strategy. And CEO Brent Saunders is now free to resume the wheeling and dealing in R&D that has marked his tenure at the top as analysts look to Pfizer for another big takeover attempt while avoiding tax inversions.

The companies officially declared the deal was off Wednesday morning after the U.S. Treasury announced new rules aimed at seriously limiting so-called tax inversions. Under the deal, NY-based Pfizer would have moved its tax base to Allergan's Irish HQ--but this has angered U.S. politicians, and notably the White House, with President Obama saying just this week these inversions were "insidious."

Allergan has been quick to point out that it doesn't need Pfizer. In a statement released this morning the company said the Pfizer deal "has been terminated by mutual agreement, effective today," adding that Pfizer has agreed to pay Allergan $150 million for expenses.

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In the statement, Allergan reiterated its "compelling standalone growth profile and strategy," and said it is positioned to drive "strong, sustainable growth powered by leading franchises, new potential blockbuster product launches and unmatched pipeline."

Brent Saunders, CEO and president of Allergan, said: "While we are disappointed that the Pfizer transaction will no longer move forward, Allergan is poised to deliver strong, sustainable growth built on a set of powerful attributes. Leading therapeutic franchises with strong brands across seven therapeutic areas provide the foundation for continued strong growth in 2016 and beyond. Our pipeline is one of the strongest in the industry, loaded with 70 mid-to-late stage programs including 14 expected approvals and 16 regulatory submissions in 2016 alone."

Saunders' dealmaking strategy stirred considerable discussion in the industry. He pointed Allergan to a number of mid- and late-stage assets, including his acquisition of Naurex to add a Phase III depression therapy. And he largely steered clear of early-stage assets, looking for biotechs to handle early-stage risks associated with discovery and proof-of-concept trials.

Its pipeline now includes the depression treatment rapastinel, which has shown promise of treating symptoms within hours rather than weeks required for standard treatments, as well as relamorelin, potentially the first new treatment in decades for delayed emptying of food from the stomach.

Allergan has predicted peak annual sales of up to $2 billion for rapastinel and up to $1 billion each for Vraylar and relamorelin.

It also expects potential annual sales of up to $2 billion each for experimental treatments for migraine headaches and for a leading cause of blindness called macular degeneration.

Saunders added: "Allergan is focused on delivering growth from an efficient operating structure while also being committed to investing in R&D through our Open Science model. The company is also poised to deliver additional growth opportunities from its attractive financial profile and balance sheet, propelled by approximately $40.5 billion pre-tax from the sale of our Actavis Generics business to Teva, expected to close in June 2016."

A deal between the two big companies could have seen a combined research budget of around $9 billion--although Pfizer had already said it would have needed to have made around $2 billion in research cuts, with its CRO partners projected to take the short term pain from a slowdown in business.  

This is second time unlucky for Pfizer as back in 2014, it tried but failed to buy British drugmaker AstraZeneca ($AZN) and its pipeline after the Anglo-Swedish company spurned its advances. It was also the prospect of this deal that began turning politicians' and the public's attention toward tax inversions, ironically in Pfizer's case helping to build the path to the Treasury's clampdown this week.

Some analysts are already speculating on what future deals the two companies may make, with the Wall Street Journal saying that Allergan will likely look to do more acquisitions of its own once the Teva ($TEVA) deal closes, according to a person familiar with the matter. If its stock stays low, the company might also repurchase shares, the person added.

On the Pfizer side Chris Beauchamp, market analyst at IG, said: "The possibility now is that Pfizer goes shopping again, and you might be prepared to develop a case that maybe a firm like Shire becomes the bid target. The implications of the new rules would have to be worked out, but if you've got cash sloshing around the sector, people are wondering who will benefit."

Raghuram Selvaraju, managing director of brokerage H.C. Wainwright, said that Pfizer may need to look for other companies with attractive products, such as U.S. drugmakers Biogen ($BIIB), Regeneron ($REGN) and AbbVie ($ABBV).

And what of Saunders? He was slated to take on the COO role at Pfizer had the deal gone through--a scenario that could have seen him became the eventual CEO of the new company, or at least for one of the companies had Pfizer split into two, something analysts had been expecting. But this avenue has now been cut off for Allergan's chief, leaving any future role at Pfizer highly uncertain.

Pfizer CEO Ian Read said in a much briefer statement: "We plan to make a decision about whether to pursue a potential separation of our innovative and established businesses by no later than the end of 2016, consistent with our original timeframe for the decision prior to the announcement of the potential Allergan transaction. As always, we remain committed to enhancing shareholder value."

Tellingly, Read spoke of the company's marketed drugs as a strength, but was not as bullish on its pipeline as Saunders was on his company's upcoming meds. Pfizer has an interesting immuno-oncology pipeline, but much of this is tied up with its $800 million deal with German Merck, and both are a little late to the game and far behind their Big Pharma rivals in this space.

Pfizer has suffered from poor R&D productivity for more than a decade and is keen to secure a major M&A to help shore up future growth and help stem the losses from its once $13 billion a year statin Lipitor, which has seen its sales decimated since losing its patents over the past three years.

- see Allergan's statement
- take a look at Pfizer's release
- check out the WSJ story

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