Allergan's (NYSE:AGN) shareholders are in a limbo after Pfizer (NYSE:PFE) announced that it was not going to go through with the merger. This leaves AGN's shareholders scrambling to try and find a fair value for the company. The company dropped substantially in trading yesterday, and I expect that after the announcement, it will drop substantially today. This should leave shareholders wondering what is next for the future of the company.
Why Pfizer Backed Out
Pfizer backed out of the deal due to new rules surrounding corporate inversions. These rules made it much harder and less profitable for Pfizer to acquire (or more precisely, technically to be acquired, even though PFE would be the remaining entity) Allergan. The rules had regulations that seemed to specifically take target at the circumstances surrounding the inversion between Allergan and Pfizer. For example, one of the rules was that when analyzing the inversion, the assets acquired by the foreign company over the last three years through acquisitions would not count. This rule seemed to be specifically built to go after Allergan, which has grown substantially through multiple acquisitions over the last three years. This decreases the size of Allergan and creates a problematic ownership structure if Pfizer had decided to continue to go along with the inversion.
Another key regulation, which helped to lessen the benefits of the inversion, was the profit-stripping regulations, in which the Treasury Department made it harder for a company to be able to strip profits from a US subsidiary and transfer those profits to a foreign headquarters in order to avoid taxes. With these regulations in place, the tax benefits of the deal became substantially lower than what Pfizer initially had in mind, so for the company, it seemed to make sense for them to back out of the Allergan deal. PFE will have to pay AGN a rather small sum of $150 million in order to back out of the deal.
Next Steps for Allergan
Allergan is going to have to get ready to operate as its own company, something that it is obviously very skilled at doing. AGN seems to have a pipeline that is substantially undervalued compared to the rest of the industry, and this pipeline should be a focus of investors now that Allergan is, at least for the time being, a standalone company.
AGN has multiple products in development that are projected to be blockbusters, including Rapastinel, a drug that is being developed for the treatment of depression. Rapastinel has the potential to grab substantial market share, should it be approved, as it has the potential to start working within hours rather than the weeks typically required for standard treatments. This means that a patient would feel relief quicker, which is of substantial medical benefit when treating depression. Some other drugs that investors should keep their eye on are Vraylar, which was recently approved, and Relamorelin, which is a drug that would be the first in a few decades, approved to empty food from the stomach. Allergan needs to take actions to show the investment community the depth of its pipeline in order to help restore the value of AGN as a standalone company. In terms of executing on the sales potential for the company, it already showed substantial progress in the fourth quarter of 2015, where it grew earnings by 95% when compared to the fourth quarter of 2014.
Over the long term, however, the company may have to look at even more acquisitions in order to expand its pipeline. These acquisitions could be accretive to shareholders and would make sense if AGN wanted to continue operating as its own company. Allergan will also need to focus on earnings growth out of its key product lines, and especially out of some of its new products like Vraylar, which according to its projections, has the potential to generate well over $1 billion in sales. Allergan will need to focus on quickly restoring the investor confidence while at the same time plotting a reasonable course for the future. This could involve seeing if Allergan can attract interest from any other large pharma companies.
Investors need to now shift their focus onto the value of Allergan as a stand-alone company rather than the inflated value of AGN as part of a merger. The company will have to focus on rapidly building up its pipeline of drugs and making sure to unlock value for investors. I would expect for Allergan to look at a couple of strategic acquisitions in order to expand its pipeline.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.