Allergan (NYSE:AGN) CEO Brent Saunders showed up on TV yesterday, selling mega-fan Jim Cramer on the idea that the government decision to kill his merger with Pfizer (NYSE:PFE) was "un-American," but that he had a contingency plan in place that is fabulous.
It worked. The stock, which lost 16% of its value after the regulations came out, and was falling further in overnight trading, bounced back sharply in Wednesday trading, gaining 3.2% to $244/share before 11 AM.
While Saunders was greeted rapturously, blaming the corporate tax rate for both Allergan's formal move from New Jersey and the Pfizer deal, my spidey sense started tingling. Cramer was dangling various acquisition targets in front of Saunders, noting the abundant cash that will soon appear on Allergan's balance sheet, and Saunders was coyly implying how some might be of interest. As Abba's Aces summed it up, The Allergan Acquisition Game is About to Start Again.
Allergan has been built in less than a decade from a company called Watson Pharmaceuticals into a giant with $15 billion in sales and major positions in seven industry niches. Saunders describes the company as a "growth pharma" business, with an emphasis on double-digit top-line growth.
So what is the difference between Allergan and Valeant (NYSE:VRX)? Both companies are built on acquisitions. Both use foreign domiciles to cut taxes, raise cash, and do more acquisitions.
One difference is that Allergan is not focused on generics. It is selling that part of the company to Teva Pharmaceuticals (NYSE:TEVA), and the cash from that deal is supposed to fuel its new ambitions.
But doesn't Allergan promise to keep a handle on expenses at the companies it buys? Doesn't Allergan seek the most aggressive pricing possible for the compounds it sells? Doesn't Allergan do a lot of direct to consumer ads on TV, selling beauty with Botox , migraine cures and prescription eyelash boosters? Aren't many of its compounds optional for patients, rather than necessary cures for dread diseases, where doctors are making the decisions?
Allergan is a growth engine that must be fed. How else do you justify its Price/Earnings multiple of 24.5, even after the fall that brought Saunders to the TV studio? He could get there easily because, in fact, Allergan isn't really an Irish company at all, as he noted during the interview, calling himself "an American patriot." Brent Saunders is based in New Jersey.
As of this writing, Allergan has made up nearly half the loss it suffered when reports of its deal with Pfizer dying came out, overnight Tuesday. It is poised for another buying spree, poised to take out more companies, using marketing and financial engineering to fuel the growth engine. The hedge funds that have bought into its story, like Paulsen & Co., Viking Global, Third Point and Pentwater Capital, must be breathing a sigh of relief.
But there is a rule about roll-ups. When the music stops, it ends in tears. So, I ask again, is Allergan just a high-class Valeant?
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.