How Has Allergan Used The $36B Received From Teva For The Disposal Of The Generic Business?

| About: Allergan plc (AGN)
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Summary

Allergan has been among the worst-performing stocks of the S&P 500 in 2016.

One key concern behind investors' skepticism in the stock has been the use of the cash received from Teva for the disposal of the generic business. But I disagree with this concern.

I believe the market has undervalued the depth of the early-stage pipeline Allergan has acquired.

Allergan (NYSE:AGN) has been among the worst-performing stocks of the S&P 500 in 2016, and one key concern behind investors' skepticism in the stock has been the use of the cash received by Teva for the disposal of the generic business. As a reminder, the transaction was valued $40.5B, with Allergan receiving around $36B after tax.

Allergan has spent around $30B of this cash received from Teva for the following operations:

  • $15B for share buyback, of which $5B have been completed before the Q3/2016 results, $8B has been completed in November with an ASR (Accelerated Share Repurchase) and the residual $2B will be completed in 2017.
  • Around $10B for debt pay-down, with Net Debt/EBITDA going from around 5x at end of 2016 to an estimated level of below 3x at end of 2016.
  • Around $2B for early-stage pipeline M&A.
  • Around $3B for bolt-on immediately accretive M&A.

Acquisitions

I have tried to report the major acquisitions announced by Allergan in 2016, with the indication of the upfront payment/milestones and the lead assets acquired, with also some comments on the peak sales potential and the likely probability of success for the key drugs acquired, according the information published by Allergan.

January 7, 2016: Allergan announced the acquisition of Anterios, for an upfront payment of $90 million plus potential development and commercialization milestone payments.

Anterios' lead asset is a platform, called NDS, which should allow the delivery of neurotoxins through the skin without the need for injections.

Given the lack of clinical data published so far on this platform, I think it would make sense to not ascribe any significant value to this asset.

April 6, 2016: Allergan announced the acquisition of Heptares for an upfront payment of $125 million plus potential development and commercialization milestone payments up to $665 million related to the clinical development and up to $2.5B related to sales performance.

Heptares' lead assets are called M1, M4 and M1/M4 agonists and they are currently in Phase 1 mainly for Alzheimer's disease. The opportunity could be huge, likely $2/3B, but given limited clinical data available I assign a probability of success <5%.

April 21, 2016: Allergan announced the acquisition of TopokineTherapeutics for an upfront payment of $85 million plus potential milestones.

Topokine's lead assets is XAF5, a first-in-class topical agent in late-stage development for the treatment of steatoblepharon. The opportunity is small, likely $200/300M, but after the successful Phase 2 study (XOPH5-OINT-2) the program seems relatively de-risked.

August 2, 2016: Allergan announced to have sold to Teva Pharmaceutical its distribution business, Anda, for $500 million.

August 11, 2016: Allergan announced the acquisition of ForSight VISION5 for an upfront payment of $95 million plus potential milestones.

ForSight VISION5's lead assets is a peri-ocular ring in development for the treatment of the glaucoma. The opportunity is small, likely $100/200M, but after the successful Phase 2 study announced in 2015 the program seems relatively de-risked.

September 6, 2016: Allergan announced the acquisition of RetroSense Therapeutics LLC for an upfront payment of $60 million plus potential milestones.

Retrosense's lead assets is RST-001, a novel gene therapy for the potential treatment of Retinitis Pigmentosa. The opportunity could be huge, likely $2/3B if the technology will be successful outside Retinitis Pigmentosa, but given limited clinical data available I assign a probability of success <5%.

September 14, 2016: Allergan announced the acquisition of Vitae Pharmaceuticals for an upfront payment of $639 million plus potential milestones.

Vitae has 2 assets in the pipeline:

1) VTP-43742, a Phase 2 first-in-class, orally active RORγt (retinoic acid receptor-related orphan receptor gamma) inhibitor for the potential treatment of psoriasis.

2) VTP-38543, a topical LXRβ (Liver X Receptor beta) selective agonist for the potential treatment of atopic dermatitis.

VTP-38543 has failed in the Phase 2 trial in November 2016 in Atopic Dermatitis, while VTP-43742 will have P2b data in psoriasis in late 2017. The opportunity could be huge, for example Novartis is generating $1B with Cosentyx in psoriasis after two years from the launch. The key for this drug to work will be to show in the P2b data in 2017 the same efficacy of P2a trial, without any signal of liver toxicity.

September 20, 2016: Allergan announced the acquisition of Tobira Therapeutics for an upfront payment of $28.35 per share, in cash, and up to $49.84 per share in Contingent Value Rights for a total potential consideration of up to $1.695 billion. Allergan announced also the acquisition of Akarna for an up-front payment of $50 million plus potential additional milestones.

With these acquisitions, Allergan have improved their Gastroenterology pipeline with 3 compounds for the treatment of NASH: 1) Cenicriviroc 2) Evogliptin 3)AKN-083.

The opportunity in NASH could be huge because currently there isn't any treatment on the market in this therapeutic indication, but it's also an area where there could be a lot of competition in the future with many players that are investing in new potential treatments, as Intercept, Gilead, Genfit, Shire etc.

The most advanced compound for Allergan is Cenicriviroc, but Phase 2 study reported in 2016 from Tobira have missed on both the primary endpoint and some important secondary endpoint. The only Phase 2 secondary endpoint that looked favorable was the "Improvement in Fibrosis Stage and No Worsening of Nash" and Allergan has advanced the compound in Phase 3 after positive interaction with the FDA.

I think the opportunity could be huge, likely $3/4B, but given the clinical profile showed so far I have assigned a probability of success of 10%.

November 22, 2016: Allergan announced the acquisition of Chase Pharmaceuticals Corporation for an upfront payment of $125 million plus potential milestones.

Chase's lead assets is CPC-201, for the treatment of Alzheimer's disease (AD), a combination of 2 generics, of which the Aricept dose being tested is not approved. The opportunity could be around $1B, but given the limited clinical data available I assign a probability of success <5%.

December 20, 2016: Allergan announced the acquisition of LifeCell for $2.9 billion in cash, an aesthetics company with revenue of $450mn and expertise in the Regenerative Medicine Field.

This acquisition is different from the previous one because it's not related to improve the long term pipeline of the company, but it's a bolt-on M&A transaction that will be immediately accretive on 2017 EPS.

Conclusion

I strongly believe that the use of the cash received from Teva by Allergan's management has been great, with a right balancing between investing in the long term pipeline opportunities and returning cash to shareholders with the buyback.

Allergan has acquired several compounds with huge potential (especially Chase, Tobira and Vitae assets) plus a series of compounds that are nice add-on to the existing franchise (e.g. ForSight VISION5 and Topokine Therapeutics) and, in the meantime, it has strengthened their aesthetics franchise with the acquisition of LifeCell that is a perfect fit for their expertise in this field. If just 2 or 3 compounds acquired by Allergan with these acquisitions will work, the whole investment would have paid off.

I believe the market has undervalued the depth of the early stage pipeline acquired by Allergan with these acquisitions and I strongly believe that during 2017, with solid management execution and better pipeline appreciation, Allergan can close the valuation gap with peers and strongly outperform.

Disclosure: I am/we are long AGN.

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.

Additional disclosure: Not investment advice. I am not an investment adviser.