Allergan Sharpens Focus on Strategic Acquisitions

To acquire Tobira Therapeutics for about $1.7 billion to develop NASH therapies

a1Irish drugmaker Allergan Inc. (NYSE: AGN), which made headlines for its collapsed $160-billion merger bid with drug behemoth Pfizer Inc. (NYSE: PFE) in April 2016, is on an acquisition spree to buy companies with drug therapies that address significant unmet medical needs. As part of these plans, Allergan announced on September 20th, 2016, that it would pay up to $1.7 billion for Tobira Therapeutics Inc. (NASDAQ: TBRA) to get a leg up in the race to develop therapies for non-alcoholic steatohepatitis (NASH), an incurable fatty liver disease closely linked to obesity. The deal assumes significance since there are no current approved treatments for NASH, which affects more than 15 million Americans. NASH involves the accumulation of fat in the liver that is not caused by alcohol; it can lead to cirrhosis, liver transplants or liver cancer.

a2Allergan’s offer of $28.35 upfront per Tobira share is a whopping 500% premium to the stock’s close on Monday, September 19th, 2016, which gives Tobira a market capitalization of about $89 million. Tobira’s shareholders could receive up to $49.84 per share, subject to the company achieving certain milestones. Tobira’s stock surged 720% to $38.91 on September 20th, 2016, after the announcement.

Tobira shares have witnessed a lot of volatility since July 25th, 2016, when they plunged 60% to $4.50 after the company’s lead product, cenicriviroc, failed to achieve its target in a mid-stage trial of showing a two-point reduction on a scale that measures features of NASH. However, cenicriviroc achieved a secondary goal by reducing the extent of fibrosis, a scarring of the liver that can lead to cirrhosis, without worsening of NASH. Tobira said the drug has potential to be approved if the favorable secondary findings can be duplicated in a late-stage study. Cenicriviroc and related therapies have the potential to reach annual sales of $5 billion.

While Covington & Burling were Allergan’s lead legal counsel, Centerview Partners and Citi were Tobira’s financial advisers, while Skadden, Arps, Slate, Meagher & Flom LLP and Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP were its legal counsel.

Allergan steps up pace of acquisitions

Allergan’s CEO Brent Saunders has been scoring several deals for the company to get a breakthrough for the treatment of NASH, which could emerge as a focus area for Allergan in the near future. The second deal that Allergan announced on the same day was for Akarna Therapeutics Ltd, a privately held company that is planning early-stage studies of a treatment for NASH. a3Allergan would pay $50 million upfront and make future milestone payments to Akarna for potential drug candidates relating to NASH.

Despite its failed merger with Pfizer, Allergan has sharpened its focus on strategic opportunities while stepping up the pace of acquisitions in high-growth areas. The Pfizer deal had raised the U.S. tax collectors’ eyebrows as they felt that Pfizer had planned the merger in a bid to cut its tax liability. In the US, corporate attracts a tax liability of 35%, while in the UK corporate tax stands at 20%. On August 11th, 2016, Allergan announced the acquisition of drug-eluting ophthalmological implant maker ForSight Vision5 for $95 million. In early September 2016, Allergan announced that it would pay $639 million for Vitae Pharmaceuticals Inc. (NASDAQ: VTAE), which is developing drugs for psoriasis, eczema and autoimmune disorders. On September 6th, 2016, Allergan agreed to pay $60 million for RetroSense, a privately held company developing an ophthalmology gene therapy.

Q2 FY16 financial highlights

a4Allergan delivered strong operational performance, with Q2 FY16 net revenues growing 2% Y-o-Y to $3.7 billion, powered by robust performance from key brands, including BOTOX, RESTASIS, LINZESS, JUVEDERM and LO LOESTRIN. Allergan’s R&D team have delivered 13 major U.S. and international approvals, including BYVALSON and NAMZARIC, and completed 9 major regulatory submissions, including XEN for glaucoma and True Tear for dry eye to the Food and Drug Administration (FDA), so far in 2016. However, the topline was impacted by the loss of exclusivity on Namenda IR.

On August 2nd, 2016, Allergan completed the divestiture of its Global Generics business, and on August 3rd, 2016, announced the proposed divestiture of its abbreviated new drug applications (ANDA) distribution business to Teva Pharmaceutical Industries Ltd. (NYSE: TEVA). These steps have positioned Allergan as a pure branded business that is able to maximize the power of its therapeutic areas and its pipeline of 65+ mid-to-late stage development programs.

For Q2 FY16, GAAP operating loss from continuing operations widened to $488 million from a loss of $476 million in the year-ago period. Non-GAAP operating income from continuing operations during the reporting quarter was $1.86 billion. Adjusted EBITDA from continuing operations was $1.94 billion in Q2 FY16 compared to $2.08 billion in Q2 FY15, mainly due to the loss of exclusivity on NAMENDA IR. Cash flow from operations for Q2 FY16 was $1.4 billion.

Rush for NASH

Many other drug majors are also focusing on developing therapies for NASH in order to gain the first mover advantage. Experimental NASH drugs being developed by Gilead Sciences Inc. (NASDAQ: GILD) have similar sales potential and that treatments being studied by Intercept Pharmaceuticals Inc. (NASDAQ: ICPT) and others also have blockbuster sales potential. Other major contenders in the race to develop a drug to treat NASH include Conatus Pharmaceuticals Inc. (NASDAQ: CNAT) and Galectin Therapeutics Inc. (NASDAQ: GALT). Currently, liver biopsies are required to confirm NASH, but less-invasive diagnostic tests should be available by the time the first NASH treatments reach the market, or soon after.

Stock Performance

a5Allergan’s stock ended the day at $243.94, up 0.21%, at the close on Friday, September 23rd, 2016, having vacillated between an intraday high of $246.50 and a low of $242.49 during the session. The stock’s trading volume was at 2,686,445 for the day. The Company’s market cap was at $96.59 billion as of Friday’s close.

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