Allergan Acquisition Spree? Some Potential Big Targets

The aftermath of the Allergan divestiture and acquisition event is currently being digested by Wall Street, because the repercussions are likely to be larger than just the single day news. The move by Allergan is a transformative shift and an RBC Capital Markets research note looks at what could become a major trend. What could surprise institutional investors, the analysis notes, is the size of the acquisition spree.

RBC: “Investors legitimately believe that the Allergan deal… is a sign that it is theoretically possible that large-cap biotech companies” are now in play

What was interesting about the July 28 note was that the scope of the dots that are now being publically connected.  Allergan could not only acquire smaller niche firms, as was the case in the Naurex deal. RBC analyst Michael Lee thinks the real meaning, the scope could be a game changer for larger firms biotech firms. “Based on our numerous conversations with investors it is increasingly evident that some investors legitimately believe that the Allergan deal and commentary on doing transformative branded deals is a sign that it is theoretically possible that large-cap biotech companies — namely Amgen, Inc. (NASDAQ:AMGN),” he wrote.

Amgen is up 4.3 percent today on the tailwind from an Allergan acquisition. Other names being bandied about by RBC include Biogen, whose stock is up 2.64 percent today, as well as Celgene, up 2.52 percent, and Gilead Sciences, whose stock is up 2.13 percent Tuesday afternoon.

ValueWalk Readers were not surprised by the scope of the Allergan deal

On July 22 ValueWalk reported on a meeting that pointed to a more aggressive force in the biopharmaceutical space. Allergan was reported to be building an acquisition machine the likes of which institutional investors and Hedge Funds may not yet comprehend, we wrote at the time.  Allergan and its bold ambitions to become the dominant category leader were benchmarked in a then secret meeting that revealed how a prototype for a next-generation acquisition model was being built. The strategy popular among institutional investors is that once a firm achieves category dominance they achieve pricing power while having greater flexibility to reduce operating expenses, a corporate tactic that hedge fund managers tend to applaud, as is the case in Micron Technologies and other category leaders. We wrote then:

In the wake of Allergan’s recent $2.1 billion acquisition of Kythera Biopharmaceuticals, and in the process of digesting integration into Actavis plc (NYSE:ACT) and a much smaller Oculeve, Allergan appears it is establishing a template for integration of future acquisitions and is likely to become more aggressive.  A recent confidential meeting that took place was said to have outlined how new acquisitions would integrate into the Allergan sales cycle. The meeting pointed to a potential for future roll-ups on the near-term horizon, according to attendees of the conference and confirmed by a source with direct knowledge of the matter.

Today’s research note from RBC, the Allergan deal may now stretch into some of the largest biotech firms in the U.S. “Based on investor conversations,” the RBC report said that people would be “shocked” if Amgen was caught up in the acquisition parade, but that anything is possible on paper. RBC thinks investors are not ready for the biotech roll-up to begin:

Based on investor conversations, we conclude that: 1) it would be a shock if AMGN was acquired by a spec pharma player (many fund managers just couldn’t envision this happening), 2) but rationale and logistics are theoretically possible on paper, 3) there is already a biosimilar joint venture with AMGN and Watson and AMGN has guided to bringing 9 to market starting in 2017+ that could lead to $3B+ in revenues in time, 4) there is a view that AMGN’s business could be more durable than consensus thinks, particularly if PCSK9 becomes a huge drug, 5) their late stage pipeline of osteoporosis, migraine, etc are much lower risk than those of peers such as BIIB and CELG, 6) AMGN should be in a roughly net-positive cash position by year-end (under-levered).

RBC probability analysis regarding a very large takeover target

Given all this M&A talk, RBC likes the $1.27 billion biopharmaceutical leading Amgen on a fundamental basis with “the off-chance of theoretical M&A” being the upside call option in the investment. RBC makes the fundamental call based on a future prediction, saying that the Thousand Oaks, CA based firm is going to beat second quarter earnings per share estimates and guide higher this year, perhaps as high as $10 per share.

In analyzing Gilead Sciences as a potential takeover target, RBC thinks they are too much of a roll-up firm themselves and then looks to Vertex Pharmaceuticals, up 2.63 percent today. But investors might just have to dream the impossible dream on this takeover as RBC points out the leverage just doesn’t work. Previously ValueWalk had discussed potential for Nora Therapeutics and Akorn Inc. to be more digestible acquisitions as next Allergan steps. If RBC is correct, Allergan might have bigger aspirations in mind.

Ready, set go! The takeover mania brought about by Allergan’s emergence as a roll-up firm has just begun.