This commentary originally appeared on Real Money Pro at 10:00 a.m. on April 18. Click here to learn about this dynamic market information service for active traders.
There are many fascinating story lines in biotech and pharma as both sectors start to recover from deep bear market declines. Some of the more interesting ones involve Ireland-based drug giant Allergan (AGN). Earlier this month, on the third try, the Treasury Department successfully bypassed Congress to rewrite the rules to combat "tax inversion," an issue much in the headlines this election year. This finally made Pfizer(PFE) and Allergan realize they were playing against a stacked deck and call off their $150 billion merger.
The thwarted tie-up obviously put a large monkey wrench in Allergan's plans, but I also expect it to result in a plethora of smaller deals that could help perk up tepid M&A activity in these sectors. Allergan -- a holding in Action Alerts PLUS -- has already made a few smaller moves and I expect it to be very active once the $40 billion sale of its generic business to Teva Pharmaceutical (TEVA) is completed. Allergan should receive about $33 billion in cash and just south of $7 billion in Teva stock, greatly bolstering its balance sheet and allowing it to hunt for some smaller fish. The transaction will also likely boost its stock price once official approval is given, seeing how many deals regulators have foiled lately.
Meanwhile, Valeant Pharmaceuticals (VRX) has brought in investment bankers to look at strategic divestures the company could make to pay down its $30 billion debt load, and I would expect Allergan to take a close look at some those potential asset sales. Allergan could be particularly interested in some of Valeant's gastrointestinal product lines if they are put on the block.
One of these Valeant assets is the marketing and distribution rights to a compound called Relistor, which is a treatment for opioid-induced constipation and chronic non-cancer pain. The drug has shown solid initial growth. Earlier this month, the PDUFA (Prescription Drug User Fee Act) for the oral version of Relistor was pushed back 90 days mainly due to the Valeant "overhang." However, it is very likely to be approved in July and should do much larger sales than the injectable version of the compound already on the market. The two versions of the drug could eventually hit peak sales of more than $1 billion, making it a potentially good strategic pick-up.
Progenics Pharmaceuticals (PGNX) developed Relistor and receives a 15% royalty on sales and milestone payments. As Progenics has a market capitalization of just under $350 million, Allergan might be wise to acquire the rights to Relistor from Valeant and Progenics in one fell swoop.
Allergan was also rumored late last week to be interested in acquiring Synergy Pharmaceuticals (SGYP). Synergy has filed has an NDA (New Drug Application) for its compound Plecanatide for the treatment of chronic idiopathic constipation which is expected to be approved soon. The product will likely be aimed at the same market as Linzess, a drug it has demonstrated some superior attributes to in trials. Ironwood Pharmaceuticals' (IRWD) Linzess currently does $450 million in annual sales and Ironwood believes it can be a $1 billion drug by 2020. With an enterprise value of just over $400 million, Synergy would be a potential bite-sized purchase for Allergan.
Regardless of whether any of these transactions end up happening, Allergan provides good value following the substantial decline off the kyboshed deal with Pfizer. I recently added some shares and look forward to the completion of the generic drug business sale and seeing where Allergan deploys that "ammo."
