AGN - Allergan

[giofranchi]

Unlike most people I think the monopoly concern will be greater than the inversion concern for regulators. 

 

This is a risk of course…

PFE seems very interested in merging the two companies and PFE’s CEO had this to say in the Q4 2015 conference call:

Upon the close of the transaction, the combined company will be an influential player in the industry with a competitive product portfolio with several leadership positions, robust pipeline, compelling capital structure, and financial position, and aligned cultures that are based on ownership and entrepreneurial spirit creating shareholder value and meeting patients' needs. This combination is about investing in our business. It's about accelerating our existing strategy, while preserving our options as putting the company into an innovative business and an established business. If we determine that is the best way to unlock the most value for our shareholders.

I understand your point of view, and though I see a good upside if the merger goes through, I’ll keep AGN a relatively small position.

 

Cheers,

 

Gio

[giofranchi]

Pfizer Names Executive Leadership Team for Combined Organization Upon Close of Proposed Allergan Transaction

 

http://press.pfizer.com/press-release/pfizer-names-executive-leadership-team-combined-organization-upon-close-proposed-aller

 

Cheers,

 

Gio

[Graham Osborn]

Yeah, no question PFE wants to close as that converts them into a "growth" play too.  Everyone wants to play with the cool kid until he ends up in the principal's office.  It's the regulators and election rhetoric that I see as catalysts.  But you're right, there are risks to either side of the trade and I wouldn't go crazy on it.

[giofranchi]

It's the regulators and election rhetoric that I see as catalysts. 

 

Well, it seems you were right!

 

Cheers,

 

Gio

[ZenaidaMacroura]

http://www.cnbc.com/2016/04/05/pfizer-allergan-will-mutually-terminate-merger-over-inversion-rule-changes-sources-say.html

 

Pfizer-Gan into the cornfield?

[giofranchi]

I have sold my AGN shares, and bought PFE.

 

With relatively small positions in three very diversified healthcare conglomerates (ABT, JNJ, PFE) I hope I have built a relatively large position in an industry that will continue to be essential and profitable for the foreseeable future. Three blue chip stocks that pay good and safe dividends.

 

Now I now that AGN shares will soar of course…!

 

Cheers,

 

Gio

 

[Graham Osborn]

I'm still short Allergan and plan on being so for a while.  Here's a writeup I did with PTs for AGN/ TEVA pre and post deal.  Also for reference I included the original writeup on Valeant - the 2 are highly symmetric.

^AGN_TEVA_final.pdf

Valuing_Valeant.pdf

[giofranchi]

It is curious, I think, that Morningstar rates AGN as both a "Wide Moat" and a "Low Uncertainty" stock. Qualitatively putting AGN in the same league with let's say JNJ and PFE. But they also say AGN is cheaper than PFE and much cheaper than JNJ...

I have no position and won't open one.

 

Cheers,

 

Gio

[Graham Osborn]

It's amazing how the sell side analysts can look at these 2 companies - VRX and AGN - with all their parallels and yet see 2 totally different companies.  And it's even more amazing that investors can focus on one deal (VRX/ Zoetis or AGN/ TEVA) as the sole determinant of a stock's future price action, ignoring the broader boom-bust cycle which has held good for serial acquirers since time immemorial.  Well, maybe it's not so amazing for the sell side - with VRX no longer doing deals, I wouldn't be surprised if Brent Saunders is sleeping with a different investment bank every day of the week (pardon the turn of phrase).  My sense from my posts and articles on AGN is an attitude of profound diffidence among investors, regulators, and the lay public.  It is not so different from the attitude which prevailed with Valeant last August.

 

I do think the AGN/ TEVA deal will slow AGN's fall somewhat, but we must not forget that a serial acquirer is allergic to cash.  The company is already 10B in pro forma debt thanks to the buybacks, and whatever bolt-on deals they do will add to that.  In the meantime SSS figures will be pending.  The company is striking a dangerous balance between maintaining its growth multiple and maintaining its credit rating.  It cannot do both at its present size.

 

While I do not think completion of the AGN/ TEVA deal would be a big catalyst to the upside, I do think a blowup of the deal would be a significant catalyst to the downside.  There is no other generics business of Teva's scale.  Interestingly this also poses the greatest regulatory threat to the deal - the expected "synergies" that were referenced when the deal was announced back in 2015 came prior to the scrutiny of Valeant's pricing practices and Shkreli's hearing.  If you look through AGN's list of pending suits with Teva it is quite extensive.  As regulators review the 2 portfolios they will view each of these intersects as a post deal price increase.  Given the amount of debt Teva was willing to assume to accomplish this deal, it seems impossible to me that they were not planning to raise prices where the portfolios overlapped to help pay for the deal.

 

The other (larger problem) is the fate of the 22B Teva bond offering.  Has Teva initiated the offering, and if not, why?  It seems to me that to transfer the cash with bridge financing alone would be suicidal.  Who will be the buyers of these bonds?  Will the ratings agencies be complicit and let Teva maintain its IG rating through the offering?  It seems clear to me to me that the ability to complete the offering is the rate limiting factor for the deal if the regulators approve, yet this offering is taking place in some of the most volatile credit conditions we have seen in a long time.

 

The thing which is clearest in my mind - although also most irrelevant - is that the TEVA/ AGN deal is inherently wrong.  A serial acquirer shouldn't be allowed to divest its crappiest assets and its entire debt load.  There is something wrong here - how could the buyer be so stupid?  To answer my own question, I think Teva's management is to some degree complicit in the scheme - they have become like the investment banks in the subprime mortgage crisis.  Since they assume that borrowings can always be refinanced, debt capital can be treated - to first approximation - like equity capital.  As always, debt covenants seem to be forgotten until they suddenly become a problem - preventing refinancings.  At some point people are going to realize specialty-generic bonds are junk just like many of the subprime mortgage bonds issued in the mid 2000s, and then this whole M&A game is going to fizzle while the spreads explode.  I fully believe that Allergan ought to go down with its own ship rather than dragging the whole generics industry down with it.  If Valeant, Allergan, and Teva all fail, we could be in for a seismic shift in the cost and sourcing of generics in the US - a bit like the shift we've seen in energy suppliers.

[Graham Osborn]

It is curious, I think, that Morningstar rates AGN as both a "Wide Moat" and a "Low Uncertainty" stock. Qualitatively putting AGN in the same league with let's say JNJ and PFE. But they also say AGN is cheaper than PFE and much cheaper than JNJ...

I have no position and won't open one.

 

Cheers,

 

Gio

 

It doesn't surprise me.  Part of the reason VRX and AGN grew as large as they did was the pharma analysts were used to simple capital structures and took the operating numbers at face value.  I wonder how many of these guys have ever analyzed a bank.  Talking about AGN's "pipeline optionality" reminds me of Ian Malcolm discussing chaos theory as the tyrannosaur approaches.

[Haasje]

Allergan increased R&D as % of sales over the last 10 years, Valeant removed it whereever possible?

[Phaceliacapital]

http://carlicahn.com/statement-regarding-allergan/

 

Go Carl, go

[marcosc]

Anyone else get the feeling that Icahn just wants to show Ackman how to make money with a pharma roll-up?

[Deepdive]

Interesting that Allergan with Botox has not face as big of a no patent cliff as other pharmaceutical products have.

[Graham Osborn]

Anyone else get the feeling that Icahn just wants to show Ackman how to make money with a pharma roll-up?

 

I thought the same thing :)).  Gotta trust the growth pharma model:

 

1. Buy companies to grow revenue

2. Shift your SG&A to restructuring expense and your R&D to amortization

3. Create a surrogate metric called “adjusted EBITDA” or "cash earnings" and add back the above to earnings, and POOF..

4. an organically growing business with no approval risk and no scientific innovation!

5. design an absurd compensation package tied mostly to TSR, then jump from the roof with a golden parachute while stockholders and bondholders pick up the tab

 

I imagine Icahn would take less kindly to this treatment than Ackman however.

 

In this case we have the interesting scenario that the CEO is trying to pawn off the weakest component of the business along with years of accumulated debt on another company.  If he succeeds, the transaction will go down with other coups like Goldman/ AIG as one of the greatest corporate thefts in history.

[Graham Osborn]

Hi there, I am looking for some accounting help.  I am investigating whether Allergan has been using Anda Distribution to book revenues prematurely.  Does anyone know how one might be able to detect this when receivables aren't broken out for the operating segment?

[Guest Schwab711]

https://www.sec.gov/Archives/edgar/data/1578845/000000000017001061/filename1.pdf

 

Hopefully this is the beginning of the end of this non-GAAP crap.

[Graham Osborn]

SeekingAlpha has put up the Pro wall on my article so just reposting here.

A_Valeant_Effort__How_Allergan_Used_Acquisition_Accounting_To_Inflate_Sales_Growth_Boost_NOLs_And_Reinvent_The_Operating_Profitability_Of_Actavis_Generics_-_Allergan_plc_NYSE_AGN___Seeking_Alpha.pdf

[Gordon Gecko]

SeekingAlpha has put up the Pro wall on my article so just reposting here.

 

I'm trying to follow your logic (but it's tough because it's really long, stoccato, and there's not really a narrative beyond AGN has some funky non-gaap reporting), but it strikes me as though AGN should be rewarded for selling Generics to TEVA? They offloaded a garbage barge onto TEVA and took very limited equity from TEVA in exchange.

 

Unfortunately they've made some iffy buys subsequent (Tobira, maybe?), and Restasis was an obvious blow. Forget their non-gaap 'cash earnings' (it's nonsensical) but their cash generation ex-tax effects seems OK. While they exclude their licensing from R&D in adjusted earnings, this isn't news, and unlike VRX at least they ARE spending on R&D. In fact R&D, licensing and capex has been in excess of D&A. In pharma it's difficult to say what the ROI on that spend will be, it is inherently risky, but surely the fact that it's there puts this in a whole difference league than VRX.

 

I guess my question for you would be at what price should AGN trade today? Doesn't seem expensive, especially as expenses from the pharma side roll-off. 

[Liberty]

https://www.cnbc.com/2019/06/25/abbvie-is-nearing-a-deal-to-buy-allergan-for-more-than-60-billion-wsj.html

 

Allergan shareholders will receive 0.8660 AbbVie shares and $120.30 in cash for each share held, for a total consideration of $188.24 per Allergan share, a premium of 45% to the stock’s Monday close.

[Haasje]

Allergan shareholders get 0.8660x combined company + $120 cash (SA is off a bit)