Put Allergan Inc. down as a big shopper this year, thanks to a full coffer of cash and a corporate credit score that could accommodate as much as $10 billion worth of deals.
“We’re always looking for something even better on the outside,” Chief Executive David Pyott said last week after the Irvine-based maker of Botox and other drugs released fourth-quarter financial results.
Pyott declined to name any potential targets during the company’s recent earnings call, but his recent comments and some industry chatter point to Allergan making a deal—or several—this year.
Pyott indicated that Allergan, which had a market value of nearly $35 billion last week, could boost its presence in neurology and urology—two fields where it has a moderate presence with more potential than actual product at this point. Botox has been approved for treating chronic migraine headaches and overactive bladders. Allergan also has a product awaiting approval to treat acute migraines under the Levadex brand name.
“A lot of the good analysts sort of started saying, ‘Tell me more about urology and neurology.’ … If you look at our history, that’s where we’ve been pleased and striving to add more things to the product range that we already carry,” Pyott said.
Some on Wall Street are betting on a different line of drugs for a possible Allergan deal.
David Maris of BMO Capital Markets wrote in a research report last month that two allergy drug makers—ALK-Abello A/S in Denmark, which has annual revenues of more than $400 million, and Stallergenes SA in France, with annual revenue of about $330 million—could be potential targets.
Allergan will be financially prepared for any such opportunities, Pyott said.
“Last year, we had a record $1.5 billion of free cash flow, and given all the prospects for the company, that’s only going to increase over time,” he said. “[And] given our relative lack of debt today, our cash flow, we could borrow a lot of money if we chose to—that’s the $10 billion number that I threw out” earlier.
The drug maker had $3 billion of cash and cash equivalents and $2.1 billion of long-term debt as of Dec. 31.
Any potential deal must fit with Allergan’s growth philosophy, according to Pyott.
“We’re very rigorous when it comes to company acquisitions,” he said. “Unless that company has the prospects of growing double-digit in our hands, all I would be doing is diluting the growth [through buying it].”
Pyott frequently stresses Allergan’s commitment to double-digit growth—and acts on it. An example: last year’s divestment of the Lap-Band weight-loss unit, which had seen several quarters of slowing sales.
“Clearly, with our strong internal growth, we would have no interest in buying—and I’ll exaggerate—a product or a company that were only growing 2% or 3%,” Pyott said on Allergan’s earnings call.
Another area of possible interest for Allergan is developing products under license agreements with other drug makers.
“Management commentary makes it clear that transactions will be geared to technology and growth,” analyst Seamus Fernandez of Boston-based Leerink Swann LLC said in a research note after Allergan issued its fourth-quarter results. “Given this framework, we see that a handful of companies/technologies may be of interest in aesthetics, glaucoma, neurology and/or urology.”
Any new technology licensing deals could look like Allergan’s 2012 agreement with Switzerland-based Molecular Partners AG to co-develop biologics for treating wet age-related macular degeneration, a major cause of blindness, Pyott said.
“We bring in technology,” he said. “The reason we can afford to do that [is] the R&D budget last year was just over $1 billion; it’ll go up to about $1.5 [billion] in five years. We have a lot of really new, exciting stuff internally.”
Some possibilities in Allergan’s pipeline include approvals for more uses of Botox—including premature ejaculation, which would fit under its urology business line.
Allergan will more likely pursue licensing deals “in fields where we’re already large” such as ophthalmology, medical aesthetics and dermatology, he added.
Pyott made his remarks while addressing Allergan’s fourth-quarter results.
Allergan posted a fourth-quarter profit, excluding nonrecurring items, of $406.9 million, up 21% from 2012’s fourth quarter and beating analyst estimates of $403.9 million.
Fourth-quarter revenue totaled $1.68 billion, 14% higher than the year-ago figure. Wall Street had expected $1.65 billion in revenue.
“Everybody could see that the business is accelerating,” Pyott said of Allergan’s performance.
Allergan said it could see a profit of $328.5 million to $337.5 million in the current quarter—much lower than consensus expectations of $364.7 million.
The drug maker forecast net product sales (which are slightly below total sales) of $1.525 billion to $1.6 billion, compared to analyst projections of $1.6 billion.
Pyott is typically conservative in outlooks on the company’s prospects. He said he wondered why Wall Street had high expectations for the current quarter, “because we’ve never done that the last 16 years I’ve been here—so I don’t know what they were thinking.”
