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Allergan: The M&A Machine

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Finding growth, repositioning the business and being nimble in the dynamic pharma environment

The pharmaceutical industry over the last five years has seen unprecedented M&A activity. In the past four quarters alone (Q4 2014-Q3 2015), there has been over $350bn total deal transaction and over 120 transactions in volume in the industry. It is an industry where business strategy appears to stay the same despite the acquisitions and divestitures that have been made in certain geographies and segments. Allergan (f/k/a Actavis and pending name change to Pfizer) was founded in 1983 and develops, manufactures, and distributes generic, branded, biosimilar, and over-the-counter (OTC) pharmaceutical products. The company has completed some of the largest M&A transactions, with many occurring in the last 3-5 years. Its business strategy of growth and pipeline development through M&A has been successfully supported by their operational changes, and shareholders have rewarded them handsomely for the successful execution.

Stock Price

Business Strategy

Allergan is one of the largest pharmaceuticals companies with revenue of $20bn and a market value of $125bn. What used to work for large pharmaceutical companies in terms of aligning their business and operations model with large R&D budgets and the race to discover the next Viagra or Lipitor is no longer viable and competitive. “It’s almost impossible to discover a drug and take it through clinical trials on your own – at the very least, you need to partner.” Allergan’s business strategy, and many other pharmaceutical companies, is to be a commercialization and marketing platform fueled by acquisitions for growth.

A Competitive Advantage – M&A Supporting Business Strategy Changes

Source: Wikipedia
Source: Wikipedia

To give a brief overview of the key M&A deals:

  • October 2012: Watson acquires Actavis for $6.0bn, creating the 3rd largest generics manufacturer
  • October 2013: Actavis acquires Warner Chilcott for $8.7bn, creating the 3rd largest specialty drug manufacturer; Actavis remains primarily generic
  • July 2014: Actavis acquires Forest Laboratories for $26.5bn, which deals primarily with branded specialty drugs
  • March 2015: Actavis acquires Allergan for $73bn; changes name to Allergan and adds significantly to branded portfolio
  • July 2015: Allergan announces divestiture of generics business to Teva for $40.5bn, which represents ~30% of the entire business and reduces plants from 40 to 12

Within the last three years, Allergan has transitioned its entire business model from a generic pharmaceutical company to a branded pharmaceutical company merely by acquiring and divesting other companies. It was a business decision made in order to reposition the company, and the operational focus of successfully and rapidly integrating acquisitions allowed Allergan to be nimble in a rapidly changing environment.

Structural Reorganization for Ease of M&A

Acquisitions have also led the company to restructure its operating segments to better align with the additional businesses, most recently between the Forest and Allergan acquisitions. This provides clearer alignment of divisions across the parent company and acquired company in order to facilitate integrations. It also helps with the divestiture of certain segments of the business going forward. As an example, the divesture of the generics business to Teva was clearer to investors given the existing generics segment.

Allocating Investments Away from Traditional R&D and the Tax Story

In lieu of traditional R&D for growth and pipeline development, Allergan and its various acquired companies have redirected significant capital to acquisitions. Allergan has averaged 7-8% of revenue to R&D expenses over the last 10 years, a cumulative total of ~$3.3bn. In contrast, it has spent over $115bn in acquisitions over the same time period, not inclusive of the Pfizer acquisition that was just announced worth $191bn. Although Allergan would be acquiring certain R&D capabilities, the biggest drivers of value in the acquisitions and rationale from senior management are operational efficiencies and lower tax rates. By being domiciled in Ireland, Allergan pays 16% in taxes (~$400mm in savings at the time of the Actavis/Allergan merger). The positive impact goes both ways: the business strategy of M&A is supported by the operational decision to direct more capital there and the operation strategy benefits through M&A because the tax savings create a better cost structure.

Going Forward

Though projecting further into the future, one wonders if this is ultimately a sustainable business strategy that will be defensible once the industry has significantly consolidated and capital is not as readily available or cheap. However, Allergan has done an impressive job executing the operations behind the scenes and convinced shareholders of the value creation.

 

Sources:

  • S&P Capital IQ
  • Company filings, press releases and investor presentations
  • 10-K
  • http://www.pwc.com/us/en/health-industries/pharma-life-sciences/publications/assets/pwc-pharma-deals-insights-q3-2015.pdf
  • http://www.financierworldwide.com/actavis-agrees-to-acquire-allergan-in-66bn-mega-deal/#.VmecmPmrTWI
  • http://www.ibtimes.com/pfizer-pfe-allergan-plc-agn-merger-why-are-pharmaceutical-companies-so-eager-make-2162555

2 thoughts on “Allergan: The M&A Machine

  1. Great to read an example of a company that successfully managed to adapt its operational strategy following a shift in business strategy. Good find!

    Here some questions to better understand how Allergan managed to make this successful shift.

    – From the consumer (patient) perspective, Allergan’s value proposition remains unchanged; Allergan creates value by bringing new, innovative drugs to market. However, the move from internal to external R&D might have impacted the extent to which Allergan can capture this created value. The surge in Allergan’s stock price hints to an increased ability to capture value – but I would like to better understand the economics behind this!
    – You mention that Allergan implemented a structural reorganization to promote alignment and facilitate integration between internal and acquired divisions. A key business risk for Allergan lies exactly in this integration piece, and I am very curious to better understand how they are going about it for core functions like R&D. In the latter, I expect some hostility between the ‘old’ and ‘new’ R&D teams, since the latter are – in a way – brought in to fill the pipeline of drugs that the former failed to sufficiently generate. Furthermore, in Wyeth pharmaceuticals we saw the significant value coming from cross-team collaboration within the R&D department and I would be curious to see how Allergan creates that culture in such a, potentially, hostile environment.
    – Just like you, I am very curious to see what will happen once there are no more pharma or biotech targets for sale. Inherently, the large upfront capital investments required for pharma/biotech start-ups and the significant uncertainty that comes with the regulatory approval process, don’t make the industry very attractive for entrepreneurial efforts. My guess is that the large firms need to take on more of the entrepreneurial risk by investing in earlier stage start-ups, and as such act more like VC firms. I am interested to see if Allergan has to get ready for yet another shift in business and operational strategy!

  2. Very well written and very compelling. A few thoughts on your post:

    – It appears that Allergen primarily focuses on the growth by acquisition with little thought of producing products through its own R&D. With acquisitions at a red hot pace, what is the future of Allergen/Pfizer when there are no large acquisitions to be had? Can they sustain the same level of growth by purchasing each year large quantities of small pharmaceutical companies that have 1-2 promising drugs which the small company has bet the farm on? Or will the growth start to plateau as these targets become either too rare or too expensive as Allergen concurrently does not have a significant pipeline of potential drugs?
    – Is this position defensible if the United States and other first world economies pass legislation or regulations penalizing companies that do a vast majority of their business in the United States but are headquartered in an economic safe haven? How would the operational and the business models need to change to adapt to this threat?
    – How does Allergen so successfully combine the merged businesses? M&A is an inherently difficult and messy process with failures littered across the competitive horizon. Would it make more sense to qualify Allergen’s primary competitive competency as a company that excels not as a pharma company but as an organization that has mastered the M&A process? From your write-up, I would be interested to learn more about how they do so well combining companies and whether their acquired companies are largely shaved of their HR expenditures in favor of keeping the intellectual property. Do they fold the new IP into their current production capabilities and shutter the purchased company’s plants, decreasing the expenses of merging? Or do they keep the full company largely in tact with only redundancies removed? Great post!

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