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Allergan pays steep premium for migraine specialist

by Jonathan Marino  |  Published January 23, 2013 at 4:20 PM
Allergan Inc.'s 2011 partnership with migraine therapy specialist MAP Pharmaceuticals Inc. has spawned a nearly $1 billion transaction that had analysts bristling Wednesday, Jan. 24, because of its high premium.

Irvine, Calif.-based Allergan has agreed to pay $25 per share in cash for the rights to MAP, an offer than values MAP's equity at $958 million. The bid represents a hefty 60% premium to MAP's $15.58 per share closing price on Tuesday. The stock soared to $24.72 per share early Wednesday.

The deal will be dilutive to Allergan's 2013 earnings per share by about 7 cents and accretive to earnings per share by the second half of 2014.

Both boards have approved the transaction, which Allergan will complete through a cash tender offer followed by a second-step merger. In other words, a majority of MAP shares have to vote for the merger and then there will be a squeeze-out of its remaining shareholders, who will be given fair value for their shares. Roughly 9% of shareholders -- largely consisting of MAP directors and entities the directors are affiliated with -- have already signed on, Allergan said.

Allergan will finance the buyout with cash on hand, cash equivalents and short-term borrowings under its commercial program. The deal doesn't have a financing contingency. Allergan expects to close the transaction late in the first quarter or during the second quarter.

Mountain View, Calif.-based MAP's lead drug is Levadex, an inhalable version of a dihydroergotamine, a drug for migraines that is available intravenously in hospitals. Allergan's aim in acquiring MAP is to expand its position as a migraine specialist and offer patients a treatment they can administer themselves.

Allergan has made a concerted effort over the past few years to roll out Botox -- famously known as a cosmetic treatment -- in different indications, one of them being chronic migraines. Chairman and CEO David Pyott noted in a statement that Allergan has won approval for Botox in that indication in 56 countries and plans to use Levadex as an acute treatment for migraine that complements Botox.

On a conference call with analysts Wednesday, Pyott said that Allergan is boosting its strength in an area where there is very little branded competition. Most of the large pharmaceutical companies have withdrawn from the market due to patent expirations, he said.

"In a strange way, we're now the big dog in this space," he added, predicting roughly $500 million in peak sales for Levadex.

Even so, however, Allergan is not only betting on an unproven commodity, but one that it already has partial rights to. The Food and Drug Administration still hasn't approved Levadex after a delay pushed back its approval by a significant period of time. Analysts thus questioned the timing of the transaction on Wednesday's call.

"We've been in contact with MAP now for a very long time and obviously had the benefit of seeing the successful ramp up for Botox in migraines," Pyott explained. "Sometimes it's just best to move when all the stars and planets come to alignment."

MAP submitted a new drug application, or NDA, for Levadex with the FDA in May 2011, but the drug's launch was put on hold when the agency requested more information on the company's manufacturing processes, among other things, in March. Though the product's development was delayed, MAP resubmitted its NDA in October. The FDA will make a decision on the drug by April 15, meaning the potential for a delay still exists.

"This is just normal with any program that exists, whether it's our own internal program or [an] external [one]," Pyott responded. "In this instance, we have been a partner of MAP from the very beginning and we've worked hand in glove with them, so we're very well-informed. But, of course, nothing's done until it's done."

In addition, Allergan was already set to share the profits to the drug with MAP through a collaboration deal the two signed in January 2011. Under the deal, Allergan agreed to co-promote Levadex -- contingent upon the drug winning approval from regulators in the U.S. and Canada -- to neurologists and pain specialists. MAP received $60 million up front and was promised another $97 million in future payments.

By acquiring MAP, Allergan brings the economics of the drug under one roof, much in the way GlaxoSmithKline plc did with lupus drug Benlysta when it paid $2.6 billion for development partner Human Genome Sciences Inc. in June.

Pyott received more than one question concerning the price tag on the conference call. Goldman, Sachs & Co. analyst Jami Rubin wondered, for example, if the high premium paid indicated a competitive auction for MAP.

"I think I'd rather just say that this is the price we agreed on with MAP, and I dare say, in due course, other filings will be made," Pyott responded.

He later added, however, that Allergan sees "extremely strong synergies" in terms of sales instead of cost-cutting. There's also net operating loss carryforwards that come in the deal.

"There is almost a perfect overlap of [physician] co-point," Pyott said, referencing the idea that Allergan can market Levadex to the same doctors it pitches on the virtues of Botox for migraines. "Adding Levadex greatly improves the economics of that operation."

Botox is now approved in eight indications, among them head and neck pain associated with cervical dystonia and muscle stiffness related to upper-limb spasticity. On Jan. 18, it was also sanctioned by the FDA as a treatment for overactive bladder. Allergan will release its 2012 earnings on Feb. 5, but has estimated that Botox would bring in as much as $1.8 billion in sales over the course of the year. Botox had $1.59 billion in sales in 2011, according to regulatory filings.

Allergan posted $938 million in net income on $5.42 billion in revenue in 2011.

Allergan turned to a Gibson, Dunn & Crutcher LLP team led by Terrence Allen, Greg Davidson, David Lee and Christopher Bors for legal counsel.

Allergan's financial advisors on the deal were Jim Katzman, Chuck Adams and Qumars Montazeri of Goldman Sachs.

Patrick Pohlen, Luke Bergstrom, Grace Chen and Joshua Holian led a team at Latham & Watkins LLP that provided MAP with legal counsel, while Alan Hartman and Mark Robinson of Centerview Partners LLC provided it with financial advice and a fairness opinion.

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Tags: Allergan Inc. | Botox | Centerview Partners LLC | David Pyott | FDA | Food and Drug Administration | Gibson Dunn & Crutcher LLP | Goldman Sachs & Co. | Latham & Watkins LLP | Levadex | MAP Pharmaceuticals Inc. | NDA

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