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As GlaxoSmithKline (NYSE:GSK) decides to streamline its business through a restructuring program, industry sources told dealReporter they believe the company could be pursuing takeout overtures for specialty pharma and medical device company, Allergan (NYSE:AGN).
A GSK spokesperson said ophthalmology is an area that the company has recently moved into in early R&D – a development that has sparked M&A interest among the investment banking community. In February, GSK and University College London’s Institute of Ophthalmology entered into a three year strategic collaboration to investigate new compounds to treat potentially sight-threatening disorders.
Even though the GSK spokesperson would not comment specifically on possible business deals, she said the company’s strategy focuses on bolt-on acquisitions that complement its current business and strengths.
In the 4Q, GSK reported cash and cash equivalents at GBP 5.6bn (USD 8.2bn), while net debt at year-end increased significantly to GBP 10bn (USD 14.6bn). The spokesperson pointed out that net debt increased by GBP 4.1bn (USD 6bn) primarily due to share repurchases, further acquisition of businesses and a significant strengthening of the foreign currencies in which group debt is denominated, partly offset by increased cash inflows from operating activities.
A first source familiar with GSK’s strategy said there is evidence that the company is willing to consider other indications and perhaps slightly outside its core areas of therapeutics focus. The source noted that GSK is evaluating external opportunities more rigorously, and said Allergan is ”one good example of where they are focusing.”
It is understood that Allergan turned down a USD 72/share offer from GSK late last year. Allergan’s share price closed at USD 43.17 on 23 March.
According to a Standard & Poor’s report dated 21 March, Allergan’s eye care drugs in 2008 accounted for 46.3 percent of sales from its continuing operations. Its Botox/neuromodulators comprised 30.2 percent, while skin care treatments 2.6 percent, urologics 1.6 percent, breast implants 7.1 percent, devices for obesity treatment 6.8 percent, and dermal fillers 5.3 percent.
One of the major concerns is the looming 2H 2009 US launch of Reloxin, the first US competitor to Botox, developed by Medicis (NYSE:MRX), which could see pricing threats. An Allergan spokesperson pointed out her concerns that there is going to be certain risks of misinformation and misunderstanding about interchangeability of botulinum toxicities.
”Botulinum toxic therapies are biologics, they are non-interchangeable, so I would assume any manufacturer in this arena is going to provide proper education to physicians to make sure that there is no jeopardizing of patient outcomes and patient satisfaction,” she said.
Because both products are different in their risk-benefit profiles, this will mean physicians will have to learn a whole new ”language” in administering this product, she said. ”There is also no fixed dose ratio in switching and that’s even stipulated by the FDA in our label,” the spokesperson added.
Still, Allergan could be a sweetened target in the eyes of large pharma as only 13% of Allergan’s revenues are dependent on Medicare reimbursement, a lower figure to most medical device and specialty pharmaceutical companies.
The Allergan spokesperson would not comment on M&A speculation or rumors, but admitted that the company’s heritage is in eye care, and has seen its seventh year in a row as achieving the status of being the fastest growing ophthalmology company worldwide. The company’s eye care drugs include prescription and nonprescription products to treat eye diseases and disorders, including glaucoma, dry eye, inflammation, allergy, and infection.
On the dermatology front, the spokesperson was more sanguine. She said the company has a medical aesthetics portfolio and a medical dermatology portfolio, of which the former is an area the company is excited about.
An industry source not privy to potential talks said Allergan is a company of scale that would touch elements of aesthetics which would be complementary to a number of different pharmaceutical companies. He compared Allergan to Mentor, which was acquired by Johnson & Johnson (NYSE:JNJ) in December at a time when Mentor’s shares were down approximately 57% for 2008.
The source said GSK makes sense as a bidder, as it would not want to be branching out in areas that it considers unfamiliar territory.
Still, a second industry source said Allergan would be attractive on the ophthalmology front, but was more cautious on GSK’s interest in Allergan’s obesity intervention product, the Lap-Band. “Does GSK really want a device?” he asked. Nonetheless, he admitted that GSK is looking to be more creative. He also said that there is an interest in the dermatology aesthetics market, and with the limited amount of larger firms, there will be further M&A plays. Medicis, Galderma and Stiefel Laboratories are all noteworthy companies that remain independent, though rumored M&A plays.
A leading healthcare investor threw caution at the situation. Allergan management has historically not been interested in selling, he said, and even when talks have taken place, the company has sought a USD 100/share offer. However, he admitted that realities change considering the current market downturn, as the company has forecasted declines in 2009 sales in most of its leading products, including Botox, facial aesthetics sales (for example Juvederm), breast implant sales, and in obesity intervention.
Allergan has a USD 13.15bn market cap.
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