Allergan: Waiting for a Deal

UBS analyst Marc Goodman explains why he raised Allergan (AGN) to Buy from Neutral following yesterday’s financial results and cost-cutting moves:

Reuters Allergan Chief Executive David Pyott

Investors have been waiting for 2 Allergan events: a restructuring and an accretive deal. Given the Friday PR for the conf call [yesterday], many investors were expecting a deal to be announced today and thus were disappointed from that perspective. But the cost cutting was solid and viewed positively (on top of the very strong qtr), and mgt couldn’t have been more confident that it can get a deal done in time. Now we wait for this deal. Can Allergan create close to as much ST value as Valeant (VRX) can with its cost cuts?

Before [yesterday] Valeant’s cost synergy targets (R&D) were already suspect because Valeant mgt indicated that it would cut $900M of a $1.1B budget and yet still pursue attractive late-stage pipeline projects. Allergan pointed to >$200M of post-approval commitments and >$300M of spend to accomplish those projects. Hence, we had already assumed that Valeant would need to change either its synergies or sacrifice projects (we assume cut projects). This is not only what it did with both Medicis and B&L but eliminating R&D is part of the b-model. With [yesterday's] cuts Allergan's cost base is ~$3.5B and Valeant's planned $2.7B of synergies would account for >75% of costs. Cost synergies are critical to determine deal accretion for Valeant, and so it will be interesting to see what Valeant will do with its aggressive targets.

Shares of Allergan are little changed at $171.22 at 2:10 p.m. today, while Valeant has dropped 1.3% to $123.97.