Allergan wraps up 2016 M&A with LifeCell buy for $2.9 billion; analysts lavish kudos all around

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Dublin-based Allergan said on December 19, 2016 it would buy LifeCell, a regenerative medicine unit owned by privately held Acelity LP (San Antonio TX), for $2.9 billion in cash, bringing the number of deals it has made this year to an even dozen.

@Allergan is buying @Acelity's LifeCell for $2.9 billion in cash Click To Tweet

LifeCell makes regenerative tissue products that are commonly used in breast reconstruction procedures and complex hernia surgeries to provide soft tissue support. The products will support Allergan’s portfolio of medical aesthetics, breast implants and tissue expanders, the company said.

Allergan chief executive Brent Saunders has described the company’s acquisition strategy as being one of “stepping stones.” Allergan’s deal to sell itself last year to Pfizer for $160 billion was dropped due to a change in tax law, says Fortune.

Allergan, best known for its Botox product, said LifeCell’s 2016 sales are expected to be $450 million and grow at a mid-single digit rate. It expects the deal to close in the first half of 2017.

Allergan, which was created through the combination of Actavis and Allergan, earlier this year sold its generics business to Teva Pharmaceutical Industries, freeing up cash for deals.

Allergan has agreed to 12 deals this year, including the $1.7 billion acquisition of Tobira Therapeutics, maker of an experimental treatment for fatty liver disease, and $639 million acquiring Vitae, maker of an experimental drug to treat psoriasis.

Steve’s Take:

Who would have guessed that Allergan, after a year punctuated by a failed merger with pharma titan Pfizer but also with 11 previous deals, would close out the 2016 M&A year with one final acquisition that meets the textbook example of a deal that creates shareholder value on both sides? Talk about an acquisition-bent strategy on a roll.

Prior tuck-in deals like Chase Pharmaceuticals, Tobira Pharmaceuticals, Motus Therapeutics, and Vitae Pharmaceuticals are all pre-revenue companies, and I agree with those who believe Allergan made these acquisitions to bolster its pipeline in the face of criticism pointing to the shift of pharmaceutical companies from R&D to revenue-driven organizations.

So how/why did this deal with Acelity materialize so quickly?

In the first week of December, Acelity pulled its IPO, and now it’s obvious why. The private equity-owned woundcare group has sold its LifeCell unit to Allergan for $2.9 billion in cash, allowing Allergan to add regenerative products to its reconstructive surgery and aesthetic lines, and setting Acelity up for further divestments or an outright sale.

The companies should be a reasonable strategic fit, says EP Vantage, with LifeCell’s tissue matrix grafts fitting with Allergan’s reconstructive breast surgery products, for example. There might also be savings on the staffing side as Allergan already has an aesthetics/plastic surgery sales force. But at around 6.4 times sales the deal does not seem cheap to some, and Allergan’s shares barely budged on the news.

Unlike recent pipeline acquisitions, LifeCell is a “nice” size, profitable, and capable of generating synergies, SeekingAlpha points out. I agree with those who believe shares of Allergan are undervalued due to the indefensible price-gouging fiascos sparking national outrage earlier in the year thanks to companies like Martin Shkreli’s Turing Pharma and generics giants Valeant and Mylan.

A bit of background:

Allergan has spent 2016 dealing with flack from its similarity to Valeant. Shares are down a sickening 40% after the Treasury blocked Allergan’s merger with Pfizer. Accordingly, 2016 is a year that CEO Brent Saunders (and shareholders) would like to forget.

However, I believe Allergan’s final move (most likely) of 2016 to buy LifeCell is a prime example of why Allergan was the “best in class” of the specialty pharma buying extravaganza. I believe the prudence of the acquisition underscores Saunders’ plan to leverage the existing commercial infrastructure he’s built and thrust Allergan into growing markets with far less exposure to pricing risk.

A bit more:

LifeCell is one of three companies that make up Acelity, having been bought by KCI (formerly known as Kinetic Concepts) in 2008 for $1.7 billion. Five years later KCI bought the UK woundcare group Systagenix and renamed itself Acelity.

LifeCell specializes in aesthetics–naturally a complementary acquisition for the company that makes Botox. It has around $450 million in annual sales, but according to EvaluateMedTech’s forecasts will grow slowly out to 2022.

It has three main products: the tissue matrices Alloderm and Strattice, used in post-mastectomy breast reconstruction and hernia and body wall defects respectively; and Revolve, a fat-grafting product that enables breast reconstruction using the patient’s own fat rather than an implant.

Alloderm, a human allograft tissue matrix, brings in around $280 million a year and Strattice, which is based on porcine tissue, around $160 million. By 2022 the two together are expected to garner $467 million.

Allergan has experienced several changes in its business model in the last year. This has spooked investors and made the valuation process more difficult for those focused on the short term. The way Allergan sees it, the addition of LifeCell’s product line will help it create:

“a world-class aesthetic and regenerative medicine business providing significant opportunity to enhance the overall product offering for plastic and general surgery customers globally,” the company said in a statement.

From Bernstein analyst Ronny Gal’s perspective, the buy is “a fit on strategy,” he wrote in his own investor note, according to FiercePharma. For one, LifeCell’s business “appears to merge well” with Allergan’s Botox-led aesthetics business, which also includes breast implants and dermal fillers.

That means there’s some cost-cutting potential for Allergan, and depending on what kind of savings it can squeeze out of the acquisition, “we expect this deal to offer about 3% accretion beginning in 2017,” Gal wrote.

What’s next?

Allergan rings in the New Year brandishing some distinctly solid positives. With a balance sheet strengthened by its sale of the generics division to Teva Pharmaceutical, Allergan can afford to pay for its spate of acquisitions with brute cash.

And it’s noteworthy that the company has not been embroiled in incomprehensible price-gouging like some of its now remorseful peers. Instead, the company focuses on segments such as aesthetics, breast implants and dermatology, where pressures on pricing haven’t yet attracted criticism and currently would make little sense.

Allergan’s been doing what it can to bolster its portfolio and pipeline through dealmaking, though, and CEO Brent Saunders has kept to his word about favoring so-called “stepping stone” deals instead of chasing the next megamerger.

The challenge now, Gal said, is that Allergan needs to convince Wall Street that the $5 billion or so it’s spent on 2016 pickups will generate positive returns. He, for one, is confident the company can. With new launches on the horizon, “we see this happening throughout the next year or so,” he wrote.

Steve's Take: There's a lot to recommend @Allergan's bold move buying @Acelity's LifeCell Click To Tweet

There’s a lot to recommend Allergan’s bold, seemingly prescient year-end move with LifeCell. Meanwhile, companies like Novartis dither over what should be a slam-dunk move to grab Amneal, although rumors of an imminent deal, rich for the privately held company, are circulating.

Surely, there’s a lot for all participants in the healthcare industry to ponder as we move toward January 20 and the installation of the new, hard-to-fathom regulatory regime forthcoming here in America. My sense is that social (and therefore political) pressure on pricing will rule the day, and the times, they are a changing.

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