“We first became involved in what is now Allergan in 2013, when it was the much smaller company, Actavis. It had recently completed its acquisition of Warner Chilcott and we believed it was poised to leverage its new Irish domicile to conduct additional accretive transactions. Over the last 20 months, this management team has done just that, closing large transactions in Forest Laboratories ($21 billion) and Allergan ($65 billion), along with many smaller deals. While critics say they are acquisition-happy, Bisaro and Saunders have articulated a strong strategic vision for Allergan and a coherent framework for pursuing deals. Their mission is to create a growth-oriented pharmaceutical company with attractive long-duration assets while implementing strict expense controls and avoiding high-risk and undisciplined R&D spend. Over the past two years, Allergan has used its formidable cash flow to acquire derisked assets and build a broad based pipeline, in line with its stated goals.On July 27, 2015, the company announced its latest transaction: the sale of its generic drug business to Teva Pharmaceuticals for $40.5 billion in cash and Teva shares. Financially, the transaction is a home run for Allergan; they sold a structurally mature business for ~17x 2015 EBITDA while delevering the balance sheet from $40 billion in net debt to nearly zero. The strategic vision of the transaction is equally impressive. Despite the fact that generic drugs were Allergan’s original business, Bisaro and Saunders recognized that the legacy segment had become an anchor on valuation and that its divesture was the right course of action for Allergan shareholders. While shareholders applauded the decision, driving Allergan stock nearly 10% higher in the ensuing three days, we believe that there is still a meaningful valuation gap to close.
Following the close of the TEVA transaction in Q1 2016, Allergan will be a pure-play growth pharmaceutical company with long duration branded assets in seven therapeutic areas, an underappreciated pipeline, an unlevered balance sheet and most importantly, a bold and forward thinking leadership team. Despite this successful track record, on July 31, 2015, Allergan stock traded at $329 per share or only ~16.5x estimated pro forma earnings of $20 per share, a valuation below comparable growth pharma companies like Celgene, Biogen, Bristol Myers, Shire, and Novo Nordisk who trade at an average 2017 earnings multiple of ~19x. Moreover, the 2017 earnings estimate assumes neither any accretive acquisitions nor the use of cash for any other purpose such as buybacks. However, on several occasions, Saunders has talked openly about the opportunity for a “transformational” transaction. Looking across the pharmaceutical industry, we see several companies who could benefit from Allergan’s operating discipline and focus and whose acquisition by Allergan would drive significant accretion and shareholder value. While many management teams would be patting themselves on the back for a job well done, Paul Bisaro and Brent Saunders have consistently demonstrated a drive to create shareholder value in Allergan with bold strategic action and focused operational execution. To align themselves with shareholders, they and the rest of the senior management have tied their long-term compensation to achieving an aspirational $25 per share earnings target in 2017. We believe that they are among the best leaders in business today and are glad to have put a significant portion of our investors’ capital in their hands.”
Dan Loeb isn’t the only activist who is bullish about Allergan. Another billionaire activist hedge fund manager, Barry Rosenstein, said the following about Allergan in his 2015 Q3 investor letter:
