Allergan Ends Merger Talks With Pharmacia
Allergan Inc. said Monday that it had been involved in merger discussions with London-based drug giant Pharmacia & Upjohn Inc. but called off negotiations because the companies couldn’t agree on terms.
Whether or not the two resume talks, analysts say it’s becoming increasingly likely that the Irvine-based maker of products for eye and skin care will find a merger partner to help it compete in an industry that’s becoming dominated by multibillion-dollar giants.
“We believe that Allergan has been smart enough to have had a number of conversations with a large number of potential partners in the pharmaceutical industry,” said Steven B. Gerber, an analyst at Oppenheimer & Co. in Los Angeles.
Analysts mentioned such drug giants as Merck & Co., Schering-Plough Corp., Johnson & Johnson and Bristol-Myers Squibb Co. among companies that might be interested in acquiring Allergan.
Wall Street has considered Allergan, valued at $2.5 billion, as a takeover candidate because it is relatively small and it stands to gain handsomely from the development of some promising new drugs for treatment of psoriasis and cancer. Analysts say Allergan is also attractive for the potential cost savings an acquirer might realize by slashing its hefty administrative budget.
The company, which reported net earnings of $72.5 million on revenues last year of $1.1 billion, employs 1,800 people in Irvine, including about 1,200 in general administration and 600 in research and development.
On Monday, volume in Allergan stock soared to 1.1 million shares in New York Stock Exchange trading, five times the stock’s normal level. It closed at $38.25, up 37.5 cents for the day. Pharmacia & Upjohn ended up 62.5 cents at $39.625, also on the New York exchange.
Late last week, Allergan’s stock, which rose $2.50 a share in two days of high-volume trading, closed Friday at $37.875, up $2.50 from Wednesday’s close, possibly on word that a merger was brewing.
Allergan, responding to a Wall Street Journal report Monday that it was in merger talks with Pharmacia & Upjohn, stated in a release that talks broke off because the two companies couldn’t agree on proposed terms involving a stock swap.
“I think the jury is out on whether they will come back and renegotiate,” said Arvind Desai, an analyst with Mehta & Isaly, in New York. Asked whether the deal could be made for cash, Desai and others noted that Pharmacia & Upjohn would likely be reluctant to entertain the idea of buying Allergan for cash--a prospect that could add debt and costly company valuation expenses to its balance sheet.
Pharmacia & Upjohn itself resulted from the merger in November of the former Pharmacia of Stockholm and Kalamazoo, Mich.-based Upjohn Co. The combination catapulted the new company into the ranks of the world’s 10 largest drug companies, Phillip Carra, a spokesman said. Carra added that if the merger had been in effect for the entire year of 1995, the combined company would have had revenues of $6.9 billion.
Analysts said Allergan would make a desirable acquisition for the London company, in part because of its strong presence in the market for glaucoma-related products. Pharmacia & Upjohn is expected to receive regulatory approval in the United States for a drug called Xalatan to treat glaucoma.
Allergan’s worldwide force of 700 to 800 salespeople who sell its ophthalmological solutions, including those for treating glaucoma, could market Xalatan.
For Pharmacia & Upjohn, as well as other potential acquirers, Allergan also offers the opportunity to participate in sales of its hot new drug Zorac. The treatment for acne and psoriasis could bring in sales of more than $100 million a year, analysts say.
The company is seeking approval to market the drug in the U.S.
In addition, Allergan has an opportunity to take advantage of advances in drugs for treatment of cancer that could attract a firm with interests in oncology. Allergan holds an agreement with La Jolla-based Ligand Pharmaceuticals Inc., enabling the two firms to buy back technology or stock in their former joint venture, Allergan Ligand Retinoid Therapeutics Inc.
The joint venture, which went public last year, is developing drugs to treat lymphoma, other cancers and an AIDS-related skin condition.
Still, it will become increasing difficult for Allergan to remain independent as mergers of multibillion-dollar corporations in the drug industry continue, observers predicted. The company is an odd size--too big to be a small, lean and wily niche player, but too small to compete against the vast financial resources and research base of larger firms.
One problem, symptomatic of its size, they note, is the higher-than-average amount of money it spends on sales, general and administrative expenses. About 40% of its total revenues went for such purposes last year.
