Why Merck & Co. and Allergan Won’t Buy Biogen

Why Merck and Allergen Won’t Buy Biogen November 4, 2016
By Mark Terry, BioSpace.com Breaking News Staff

Rumors over mergers and acquisitions are investors’ bread and butter. There has been persistent speculation on mega-mergers involving Biogen as a target, Merck & Co. and Allergan as potential buyers. Ed Wijaranakula, writing for Seeking Alpha, presents arguments for why none of those will happen.

The Allergan Argument.

Since its merger deal with Pfizer (PFE) fell through, Allergan has been very active in smaller mergers, consistent with its long-term history of M&A activity. The company is sitting on a lot of cash. But Allergan’s chief executive officer, Brent Saunders, has said he’s not interested in buying Biogen.

Max Nisen, writing for Bloomberg in August, said, “His (Saunders’) disavowal comes as Allergan’s balance sheet gets a $27.6 billion dollar infusion from selling its generics business to Teva . Allergan is sitting on an enormous pile of cash, and it will feel the itch to spend it. It may not spend it on Biogen, but billions of dollars’ worth of smaller deals could be plenty transformative.”

Wijaranakula writes, “Allergan, which has no revenue growth problems, would probably not be interested in any mega deal now as CEO Brent Saunders is more focused on buying back shares and small acquisitions.”

The Biogen Argument.

In early August, George Scangos, Biogen’s chief executive officer, indicated he was retiring by the end of the year. It is also spinning off its hemophilia unit as an independent, publicly-traded company, Bioverativ, which will launch in early 2017. Biogen is facing stiff competition for its multiple sclerosis (MS) franchise, so investors are always encouraging it to buy someone. George Budwell, writing for The Motley Fool, put forth a persuasive argument for Biogen to acquire Ionis Pharmaceuticals earlier this week.

But the question today is whether Biogen will be the target of a big merger. Despite sagging MS sales, it’s still bringing in a huge amount of revenue and if its aducanumab for Alzheimer’s disease is even a modest success, there isn’t a company in the world that wouldn’t want a piece of that market.

Wijaranakula writes, “The likelihood of Biogen becoming a potential takeover target may have risen after it reported better-than-expected third-quarter 2016 earnings results, as companies such as Pfizer, Gilead Sciences and Sanofi are still searching for deals to boost their revenues. Biogen admitted during its earnings call that the overall multiple sclerosis, or MS, market, particularly in the U.S., has experienced a decline in commercial patients, but the European market continues to grow at a slower pace.”

When the first big rumors broke in early August about Merck or Allergan acquiring Biogen, a lot of skepticism came down to price. Michael Yee, an analyst with RBC Capital Markets, told Bloomberg that a Biogen takeover could run $375 to $475 per share, depending on how the buyer feels about the Alzheimer’s drug or the company’s future profits. Brian Abrahams, a Jefferies Group analyst, cited a possible takeover price of $400 per share. The company’s peak stock price was $475.98 on March 20, 2015.

The Merck Argument.

Merck doesn’t really have a history of big acquisitions. In its third-quarter report sales were up 5 percent from the same period in 2015, to $10.5 billion. Keytruda third-quarter sales were $356 million, up from $159 million in the 2015 third quarter. It is continuing to be approved for additional indications, including two supplemental Biologics License Applications (sBLA) in lung cancer, and positive data for the drug with chemotherapy as a first-line treatment in metastatic non-squamous NSCLC regardless of PD-L1 expression.

Keytruda is involved in 360 different clinical trials, with 200 of them combination studies.

So, on that basis alone, it would seem that Merck would be inclined to focus on exploiting Keytruda, rather than on mergers, large or small. The most recent deals haven’t been big. They include an acquisition of Afferent for $500 million down and $750 million in milestones, and the acquisition of UK-based IOmet for an undisclosed amount.

But Merck’s chief executive officer, Ken Frazier, doesn’t rule M&A out. At the third-quarter conference call, he said, “So I said that it remains an important priority, and you should know we’re actively engaged and looking for ways of augmenting our pipeline. And in so doing, it’s important to remember that we are not limited by size or by phase. We’re going to continue to look for the best partnerships and collaborations. But fundamentally, we’re looking for bolt-on opportunities as a company.”

Wijaranakula writes, “Merck might be interested in acquiring Biogen, as the company needs to find ways to boost its revenue growth soon but its track record suggests that they prefer bolt-on acquisitions rather than a large consolidation type merger. Since Merck’s top-selling drugs are facing growth challenges and revenues from newer drugs, including HCV drug Zepatier and anti-PD-1 cancer drug Keytruda, may still be years away from generating enough to significantly impact the top line, Merck may need to reconsider its M&A strategy.”

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