Pharma Buyout With a 60% Premium

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Irvine, California-based healthcare company Allergan (NYSE: AGN) has announced its intention to purchase Mountain View, California-based MAP Pharmaceuticals (NASDAQ: MAPP) in a complex tender deal valued at about $960 billion. The deal will involve the purchase of all of MAP's outstanding shares. Although the deal is subject to customary closing conditions like an antitrust investigation and dual shareholder vote, it appears unlikely that any issues will arise to delay or derail it. As such, the merger could wrap up by the end of the third quarter of 2013. 

About Allergan and MAP Pharmaceuticals

Allergan is a diversified healthcare company that operates several semi-independent divisions. Its principal activities include the development and manufacture of pharmaceutical products, the design and development of medical devices, and the distribution of certain over-the-counter medications. It also makes surgical equipment and devises specialty medical procedures for surgeons and other doctors. The company manages many blockbuster brands, including Botox, Lap-Band and Orbera Intragastric Balloons. Many of Allergan's most lucrative offerings are high-margin products that can be marketed to a wide range of customers. The company employs over 10,000 full-time employees and earned $1.1 billion on $5.7 billion in gross revenues in 2012.

MAP Pharmaceuticals is a smaller firm that also specializes in complex drugs, procedures and devices. As a young company, it has few proven products and serves mainly as a research-and-development incubator. As such, it is attractive to established healthcare companies like Allergan. The company's main products include an inhaled therapy system for migraine sufferers and several proprietary molecules that could be used in the development of gene therapies and cancer treatments. The migraine treatment system has finished Phase III clinical trials and currently awaits Food and Drug Administration approval. MAP Pharmaceuticals employs about 120 people and lost $57.6 million on revenues of $3.6 million in 2012.

How the Deal Is Structured

Under the terms of the deal, current MAP shareholders will receive cash payments of $25 per share. This purchase will cover the entirety of MAP's share float and provides shareholders with a premium of about .1 percent over the company's current per-share price of $24.85. Relative to MAP's pre-announcement closing price of about $15.60 per share, this buyout offer provides a premium of 60.2 percent.

It is important to note that the deal is structured as a tender offer. As such, Allergan will use a wholly-owned subsidiary to purchase MAP shares in large tranches from the company's individual shareholders. These purchases commenced on January 31, 2013 and are scheduled to terminate on February 28. If a majority of MAP's outstanding shares have not been purchased by that date, Allergan may initiate successive extensions of the deal until May 22. At that point, the company will have the right to call off the tender offer.

Once the tender offer has been completed, the subsidiary will merge with MAP and become a standalone division within Allergan's larger corporate structure. Both companies' management teams will remain intact and report to Allergan's board of directors.

Complications and Legal Issues

At this point, it appears likely that the deal will go through without a hitch. Although it is currently undergoing regulatory review, MAP does not appear to pose a significant antitrust problem. However, unexpected resistance among MAP's shareholders could delay or even scuttle the deal. Given the premium that Allergan is willing to pay for MAP, this appears unlikely as well.

A rival bid could yet arise to force Allergan to raise its offer price. Major pharmaceutical companies like Pfizer (NYSE: PFE) and Merck (NYSE: MRK) could probably find value in MAP's current portfolio. Both have the cash: PFE has $22 billion in the bank and MRK has $18 billion.  However, time is running out for such a bid to emerge. With dozens of companies like MAP in the process of developing promising new drugs, Pfizer and Merck have plenty of different options. Unless the deal falls through on its own, Allergan looks poised to earn this particular prize.

Long-Term Prospects and Probable Outcomes

There are certain obvious risks associated with this deal. For starters, MAP Pharmaceuticals has yet to develop a steady revenue stream. While this problem should take care of itself in the wake of the FDA's approval of its migraine therapy system, MAP remains a risky prospect. It is clear that Allergan believes that the company's development prospects outweigh its known risks. However, a sudden reversal of the FDA's position on the drug may threaten the current deal and damage MAP's position in any future deal. In fact, an outright denial from the FDA could threaten the incubator's long-term survival.

Assuming that this worst-case scenario does not transpire, this pending merger offers some attractive synergies for Allergan. Additionally, the company appears to be taking steps to insulate itself from MAP's more obvious risks by structuring the deal to preserve MAP's nominal independence. As such, the downside risk for Allergan appears to be minimal.

Investors who wish to take advantage of a speculative play in a fast-growing industry might wish to investigate the terms of this deal. Unless MAP's share price drops in the wake of a surprise news event, the best way to play this merger may involve purchasing Allergan shares in the aftermath of the deal. Any temporary weakness in the company's share price is likely to be outweighed by the long-term benefits of this acquisition. In the coming months, investors would do well to watch the FDA's moves carefully.


mthiessen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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