Fresh Off Generic Sale, Allergan (AGN) is Poised for Merger of Epic Proportions (AMGN) (ABBV)

Yesterday, after agreeing to sell its generic unit to Teva (NASDAQ TEVA) for $40.5 billion, Allergan (NYSE: AGN) CEO Brent Saunders said it will use the $36 billion it nets from the sale for more deals, including "transformational" ones. Today, analysts are putting paper to pen, and what they have come up with might shock some investors.

In a note to clients Tuesday, Cowen analyst Ken Cacciatore said, "... we believe that broader, larger transactions in which Allergan will seek to enhance the proper allocation of capital within these more inefficient companies will also still be pursued. And we do not believe that the Street is being creative enough in their thinking about the potential size and scope of the type of transactions that Allergan might seek and the time frame in which they might seek them."

Thinking more creatively/boldly, Cacciatore pointed to two potential targets: Amgen (NASDAQ: AMGN) and Abbvie (NYSE: ABBV). Cacciatore said he was struck by a portion of CEO Brent Saunders’ response to the question about potentially approaching – in the future – a larger player.

“I think the second thing is there are other large players that we believe are inefficient that would benefit from our operating model, our management philosophy, the way we approach customers in a more efficient manner. And so over time there may be some targets that could be surprising to folks but we have to deliver and we have to maintain our investment grade credit rating. And so those are all the factors that go into everything we look at and obviously I think by now we have earned some trust that if there is something opportunistic that creates shareholder value, this isn't a team that sits back and watches it pass us by. We react very quickly and do things in a very creative but value creating way."

The analyst said while most investors might have dismissed that statement given the current debt structure, and the time it might take to appropriately deleverage, they believe that the window is much shorter than generally believed, and is clearly now accelerated with the the generics division now divested.

"As we analyze the potential of an Abbvie or Amgen transaction, what becomes clear is that by mid-next year it would appear that both of these transactions – even at 30-35% premiums to the current share prices – could be done in an exceedingly value-creating way with leverage ratios that easily remain at 4.5x, with the investment grade maintained, and with a share dilution level that would still be amenable. And with the cash from a proposed divestiture of the generics division, these leverage ratios could be even further improved."

On a potential Amgen deal, the analyst notes the potential $370 DCF figure, the proforma AGN/AMGN equity would reflect 11.7x the 2017 proforma earnings per share, and 10.0x the 2018E proforma earnings per share

The AGN/ABBV DCF inflects to $395-400, which based on these assumptions would mean AGN/ABBV would trade at that increased price at 11.6x the 2017E proforma earnings per share, and 10.4x the 2018 proforma earnings per share, the analyst said.

"We simply do not believe that the Street is contemplating such potential, wealth-creating transactions," he said.

In addition to Amgen and Abbvie, the analyst listed a host of other potential targets for Allergan:

Ophthalmology:

• Inotek Pharma (NASDAQ: ITEK)
• Ocular Therapeutix (NASDAQ: OCUL)
• Ophthotech Corp (NASDAQ: OPHT)

Dermatology/Aesthetics

• Anacor Pharma (NASDAQ: ANAC)
• Foamix (NASDAQ: FOMX)
• Revance Therapeutics (NASDAQ: RVNC)

CNS/Neurology

• Acadia Pharma (NASDAQ: ACAD)
• Alkermes plc (NASDAQ: ALKS)
• GW Pharma (NASDAQ: GWPH)
• Intra-Cellular Therapies (NASDAQ: ITCI)
• Neurocrine Biosciences (NASDAQ: NBIX)

GI/Liver:

• Intercept Pharma (NASDAQ: ICPT)
• Ironwood Pharma (NASDAQ: IRWD)

Others:

• Cempra (NASDAQ: CEMP)
• Perrigo (NYSE: PRGO)
• Radius Health (NASDAQ: RDUS)

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