AGN Women’s Health & ID sale(s) – will investors say, “This was not the split that we were looking for”?

Since the last AGN earnings call, Allergan investors have been looking to unlock value, presumably from the sale of the aesthetics business away from the more traditional pharma assets. Others can comment upon whether that’s a repudiation of management’s strategy for the last 3 to 5 years…

However, the suggested sale of the Women’s Health and Infectious Disease assets seem to ask What IS Allergan?  and Why does it make sense for the remaining ‘core’ assets to be core and the non-core (particularly women’s health) to be up for sale?

Loss of synergies

Having a women’s health and GI division within the same pharmaco makes sense since women represent a disproportionate share of sufferers. The ability to cross sell GI and OC/Menopause medications would seem to make logical sense.

Assuming Allergan sells the women’s health assets to a company already in the space, there shouldn’t be many available synergies – unless Allergan has been vastly overstaffed in their marketing and sales efforts. Recent efforts to cut costs SHOULD limit the financial savings for a partner.

Raison d’être

AGN’s decision to sell these assets makes logical sense – they are distinct businesses with lower multiples than their cosmetic/aesthetic, Eyecare, and GI/Neuro divisions. But post sale, the question as to why these three business units are together under one roof will become MORE pronounced, not less so.

Why should a company sell Botox, Restasis, and Linzess? Clearly the NASH and Migraine assets look promising. But why buy the AGN version of the story/upside versus competitors?

Perhaps there are management, leadership, and sales advantages that I’m missing. I hope for the sake of my many friends still working at AGN that this is the case.

A question of value

AGN will either get fair market value or not for the sale of these assets. Competitive bidding will likely drive up the price, leaving Allergan with a nice pay day. But what if few, or no buyers, want to pay what Allergan believes these businesses are worth? Having additional cash to pay down debts or make investments is great – UNLESS, the lost revenues and profits continue to expose weakness in the rest of the business. Again, further concentration will increase the attention on the growth in the core businesses.

 A better solution?

I would have suggested a rational split of the aesthetics assets from the rest of Ethical pharma. Announcing the sale of Infectious Disease at that point would have been sensible – as many in the ID space have struggled lately. Structurally, AGN can’t spin off aesthetics & eyecare from the rest of the business, as this would be a capitulation on the Actavis/AGN merger thesis.

It’s easy to imagine a nice premium being put on the aesthetics business (I’m assuming ALL of Botox would stay together in the New Co.) especially considering the different sales and marketing practices in non-reimbursed Pharma. The question here, is what would happen to the ‘core’ business (Neuro, GI, Women’s Health). It’s likely that it would enter a no-man’s land of mid-sized companies where operational excellence matters.

It will be interesting to see where Allergan and AGN (the stock) go from here…