Two acquisitions in a day: What is Allergan up to?

Both, in fact, are companies developing drugs to address NASH–nonalcoholic steatohepatitis, one of a group of conditions called nonalcoholic fatty liver disease. Patients with NASH suffer inflammation and damage to the liver.

One acquisition was privately-held Akarna Therapeutics for $50 million in cash plus unspecified milestone payments. (Akarna is developing small molecule drugs for the treatment of inflammation in the liver. Its lead product is AKN-083, a FXR agonist that reduces the expression of certain genes that control the synthesis of triglycerides in liver cells.)

The second is Tobira (TBRA) at an amazing 600% premium (more if you include contingent value rights) to the company’s pre-acquisition market value of $90 million. The premium is especially amazing given the limited success of Tobira’s NASH drug candidate cenicriviroc in Phase II trials back in July. The drug demonstrated its efficacy only for patients with advanced NASH. That’s a much smaller population of an estimated 6 to 10 million patients in the United States than the estimated 95 to 127 million with early stages of NASH. (Frankly, I find that estimate of the early-stage NASH market hard to swallow. Think about it.) The market wasn’t amused by the Tobira premium, sending shares of Allergan down sharply.

The two deals have certainly set off a NASH boom. If you’re looking for other obscure NASH biotech stocks that might be takeover candidates look at Conatus (CNAT), Genfit (GNFTF), Galmed (GLMD) and Intercept Pharmaceuticals (ICPT). Warning note: This is the second go round for a NASH boom. The first took off back in early 2014.

But a NASH boom in biotech aside, what is Allergan up to?

Three possibilities, I think.

First, Allergan sees real promise in NASH therapies and especially in their connection to the development of drugs for inflammation (a hot area of research) and manipulation of genes to fight diseases. Could be. Gilead Sciences (GILD) has a big NASH program so that company at least thinks there’s good market potential in NASH drugs. Gilead is looking for results from Phase II clinical trials this year with a possibility of taking a drug to market in 2018.  But Gilead (and now Allergan) seem to be behind Intercept Pharmaceuticals (ICPT). That company began enrolling patients in a Phase III trial in September 2015 and expects to finish enrollment in that trial early in 2017. Gilead, and now Allergan, are pursuing a different drug mechanism than Intercept but so far Intercept has the produced the most complete Phase II data. (And at a market cap of just $4.2 billion Intercept is certainly a much cheaper way to play any NASH boom than either Gilead or Allergan.)

Second, the two acquisitions in the NASH area are somehow part of the lead up to a bid for Gilead itself by Allergan. That was a theory being floated around earlier this week. Gilead’s shares have been hammered by troubles with its Hepatitis C drug sales and Wall Street is aswirl with rumors that the company might be a takeover candidate. But with a market cap of $107 billion even after its drop to $81.52 at the close on September 22 from $101.11 on April 25, Gilead would be a big mouthful for Allergan with its market cap of $94 billion. And frankly the idea of adding overlapping NASH development efforts prior to a move on Gilead doesn’t make a lot of sense to me. The resulting company would be so leveraged that, if I decide that this alternative is Allergan’s real plan, I’d have to re-evaluate owning Allergan in my Jubak Picks portfolio.

Third, these two NASH acquisitions are an affordable side-bet–Allergan is sitting on a lot of cash so the two deals are relatively minor from that perspective although as a shareholder I never want to see a company mis-allocate cash. The impending deal that has real importance to Allergan in my opinion, and the focus on dermatology drugs that sparked my purchase of the stock in the first place, is the pending sale by Bayer (BYTRY) of its dermatology unit to help finance its acquisition of Monsanto (MON.) The sale is expected to generate interest from Teva Pharmaceutical Industries (TEVA), Perrigo (PRGO), Nestle (NSRGY) and Sun Pharma (SMPQY) as well as Allergan. If Allergan steps forward as a serious player in that sale, I’d see it as testimony that management remains focused on what I regard as Allergan’s core. If not, again I’d have to reevaluation my position in Allergan. The Bayer unit is expected to sell for $1.1 billion or so.