While the markets have responded unfavorably in the few weeks since Allergan (AGN) agreed to pay a nearly 500% upfront premium for Tobira Therapeutics (TBRA) , at least some company followers believe the price tag is reasonable given the deal's structure and contend investors have overreacted to recent disappointing trial results in one of the target's pipeline drugs.
Shares of Allergan retreated about 1.9% to about $233.51 a piece midday Wednesday, which is about 5% less than the $245.29 that shares finished at on Sept. 19, a day before announcing a deal for Tobira whose total consideration could ultimately amount to about $1.7 billion.
The Dublin-headquarted company also announced Sept. 20 a much smaller, $50 million deal for Arkana Therapeutics Ltd., a privately held biotech that Allergan pledged would complement its Tobira purchase unveiled just hours earlier. Both of the acquired assets are centered around the development of treatments for liver disease.
It's the larger of the two deals that has drawn the most controversy, in part because of the setbacks seen in one of Tobira's in-development compounds for the treatment of nonalcoholic steatohepatitis, or NASH, an increasingly common type of liver disease. Tobira in July announced the results of its Phase IIb trial for cenicriviroc (CVC), one of its NASH products, which showed that it failed to meet its main goal and one of two secondary goals.
An argument can be made that the stock's subsequent pullback is overdone.
Despite the "failed" Centaur trial, Irina Koffler of Mizuho wrote in an Oct. 11 report that her firm still views the deal as providing a "viable, late-stage compound that has a good likelihood of success".
While CVC didn't meet its main goal in the recent study, Koffler emphasized the importance of achieving a one stage improvement in fibrosis without worsening of NASH, describing it as "an impressive result as many companies have struggled to demonstrate improvements in fibrosis." This, paired with continuously evolving regulatory thinking on NASH endpoints, suggest that CVC has a "solid" chance for FDA approval, the analyst wrote.
Ken Cacciatore of Cowen also wrote in a recent note that the Allergan team likely has access to upcoming data and more detailed information with respect to its in-development Phase IIb NASH therapy that the Street has not seen.
The structure of the deal, which includes contingent value rights, is also important to consider. CVRs are a financial instrument used to bridge the gaps in deals, especially those involving risk-heavy biopharma or biotech assets, which leave a portion of the buyer's risk in a transaction with the seller.
In the Tobira agreement, more than half of the total potential consideration is contingent.
The deal calls for Allergan to pay $28.35 per share up front, and up to $49.84 based on whether the target meets certain development goals. In other words, Allergan has agreed to pay about $595 million upfront and a potential additional consideration that could ad up to $1.1 billion.
More specifically, an initial CVR payment of $300 million would be paid should Tobira's CVC's fibrosis endpoint, which was successful in its latest trial, read out positively in Phase III. That essentially means about $900 million is being paid to determine if this is a significant, multi-billion dollar product, according to Cacciatore.
"We undertand that the $900MM is still a dramatic premium to be paid for an asset that has appeared to have had varying degrees of initial success, but we believe it is still manageable given the potential opportunity," Cacciatore wrote.
"While the 498% premium in the upfront appears high, we believe the absolute spend is reasonable, and the total potential payout has been de-risked via the CVR structure," Koffler added.
In fact, a majority of payments associated with CVRs in pharma and biotech deals haven't been paid out to investors because the catalysts have not occurred, according to a report published by equity analysts of Jefferies earlier this summer. Still, CVRs vary on a case-by-case basis.
Brent Saunders, meanwhile, insisted on a CNBC interview with TheStreet's Jim Cramer following the deal's announcement that Allergan did not over pay, calling it a "competitive price" and describing this Tobira recent trial results as "misunderstood".