Allos and Amag’s marriage of convenience could end happily

While it shows no signs of being a love match, in the absence of strong mutual attraction or even stronger assets, Amag Pharmaceuticals and Allos Therapeutics' marriage of convenience might in the long run work out - if it actually manages to go through.

This could be a big if, as the deal is dependent on Amag’s share price holding up sufficiently to provide a premium that Allos shareholders will find palatable. So far the signs are not encouraging. Shares in Amag fell by 14% on the news of the deal, dropping from $19.07 to $16.31 yesterday, considerably reducing the value of any future transaction.

Under the terms of the deal Allos shareholders will get 0.1282 of an Amag share for each Allos share they own. This will result in Amag owning 61% of the new company with Allos having the remaining 39%.

Sliding value scale

If the deal had been struck yesterday, with a share price close of $16.31 for Amag, Allos shareholders would have been entitled to $2.09 a share, a rather mean looking 7% premium on Allos’s closing price of $1.94 yesterday, which was also down, falling from $2.06 the previous day. At these prices the combined company would have a market capitalisation of $587m, with combined cash and cash equivalents of $374m.

If the deal had been struck on Wednesday before Amag’s stock headed south the premium would have been a slightly more attractive 18%. Today in early trading Amag shares were flat.

Some worried shareholders in Allos have already launched lawsuits to try and stop the merger, questioning the fairness of the proposed deal and if they are being underpaid for their stock. With this already hanging over the arrangement, if Amag shares continue to weaken then the vote to pass the deal in the fourth quarter might not go the way the two boards of the companies want. Although Warburg Pincus, Allos' biggest shareholder with 25% of the stock, has voted in favour of the deal.

Slowing sales

What investors appear to be concerned about are two companies, both struggling with sluggish sales of their lead products, joining together from a position of weakness rather than strength. Some investors might also have been hoping for a take out of either company, rather than a merger.

Fears about any union have been further compounded by the two groups revealing flatter than expected sales of their two lead products. Amag said second quarter sales of its iron replacement product, Feraheme, for pre-dialysis chronic kidney disease, would hit $12.7m-$12.9m - research house Leerink Swann had been expecting turnover of $13.2m.

It was a similar story with Allos’s treatment for peripheral T-cell lymphoma (PTCL), Folotyn. Second-quarter sales of the oncology drug are expected to reach $11m, Allos has said, not much above the $10.9m reported in the first quarter.

Like Feraheme, Folotyn is Allos’s only product and the company pretty much stands or falls by its performance. The sluggish sales that have occurred since its approval in 2009 are one of the main reasons for a tie up with Amag. Plans to move the drug into lung cancer have also stalled, leaving the niche market of PTCL as its only outlet (Allos leaves questions unanswered with Folotyn data, July 29, 2010).

Talking the deal up

With stagnating sales Amag and Allos have been keen to stress the potential cost savings that they will achieve from a merger. These are estimated to be $55m-$60m, most of which the companies argue could be achieved in the first fiscal year of the deal.

Amag and Allos have also been trying to talk up the complimentary nature of the customers for their products, pointing to the common commercial sales points of haematology/oncology clinics and hospitals.

However, given that the synergies include cutting the combined sales force from 121 to 70-75, some analysts have questioned if the sales growth that both products need can be achieved with a reduced push.

On the plus side

But hooking up does move the groups from essentially one product companies to an entity that has, by a bit of a stretch of the imagination, multiple products.

In addition, the cost savings that can be achieved by stripping out duplication, such as head office and back office costs, look to be attractive.

RBC also points out that the merger will diversify the commercial and regulatory risk faced by the companies as they try to get extensions for uses of their products, and that any up tick in either product would make the combined company successful.

The as yet unnamed company also has a decent cash pile of $374m that could be used to buy new assets to kick start growth.

So while there are downsides to combining the two companies and still considerable risk, by throwing their lot in together Allos and Amag might yet make what appears to be a bad match a successful union.

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