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Expert Financial Analysis and Reporting

Investment Implications of the Acquisition of MAP Pharmaceuticals by Allergan

Allergan to Acquire MAP Pharmaceuticals

Allergan (AGN) has announced that it will acquire MAP Pharmaceuticals (MAPP) at a price of $25 per share which represents a 60% premium over the closing price of $15.58 on Tuesday, the day before the deal was announced. This values MAPP at just under $1 billion. The deal was obviously done to acquire MAP Pharmaceuticals’ new drug Levadex for which AGN held co-promotion rights in the US. Levadex uses MAP’s Tempo inhaler to deliver dihydroergotamine for the treatment of acute migraines. I wrote in my initiation piece on MAPP that I believed that this drug was a significant advance in treating migraines and had blockbuster sales potential of over $500 million in the US. This product fits beautifully with Allergan’s Botox which is approved for treatment of chronic migraines.

I am not surprised by Allergan acquiring MAPP as this is a great fit, but I am a bit surprised by its acquisition prior to the PDUFA date for Levadex on April 15, 2013. I would have thought, along with most investors that Allergan might have waited to make sure the product was approved and then perhaps a year or so to see how the launch was going. I am a little sad to see the company acquired as I had looked forward to covering the commercialization process. Oh well, onwards and upwards.


Investment Implications of the MAPP Takeover

I think there are important takeaways from this acquisition. From a broad overview standpoint, acquisitions like this that produce dramatic quick returns for investors whet their appetite to look for who is next or at the very least may prompt them to be willing to pay higher valuations to companies with late stage product candidates. I think that valuations on such companies are compelling due to the widely held trading practice by hedge funds which assumes that most new products will not be approved on their PDUFA dates and even if they are approved they choose to short the stock in anticipation of a slow and disappointing launch. In the parlance of day traders, this is a popular and crowded trade. Indeed MAPP was recently the subject of meaningful shorting based on this line of reasoning. This has produced some compelling valuations for many companies in positions that are not that dissimilar to MAPP.

The acquisition helps all biotech companies in general and creates a significant new concern for shorts that big pharma will consider the depressed valuation levels as great buying opportunities. There are a long list of companies that investors will turn to in their quest for “who’s next”. Let me give you some companies that come readily to mind. I make no pretense that this is an exhaustive list, rather these are companies that I cover.

NuPathe (PATH, $3.80) This company has an innovative product for acute migraine treatment called Zecutity which received approval on January 17, 2013. The MAPP acquisition highlights the big pharma belief that there is a need for new innovative treatments when triptans fail. The current market capitalization of PATH is a miniscule $56 million. PATH is seeking a partner to help it execute a 2H, 2013 launch.

Discovery Laboratories (DSCO, $2.38) The troubled journey to gain approval for Surfaxin took nearly eight years and five complete response letters. Finally the FDA approved the product and management guided to a November 2011 launch only to disappoint investors once again as not fully defined issues with a quality assurance test caused the company to change guidance for the launch until May of 2013. This delay lowered the credibility of the company to an even newer low and also created an issue about financing as DSCO is running low on cash. I expect a partnering deal in 2013, but without one the company would run out of cash in 3Q, 2013. The launch delay disappointment and financing pressure has led to a market valuation of only $103 million. Even some of the company’s most vocal critics tend to blame management execution for this low valuation and laud Surfaxin and its related pipeline products, Surfaxin LS and Aerosurf. In my opinion, the potential of Surfaxin, Surfaxin LS and Aerosurf, which are unpartnered, may significantly exceed that of MAPP’s Levadex. For more in-depth analysis, I suggest investors go to reports on my website.

A.P. Pharma (APPA.OB, $0.70) This company has a PDUFA date of March 27, 2013 for its lead product APF530, which is unpartnered. I have written that I believe that this product will be approved and because of the peculiarities of Medicare Part B pricing I am looking for an explosive launch with sales reaching as much as $200 million in 2014 or 2015. The market capitalization is currently about $200 million. For a more in-depth analysis, I suggest investors go to reports on my website.

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