Allergan Makes an Eye-Opening Acquisition

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Global pharmaceutical company Allergan (NYSE: AGN) may have just revealed its plans for the future. On Aug. 11, the company announced its plan to acquire ForSight Vision5, a privately held biotech. Allergan will pay $95 million up front and will also pay a milestone payment next yearif ForSight's innovative glaucoma treatment device makes it through the FDA gauntlet and is successfully launched.

The relatively small acquisition certainly isn't what Wall Street expected from Allergan, which isknown for making deals worth billions.After selling off its generics business to Teva for $40 billion,the so-called growth pharma was anticipated tocollect its cash pile and head straight for another megadeal -- say, an acquisition ofBiogenor AbbVie.

Read my lips: We don't need a big deal

Instead, CEO Brent Saunders appears to be eschewing Allergan's former large-scale strategy and making good on his new vow to pursue a "stepping stone" merger-and-acquisitions strategy. "We are not looking at and we are not focused on any large transformation M&A," he saidwhen asked recently of his interest in Biogen. In an investor call, he kept it simple: "We don't need a big deal, and we're not looking at big deals."

The targeted acquisition of ForSight shows that Saunders is walking his talk -- at least for now. And the diminutive size of this medtech deal may even be why it works. Research by respected consulting company McKinseyhas shownthat large M&A medtech deals rarely create shareholder value. In a report evaluating 396 deals over a 15-year period, McKinsey foundthat smaller and higher-frequency M&A acquisitionsin medtech delivered better shareholder returns than big deals.

Acquisition isspot-on in terms of market opportunity

Other things work in favor of the ForSight acquisition.The market for glaucoma treatment is growing rapidly due to the aging global population and the rising incidence of eye disease. By 2020, glaucoma is expected to afflict more than 80 million people.In the U.S. alone, it is estimated that over 3 million people have glaucoma.MicroMarketMonitor, a market research company, has estimated that the market for glaucoma devices should grow at a compound annual growth rate of 8% from 2014 to 2019.

Better treatments are badly needed. The most common treatment -- daily eye drops -- is often too difficult for patients to administer. In fact, nearly 50% of patients prescribed eye drops may stop refilling their prescriptions after six months due to the difficulty of using the drops.

To solve that problem, ForSight's Helios ring rests on the surface of the eye under the eyelids and releases medication for multiple months. A phase 2 study showed that Helios reduced intraocular pressure for six months, and 90% of patientsretained the insert without assistance.

ForSight has other devices in its pipeline aimed at dry eye disease and ocular allergies. Helios is the lead product and is expected to complete phase 2 this year and enter phase 3 development in late 2017.

Is Valeant next on Allergan's shopping list?

Billionaire activist investor Bill Ackmanraised the possibility a few months ago that Valeant Pharmaceuticals International, Inc.(NYSE: VRX) might consider selling its Bausch + Lomb eye care business. When asked if Bausch would be a good acquisition for Allergan, Saunders said,"I think Bausch and Lomb is interesting at the right price, given that we are in eye care, and it's a complementary business to us."

Saunders is familiar with Bausch's assets, as he was Bausch's CEO prior to its sale to Valeant in 2013 for $8.7billion. He admits he still has a fondness forthe eye care stalwart, but he also said he needs better information (than is publicly available) to evaluate its current growth potential.

Meanwhile, Allergan, perhaps taking a lesson from Valeant's debt-laden collapse, has used a big chunk of Teva's $40 billionto pay down debt. Allergan's second-quarter results revealed that around $9.3billion in debthas been erased from its balance sheets since the end of the first quarter.

The company said it now holds $27.6billion in cash. Of that, $5 billion is headed for buybacks, but that still leaves plenty of dry powder. Saunders has proven to be a savvy navigator of deals in the past, so investors can expect Allergan will put the funds to good use to boost earnings and revenue. Just don't expect a big deal -- at least not for a while.

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Cheryl Swanson owns shares of Allergan. The Motley Fool owns shares of and recommends Biogen and Valeant Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.