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Why Allergan Is Willing to Pay So Much Money for This Biotech

September 20, 2016, 9:34 PM UTC
Photograph by Ullstein Bild via Getty Images

Allergan (AGN) wants to snap up liver disease drug maker Tobira Therapeutics (TBRA)—and it’s willing to spend an unusually massive amount of cash to do it.

The pharma giant announced Tuesday that it struck a deal to buy the California biotech for an upfront payment of $28.35 per share in cash. And Allergan said it would pay as much as $49.84 per share in contingent value rights if Tobira, which doesn’t have any approved treatments on the market, meets certain developmental milestones. That means the total deal could be valued as high as $1.7 billion. (Later in the day, Allergan announced a $50 million upfront payment deal for Akarna Therapeutics, a different company developing therapies in the same space.)

That’s not a particularly exorbitant nominal sum in health care and biotech acquisitions. But it’s a staggering amount when it comes to the premium paid relative to a company’s current value. The cash component alone amounts to more than six times Tobira’s closing price of $4.74 on Monday—and the overall acquisition could ultimately be worth about 19 times that value.

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So what makes Tobira worth such an outsize payment, especially considering that its drug candidates have yet to win Food and Drug Administration (FDA) approval? The answer, simply put, is America’s obesity and diabetes epidemics.

Tobira’s main late-stage therapy, cenicriviroc is being tested for the treatment of non-alcoholic steatohepatitis (NASH), also known as fatty liver disease. The condition involves the buildup of fatty tissue in the liver, which causes damage to the organ and can potentially lead to cirrhosis or even liver cancer. And people with diabetes or weight problems are significantly greater risk of developing the condition.

“In the general population of United States, the prevalence of NASH is about 3% but could be more than 25% in obese individuals,” Dr. Monjur Ahmed, of Philadelphia’s Thomas Jefferson University, claimed in a 2015 paper.

Allergan estimates that as much as 5% of Americans have the disease. “NASH is set to become one of the next epidemic-level chronic diseases we face as a society,” said CEO Brent Saunders in a statement announcing the acquisition. The company will also gain access to another experimental Tobira therapy for NASH, called evogliptin.

The massive cash bet could prove to be risky. Tobira recently suffered a mid-stage clinical trial stumble for cenicriviroc. But the therapy was able to meet a secondary goal of improving liver scarring while halting NASH disease progression. And since there are no approved drugs for NASH on the market, the FDA may be more willing to approve the therapy even if it has modest efficacy in planned late-stage trials, as highlighted by the agency’s controversial approval for Sarepta’s (SRPT) muscular dystrophy drug on Monday.

Saunders and Allergan have been on a regular M&A tear in 2016, with four deals announced in September alone, including the Tobira and Akarna acquisitions announced Tuesday.