Why Is The Allergan-Pfizer Spread Near All-Time Highs?

Deutsche Bank’s Christopher Mcdonagh mentioned that the spread on the deal between Allergan Plc Ordinary Shares AGN and Pfizer Inc. PFE has widened in recent days. He added, however, that the spread is still one of the most compelling ones.

The spread on the deal closed at $63.36, or 23.5 percent gross and 39.7 percent annualized, using an estimated September 30 closing date. This compares with a gross return of about 6 percent on the remainder of the arb deals. The spread widened from $47 in the last week, analyst Christopher Mcdonagh noted.

Factors Leading To Widening Of Spread

While political developments continue to be a major factor for the widening of the spread, only three things could have a material impact on the deal, Mcdonagh commented. These include: Congress acting on a deal, Obama acting unilaterally to impose a ban and the Treasury implementing a third notice that impacts the deal.

Other factors that resulted in the widening of the spread include the recent sell offs in the specialty pharma segment and their disproportionate impact on Allergan’s shares and a recent disclosure by Teva Pharmaceutical Industries Ltd (ADR) TEVA.

Teva said it believes that the acquisition of Allergan’s generics will be delayed until June due to the complexity of the FTC’s antitrust review. The analyst believes that this would not have an impact on the deal’s timing in the long run.

Although the headlines are moderately negative for Allergan, they will ultimately not result in a change in vote timing or the probability of the overall deal closure, Mcdonagh mentioned.

“We believe that the risks to this transaction have NOT increased, and that the selloff has likely been due to technical factors rather than fundamentals, primarily the spec pharma sell off and forced selling among investors in the space, coupled with the AGN Generics sale delay,” the analyst wrote.