Allergan Fell on the Possible Termination of Pfizer Merger



Biotech review for the day

The Dow Jones Industrial Average went down by 0.75% on April 5, 2016, as the US markets followed the global sell-off trend. Biotechnology and healthcare stocks also witnessed the sell-off pressure and ended low for the day. The talk of the day was a possible termination of the merger between Pfizer (PFE) and Allergan (AGN). The Health Care Select Sector SPDR ETF (XLV) went down by 1.3% on April 5, 2016, and it underperformed the SPDR S&P 500 ETF (SPY), which went down by 1%.

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The above table gives information about XLV’s pricing and returns along with details of the SPDR S&P 500 ETF and some of XLV’s holdings as of April 5, 2016. XLV closed at $68.47 and was trading above the 20-day moving average and just below the 100-day moving average. As of April 5, XLV’s year-to-date (or YTD) returns stood at -4.9%.

Allergan was the top loser within XLV

Allergan stock went down by 14.8% on the news of a possible merger breakdown with Pfizer. The deal, in which Pfizer was to take over Allergan, was valued at $160 billion, the largest in the pharmaceutical space. The reason for the possible termination is the US Treasury’s move to curb tax inversion deals in which companies relocate their headquarters to countries with lower tax rates.

Allergan closed at $236.5 and was trading below the 20-day moving average price. Year-to-date (or YTD), Allergan has returned -24.3%. Allergan has a book value of $181.22 per share and with its current price, the stock is trading at a price-to-book value (or PBV) of ~1.3x and at a 2016 forward price-to-earnings (or PE) of 16.6x. Allergan has a weight of 4.6% in XLV’s portfolio.

The other stocks that went down were Baxalta (BXLT) and Endo International (ENDP), which fell by 7.4% and 5.3%, respectively.


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