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NEW YORK (Reuters Breakingviews) - Allergan has added ice and a slice to its M&A cocktail. The drug company is paying just under $2.5 billion for Zeltiq Aesthetics and its diet-avoiding, fat-freezing tech. It sounds a wackier play than the dozen deals Allergan struck last year. But vain customers pay cold cash for the treatment, making it less speculative than other acquisitions, like gene therapy.
Allergan's deal machine received a $40 billion injection, before tax, from the well-timed sale of the company's generic drugs unit to Teva Pharmaceutical last year. Boss Brent Saunders used the pick-me-up to shrink debt and repurchase shares. He's also trying to refill the pipeline by ramping up R&D spending while spending heavily on acquisitions. The company's biggest drug, Botox, will soon face increased competition, while its second-biggest drug may be about to lose patent protection.
That may help explain Allergan's deal hunger. In addition to aesthetic drugs, it has since the start of 2016 bought or licensed gastrointestinal drugs, gene therapy for eye disease, and long-shot treatments for Alzheimer's and other neurological disease.
Zeltiq may be a safer bet, despite its odd beginning. It was founded after doctors noticed that kids who ate popsicles tended not to have chubby cheeks. Zeltiq applies this idea to other areas of the body. The treatment fits well with Allergan's other cosmetic surgery assets, such as Botox and chin-fat reducing Kybella. Moreover, customers pay, rather than insurers and governments which demand big discounts for more essential drugs.
Allergan is not getting the fat-freeze technique on the cheap. It's paying well over 100 times estimated earnings and six times estimated 2017 revenue. Zeltiq's growth should be some 20 percent this year, about half of 2016's performance. A further slowdown, perhaps because customers question whether the service is worth the price, would mean a poor return on the purchase.
Allergan has now churned through a substantial chunk of its Teva windfall. It had about $13 billion of cash on its balance sheet at the end of the year. That's still enough for several more deals, especially as its business should throw off $6.5 billion of free cash flow this year. The frenetic pace of the company's M&A, and the scattershot targets, raise the risk that the company is misspending its windfall.