The AbbVie/Allergan Deal
Early Tuesday morning Biopharmaceutical giant AbbVie (ABBV) announced plans to acquire Ireland-based Allergan plc (AGN) for $63 billion. The market hates the deal and AbbVie stock plummeted over 16% on the day.
Let’s take a look at the deal and see what’s going on.
The price tag of $63 billion is $188.24 per share for AGN, a 45% premium to yesterday’s close. The purchase will be made in cash and AbbVie stock, 0.866 ABBV shares and $120.30 in cash for every AGN share. The deal is targeted to close in early 2020.
Allergan is one of the world’s largest specialty pharmaceutical manufacturers. It’s about half the size of AbbVie with annual revenues of about $16 billion. It specializes in aesthetics, ophthalmology, women’s health, gastrointestinal, and central nervous system products. Its most notable drug is facial rejuvenation treatment Botox.
Here’s the problem. Allergan was floundering. Sure, Botox is still a $3 billion to $4 billion per-year drug, but it’s past its prime and facing increasing competition. At the same time, the company doesn’t have much of a pipeline, which is the Holy Grail of acquisitions. Wall Street is okay with buying growth, but not with buying stagnation.
For 63 billion bucks, investors wanted something to solve AbbVie’s growth problem right away. But this drug maker hasn’t been pulling its own weight. Revenues have been on the decline and the stock is down 25% over the past year and has posted average annual returns of -15% over the past three years. So far, Wall Street is giving AbbVie the Bronx cheer on this one.
Of course, that isn’t Abbvie’s version of the story, and not every analyst is negative on the deal.
ABBV has declined of late because of increasing competition for its blockbuster anti-immune drug Humira, which accounts for 57% of revenues. The drug is facing overseas competition from biosimilars and revenues are falling. However, AbbVie has highly promising, fast-growing newly launched drugs with more on the way this year. It also has one of the best pipelines of new drugs in the industry. And Humira doesn’t face competition in the U.S. (which accounts for three quarters of Humira sales) until 2023.
The longer-term prognosis for replacing lost Humira revenue was solid. However, a big question remained about how things would play out in the upcoming quarters and year. The Allergan acquisition helps in that regard. While it doesn’t give AbbVie a sweet pipeline, it buys time and breathing room to develop their own.
First, it will enable AbbVie to diversify away from overreliance on Humira. The drug won’t account for 57% of revenues anymore and the impact of the sales slippage will be blunted. Second, according to AbbVie, the deal will boost earnings per share by an estimated 10% in 2020 and an anticipated 20% per year thereafter. If that happens, the near-term picture will be taken care of and AbbVie’s existing pipeline should provide solid growth thereafter.
Of course, there is also the problem of the regulators. They were a pain in the tweasel with the Bristol Myers/Celgene deal and scrutiny will probably get worse. The only thing Republicans and Democrats can agree on these days is that they hate big pharma. And next year is an election year.
You may say, “So what?” If they stop the deal ABBV will regain what it lost today.” But it isn’t that simple. The regulators may ultimately allow the deal but harass AbbVie through the process. They could create additional expenses and force them to divest certain drugs, making the deal worse than it is now. That’s another risk.
I believe in AbbVie long term. The company has some of the very best, most innovative drugs and treatments in the business. And they have a huge demographic tailwind with the aging population. But I’m far less certain about the near term. This deal will be a huge driver of performance in the near term. I frankly doubt that Wall Street will be warming to a deal for which it has so definitively expressed its distaste.
The stock rating will be changed from a “BUY” to a “HOLD” for now. I will reevaluate going forward as the market further digests the ramifications of what happened today.
