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AbbVie makes $63B play for Allergan
July 2019
by Jeffrey Bouley  |  Email the author
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NORTH CHICAGO, Ill. & DUBLIN—June 25 came with an announcement that caught market-watchers a bit by surprise: The news that AbbVie planned to acquire Allergan for about $63 billion.
 
As analysts from SVB Leerink LLC noted the day of the announcement, “This morning’s announcement of the purchase of Allergan by AbbVie comes as a surprise, but is consistent with AbbVie’s intention to diversify away from their dependence on Humira. The transaction takes advantage of AbbVie’s dividend yield, discounted multiple and low borrowing cost, and significantly reduces their future dependence on their immunology franchise. With synergies, the combined company is likely to be able to maintain AbbVie’s impressive track record of dividend growth.”
 
The deal news arrived even as speculation had been percolating that Allergan might break up the company, splitting off its Botox franchise from the rest of the pharmaceutical division, with Wells Fargo analyst David Maris adding, “This is a good alternative for Allergan vs. the current share price.”
 
Also, Canaccord Genuity analyst Sumant Kulkarni wrote, “We see the overarching rationale for the proposed acquisition as a means to diversify AbbVie’s revenue base away from Humira, which is currently the world’s largest-selling therapeutic, and is facing biosimilar competition in the US in 2023. After having covered Allergan over several years in its various incarnations, we can see how [shareholders] may have a mixed response depending on their cost basis.”
 
For example, Kulkarni noted that three years ago, Pfizer failed to acquire Allergan when the U.S. Treasury Department scuttled the “tax inversion” deal, then added, “From where we sit today, however, our bottom line take is that we are encouraged by the focus that ABBV is placing on AGN’s neurology/psychiatry assets.”
 
As AbbVie notes in its own words about its proposed deal with Allergan, the combination will provide immediate scale and profitability to AbbVie’s growth platform, excluding Humira, significantly expanding and diversifying its revenue base with new therapeutic areas, including Allergan’s leading medical aesthetics business.
 
Also, the deal is expected to:
  • Enhance long-term R&D funding capacity, allowing for continued investment and sustained focus on innovative science and advancement of an industry-leading pipeline
  • Increase global commercial scale to further maximize the value of Allergan’s attractive portfolio of fast-growing products
  • Produce robust cash flow to support continued dividend growth, further investment in the pipeline and reduction of debt levels
Assuming all goes well with the deal with regard to shareholders and regulators, it is expected to close in early 2020.
 
“This is a transformational transaction for both companies and achieves unique and complementary strategic objectives,” said Richard A. Gonzalez, chairman and CEO of AbbVie. “The combination of AbbVie and Allergan increases our ability to continue to deliver on our mission to patients and shareholders. With our enhanced growth platform to fuel industry-leading growth, this strategy allows us to diversify AbbVie’s business while sustaining our focus on innovative science and the advancement of our industry-leading pipeline well into the future.”
 
The transaction is expected to be 10-percent accretive to adjusted earnings per share over the first full year following the close of the transaction, with peak accretion of greater than 20 percent.
 
Upon completion of the transaction, AbbVie will continue to be incorporated in Delaware as AbbVie Inc. and have its principal executive offices in North Chicago, Ill. AbbVie will continue to be led by Gonzalez as chairman and CEO. Two members of Allergan’s board, including Chairman/CEO Brent Saunders, will join AbbVie’s board upon completion of the transaction.
 
It is expected that, immediately after the closing of the Acquisition, AbbVie shareholders will own approximately 83 percent of AbbVie on a fully diluted basis and the Allergan shareholders will own approximately 17 percent of AbbVie on a fully diluted basis.
 
“The combined AbbVie-Allergan company is expected to be catapulted to fifth position in terms of 2019 sales, overtaking many competing pharma companies,” said Maura Musciacco, senior director of the Neurology & Ophthalmology aspect of data and analytics company GlobalData. “As with all mega-mergers, size is generally a major driver behind these deals, but there are several other motivations too.”
 
“It is not surprising to see AbbVie turning to mergers and acquisitions (M&As) given that the company is facing the patent expiration of its flagship brand, Humira, which happens to be the world’s top-selling drug. Humira generated approximately $19.9 billion in total sales in 2018 alone, representing 60-percent of AbbVie’s total sales,” according to GlobalData. “Perhaps AbbVie has been too reliant on this drug, but knowing that its main source of revenue is at risk of sales erosion from biosimilars means that an M&A can provide a rapid source of new revenue streams to secure long-term growth.”
 
But there is an unexpected aspect to this deal, Musciacco said, noting that “AbbVie has turned to a rather diversified company, therefore the deal is expected to transform the company’s portfolio. Importantly, the deal will also lower its reliance on Humira, meaning that just 41 percent of the combined company’s sales would be generated by this drug.
 
“Allergan has a broad offering: roughly 50 percent of its sales are generated by neurology drugs. That said, it also has drugs for ophthalmology, gastrointestinal, women’s health and cardiovascular indications, just to name a few. Its sole blockbuster brand is Botox, which—similarly to Humira—has been approved in multiple indications. Notably, Allergan also has several promising pipeline assets that will contribute to future sales growth; for example, ubrogepant and atogepant are two oral calcitonin gene-related peptide receptor antagonists in late-stage development for the lucrative migraine market.”
 
Musciacco also expects that regulators are fairly likely to require that the companies divest some of their assets.
 
Code: E071927

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