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AbbVie to Acquire Allergan in Nearly $62B Cash & Stock Deal

Zacks Equity Research

AbbVie Inc. ABBV has entered into a definitive transaction agreement with Allergan AGN in a bid to acquire the latter in a cash and stock deal. AbbVie is offering $120.30 in cash and 0.866 of its shares for each share of Allergan. The offer price, total of cash and stock, represents a premium of 45% over the closing price of Allergan on Jun 24. The total transaction value is nearly $63 billion taking into account AbbVie’s closing share price on Jun 24. The deal is expected to close in early 2020.

In its press release, AbbVie stated that the combined company will gain leadership position across segments, which include immunology, hematologic oncology, medical aesthetics, neuroscience, women's health, eye care and virology. AbbVie expects its commercial strength, expertise and international infrastructure to boost the prospects of Allergan’s product portfolio. Sales at the combined entity are likely to grow in high-single digit annually till 2030. The transaction will be accretive immediately and is expected to increase AbbVie’s earnings by 10% over the first full year of operation.

In 2018, combined revenues of both the companies were approximately $48.6 billion, with $19 billion in operating cash flow. AbbVie expects combined commercial business to boost operating cash flow. The combined entity is expected to have pre-tax synergies and lead to cost reduction of more than $2 billion in the third year of full operation.

The move came as a surprise as investors were expecting a split of Allergan’ business. On Jun 19, shares of Allergan spiked on rumors of a split, following the statement of an analyst.

Although shares of Allergan gained more than 25% following the announcement of the offer, AbbVie’s stock declined 16.2% on Jun 25. Investors remained skeptical about the deal’s synergies and regulatory hurdles. The deal may also face opposition from activist investors. Moreover, one analyst at SVB Leerink anticipates that AbbVie’s offer may represent a cheaper valuation for Allergan and other pharma companies may rival the bid in that case.

AbbVie’s shares have declined 28.7% so far this against the industry’s increase of 4.4%.

 

Year 2019 has seen quite a few mega mergers so far. The year started off with Bristol-Myers BMY announcing a $74 billion acquisition offer for Celgene CELG, the largest acquisition deal in the pharma space in a decade. This was followed by the closing of the $62 billion merger of Shire with Takeda Pharmaceutical. Meanwhile, several pharma companies announced blockbuster deals to acquire biotechs with gene therapies or oncology drugs/candidates. Earlier this month, Pfizer announced a deal to acquire Array Pharma for $11.4 billion to broaden its cancer portfolio.

Please note that Bristol-Myers agreed to sell one of Celgene’s key drugs, Otzella, to mitigate the concerns raised by the U.S. Federal Trade Commission related to the deal. Although there is not much overlapping of products in Allergan and AbbVie’s portfolio, such regulatory issues may arise.

Our Take

We note that shares of AbbVie and Allergan have been declining for most of the past couple of years. AbbVie has been facing pricing pressure for its HCV drugs. Both the companies are facing branded as well generic competition for their key products. AbbVie’s Humira, which generates almost 60% of the company’s sales, has started facing biosimilar competition in international markets, which is likely to extend to the United States following the loss of exclusivity in 2023. Meanwhile, Allergan’s eye drug, Restasis, is losing significant sales to generic competitors. The company’s major drug, Botox is also set to face competition with approval of Evolus’ Jeuvantu, which is expected to be launched soon.

The merger of these two large pharma companies will lead to the creation of a diversified product portfolio comprising AbbVie’s inflammation and immuno-oncology drugs and Allergan’s medical aesthetics and neuroscience portfolio. Moreover, AbbVie stated that the acquisition will reduce dependence on Humira as the proportion of the drug’s sales will decrease from 60% to 40% of total sales.

The deal may provide AbbVie time to develop new potential blockbusters. However, the company said that the deal is not focused on strengthening its pipeline. Strong uptake of newly launched drugs and successful development of pipeline candidates are necessary to offset the loss of older drugs of both companies, especially Humira.

AbbVie Inc. Price

 

AbbVie Inc. Price

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Zacks Rank

AbbVie currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Bristol-Myers Squibb Company (BMY) : Free Stock Analysis Report
 
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