[Updated, 10:11 am ET, see below.] Pharmaceutical giant AbbVie this morning agreed to acquire Allergan in a $63 billion deal meant to provide the pharmaceutical giant with enough revenue to brace for the loss of patent protection for the world’s top-selling drug.
AbbVie (NYSE: ABBV) will pay $188.24 per share in cash and stock for Allergan (NYSE: AGN) and its portfolio of aesthetic treatments such as Botox and eye drugs like Restasis. Specifically, Allergan stockholders will get $120.30 in cash and 0.8660 AbbVie shares (which closed at $78.45 apiece on Monday) for each Allergan share they own.
The deal, if approved by AbbVie and Allergan shareholders, should close early next year. AbbVie shares fell more than 7 percent, to $72.89 apiece—levels it hasn’t seen since mid-2017—in pre-market trading Tuesday. Allergan shares, which closed at $129.57 on Monday, climbed about 30 percent to $167 apiece.
North Chicago, IL-based AbbVie was once the research-based pharma business of Abbott Laboratories, the diversified healthcare company that sells a variety of products including baby formula and lab equipment. But in 2012 Abbott spun out AbbVie, separating the two businesses. That move meant AbbVie had to find a way to protect itself from the looming patent expiration of adalimumab (Humira), the top-selling drug in the world, which is approved for a slew of autoimmune diseases and generated almost $20 billion in revenue in 2018. AbbVie has used aggressive legal tactics to keep generic competition for Humira at bay, but cheaper versions should arrive in the US in 2023.
Humira still accounts for more than 60 percent of AbbVie’s sales, and the company has struggled to diversify beyond it. Its next two top sellers are ibrutinib (Imbruvica), a blood cancer drug it splits with Johnson & Johnson (NYSE: JNJ), and the hepatitis C medicine glecaprevir/pibrentsavir (Mavyret). Combined, both generated about $7 billion in 2018. But other attempts to diversify have disappointed, most notably its $5.8 billion buyout of cancer drug developer Stemcentryx.
Allergan, meanwhile, has seen its share price more than cut in half since mid-2015, when it was worth more than $330 a share. Though the Dublin, Ireland company’s aesthetics business—led by Botox—has performed well, its pharmaceutical division hasn’t been as productive. Analysts have been calling for a split of the two businesses, and chairman and CEO Brent Saunders had expressed openness in doing so. Saunders recently fought off a bid by activist investor Appaloosa Management to split those positions. Investors “have increasingly grown concerned about R&D productivity,” Evercore ISI analyst Umer Raffat wrote in a note last month.
Still, buying Allergan is meant to soften the blow of Humira’s coming patent loss. In explaining its rationale, AbbVie said that the deal achieves “unique complementary strategic objectives” for both companies. AbbVie gets a group of products already generating cash, while Allergan gets ahold of AbbVie’s R&D capabilities. The combined company will have some $48 billion in combined 2019 revenue.
The deal “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,” said AbbVie CEO Richard Gonzalez, in a statement. AbbVie chose to go this route versus several smaller “bolt-on” deals because such acquisitions “also require significant R&D investment amid scientific and clinical uncertainty,” the company said in its statement. “This transaction offers immediate compelling financial and strategic value to our shareholders with a much lower risk profile,” AbbVie said.
[Updated with comments from AbbVie’s conference call.] Gonzalez told analysts on a conference call that he and AbbVie’s board had been evaluating potential acquisitions for about a year. In Allergan, they saw a company that has products with growing revenue, little patent expiry risk, and durability. He said AbbVie will continue to defend Humira from companies trying to commercialize competing biosimilar drugs. But he added that Allergan’s aesthetics business, and to some extent its late-stage central nervous system compounds, will help reduce AbbVie’s dependence on its autoimmune disease drug. Meanwhile, Humira’s status as the top revenue-generating medicine in the world will produce the cash to pay down the debt that is financing the Allergan deal. “So essentially, Humira is buying the assets that replace it in the long term,” Gonzalez said.
[Updated with analyst comments.] Nonetheless, SVB Leerink analyst Geoffrey Porges expects skepticism from investors. What the two companies have beyond their two core franchises—aesthetics for Allergan, immunology/hematology for AbbVie—is unclear. And investors “are unlikely to give them much credit for future innovation or R&D productivity” given their past stumbles, Porges wrote in a research note.
“As such, we expect the future AbbVie to trade as an attractive financial asset, but not as an industry innovator and expect the combined company’s multiple to largely reflect the existing multiple of AbbVie,” he wrote.
Gonzalez will be the CEO and chairman of the company until Humira’s patents expire in 2023. Two Allergan board members, including Saunders, will join the new board. AbbVie shareholders will own 83 percent of the combined company, with Allergan stockholders getting the remaining 17 percent.