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AbbVie Heads to Record Rout as Allergan Deal Fails to End Doubts

June 25, 2019
The proposed takeover doesn’t give AbbVie a pipeline full of potential blockbuster drugs, but it buys the company time to develop more.

AbbVie Inc. agreed to pay $63 billion for rival drugmaker Allergan Plc, the latest merger in an industry where some of the biggest companies have been willing to pay a big premium to resolve questions about their growth prospects.

The price tag caused some heartburn on Wall Street, with AbbVie declining as much as 16% to $66 at 1:38 p.m. in New York, putting the stock on course for its worst single-session drop since the drugmaker was spun off from former parent Abbott Laboratories.

Allergan shares climbed as much as 30%. AbbVie will pay $188.24 a share in cash and stock, according to a statement, a 45% premium to Allergan’s closing price on Monday.

“Allergan, with its well-known Botox, is being used to smooth the wrinkles this time not of a face but of a company,” said David Maris, an analyst with Wells Fargo. “While this is a good alternative for Allergan versus the current share price, we are not convinced that this is a better long-term alternative for shareholders.”

The proposed takeover doesn’t give AbbVie a pipeline full of potential blockbuster drugs, but it buys the company time to develop more. Allergan provides AbbVie with a set of products big enough to diversify its revenue from Humira, the rheumatoid arthritis injection that is the world’s biggest-selling drug worldwide, with about $20 billion in sales last year. Allergan, which is heavily reliant on the wrinkle reducer Botox, will get a profitable exit for shareholders after a four-year slide.

While they use cost savings from the deal to shore up profits, the companies will still be under pressure to show investors they can come up with the next big thing. AbbVie may be nearing the limits of how far it can boost Humira’s price as cheaper competitors come to market, a problem Allergan is already grappling with as more alternatives to Botox emerge.

The companies have developed several potentially promising medicines for a range of diseases, though so far none have convinced investors that they can attract the vast pool of patients that take medications like Humira.

On a conference call announcing the deal, AbbVie Chief Executive Officer Richard Gonzalez, who will lead the combined company, said the transaction should ease concerns about future competition to Humira, adding that the drug is lucrative enough to bankroll the purchase of its eventual successor.

“This is a transformation transaction that provides important strategic benefits for both AbbVie and Allergan,” Gonzalez said. “This will have a profound impact on AbbVie’s overall growth story.”

Gonzalez said on the call with investors that the transaction “isn’t highly dependent on pipeline.”

One drug considered to be a contender to replace some of Humira’s sales over the long term is AbbVie’s Skyrizi, a new psoriasis treatment that many patients may find more convenient than Humira, as it needs to be injected less frequently.

“Patients love Skyrizi, it’s a big contender,” said Mark Lebwohl, the Waldman Chair of Dermatology at the Icahn School of Medicine at Mount Sinai in New York. “It’s four shots a year and appears to be incredibly effective. AbbVie already knows how to sell this drug.”

Back to the U.S.

The deal will return Allergan to the U.S., at least for tax purposes. While the company is run from New Jersey, it moved its domicile to Dublin in 2015 via another merger, partly to take advantage of lower corporate rates abroad. The 2017 U.S. tax overhaul cut corporate levies to 21% from 35%, which reduced incentives for companies to relocate overseas.

AbbVie currently pays far less in tax than that, however, and has said it will have an effective rate of 9% this year. It has projected its effective rate will rise to 13%.

Allergan CEO Brent Saunders had spent months turning over plans for the drugmaker’s future as its stock price dropped from a 2015 peak of almost $340. Those options included selling off the company’s gastrointestinal drugs or women’s health unit, which would have left it more focused on its profitable medical aesthetics line that includes Botox.

AbbVie said it expects at least $2 billion in annual pretax synergies and other cost reductions in year three of the deal.

Allergan holders will receive 0.8660 AbbVie shares and $120.30 in cash for each share they hold. AbbVie will take on Allergan’s debt, which totaled about $24 billion at the end of the first quarter.

Two Allergan directors, including Saunders, will join AbbVie’s board after the purchase is completed, according to the statement. Gonzalez said on the call that he intends to stay with the company at least through Humira’s loss of exclusivity in the U.S.

The deal is expected to close in early 2020, the companies said.

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