One of the year’s biggest merger announcements sent shockwaves through the U.S. pharmaceutical sector on Tuesday when Humira drugmaker AbbVie Inc. (ABBV) struck a deal to acquire Botox producer Allergan Plc. (AGN). Investors reacted strongly to the news, making ABBV and AGN the market’s single biggest loser and winner, respectively.
After the deal closes, AbbVie would immediately become one of the country’s largest pharma companies, giving industry leader Pfizer Inc. (PFE) a run for its money. However, it’s difficult to comprehend just how diverse AbbVie’s business will be once it purchases all of Allergan’s product lines. Comprehending this — and the rationale behind the deal — is key to understanding where ABBV stock will head in the long term.
Here’s a breakdown of both the merger specifics and AbbVie’s mammoth size after the deal finalizes…
The News
During Tuesday’s session, AbbVie agreed to buy Allergan for $63 billion in cash and stock, making it the second-largest pharma deal of 2019 after Bristol-Myers Squibb Co. (BMY) agreed to buy Celgene Corp. (CELG) for $74 billion back in January. AbbVie’s purchase translates into $188.24 per share of AGN, representing a 45.3% premium over the Monday close of $129.57. Allergan stockholders will receive 0.8660 shares of ABBV and $120.30 in cash for each share they own, adding up to a total share price of $188.24.
Two members from Allergan’s board of directors will join AbbVie’s, while AbbVie CEO Richard Gonzalez will remain in his position. In a conference call Tuesday morning, Gonzalez noted how the merger will pose “immediate standalone scale” and “best-in-industry growth prospects.”
How Investors Reacted
As is typical of mergers and acquisitions, shares of the acquiring company dropped while shares of the acquired company skyrocketed. ABBV plummeted 16.4% on the day from $78.45 per share to a more than two-year low of $65.61. That puts the stock even deeper in the red for the year at a 28.8% loss from the Dec. 31 close of $92.19.
Allergan investors enjoyed a much better session, as AGN shares popped 25.4% from $129.57 to $162.47, the highest level since Nov. 13, 2018 when they closed at $162.65. Analysts and investors had already been speculating that Allergan would begin to break up its business, which led to a huge 13% gain just last week alone. The stock now boasts a total 2019 gain of 21.5%.
The Bigger Picture
While the two firms’ product portfolios overlap in certain areas, their combination will create the fourth-largest pharma company in the world thanks to the addition of Allergan’s annual revenue of roughly $16 billion.
That extra cash will come from Allergan’s blockbuster products like Botox, which itself constitutes a more than $8 billion market. While AbbVie and Allergan share similar brain, women’s-health, and stomach treatments, the newly combined company will make AbbVie a new player in several lucrative beauty realms, including eyelash lengthening, frown-line smoothing, and double-chin removal.
Despite AbbVie’s already intimidating size, the firm’s purchase of Allergan is largely seen as a way to remedy the looming patent expiration of its blockbuster arthritis drug Humira. According to company filings, Humira alone generated $19.1 billion in revenue last year, more than half of AbbVie’s 2018 total of $32.8 billion. With inexpensive versions already on sale in Europe and expected to hit the U.S. market in 2023, Humira’s patent expiration has put AbbVie between a rock and a hard place in terms of projected growth. The addition of Allergan’s products appear to be AbbVie’s way of shouldering any forecasted drop in Humira sales.
But the deal also highlights an unsettling yet increasingly prevalent truth across the pharma sector: it’s much easier to buy another company’s drugs rather than spend money on researching and developing (R&D) newer, more competitive drugs. According to data from Deloitte, R&D spending at the biggest U.S. pharma firms yielded them an average return of just 1.8% last year. That’s far below the 10% seen back in 2010.
Looking Ahead
With a 2019 decline of 15% before the merger news even broke, it was clear AbbVie needed to make some drastic financial decisions to let investors know the turnaround was imminent. However, ABBV’s 16.4% loss on Tuesday indicates investors believe the firm may have overpaid for Allergan, which may consequently lead them to lose faith in the company’s overall turnaround plan.
That being said, investors should assume a wait-and-see approach with ABBV stock. Since market sentiment surrounding the firm and the deal is already negative, investors would be wise to keep an eye on upcoming earnings reports for signs that the deal is yielding positive results.