AbbVie ducks bolt-on trend and agrees Allergan mega-merger

AbbVie is stumping up more than $188 per share for Ireland-domiciled Allergan, best known for wrinkle treatment Botox, which is a 45% premium to its closing price before the deal was announced.

It’s the second largest transaction this year after Bristol-Myers Squibb’s $74 billion play for Celgene – still struggling to get over the finishing line – and comes after $10 billion-plus acquisitions such as Pfizer’s buyout of Array BioPharma and Eli Lilly’s takeover of Loxo Oncology.

The combined company will be the fourth-largest drugmaker in the world with almost $50 billion in revenues and the potential to trim around $2 billion a year off the cost base.

The takeover is a route towards solving both companies problems. AbbVie is still trying to diversify its portfolio of products and reduce its reliance on near-$20 billion blockbuster Humira (adalimumab) which accounts for more than half of its total revenues, but is starting to lose patent protection.

Adding Allergan would provide another $16 billion to its top-line, including $3.5 billion from the Botox franchise, as well as a pipeline of specialty medicines including antidepressant cariprazine, migraine therapies ubrogepant and atogepant, and abicipar for  neovascular age-related macular degeneration (AMD).

Meanwhile, for Allergan the deal gives some relief for long-suffering investors that have seen the value of their shares plummet from highs in the $300-plus range a few years back on the back of serial trial setbacks – including depression drug rapastinel – and the loss of sales to generic competition.

The transaction comes amid speculation among some analysts that a break-up of Allergan was on the cards, mulling options such as the sale of women’s health business to tighten its focus on medical aesthetics.

AbbVie’s offer is less than half the $160 billion that Pfizer offered for Allergan when it was peaking four years ago, a deal scuppered by a US crackdown on so-called ‘tax-inversion’ deals.

AbbVie CEO Richard Gonzalez – who will head up the combined company once the deal goes through, likely in early 2020 – said that the merger provides an “enhanced growth platform” and “allows us to diversify AbbVie's business while sustaining our focus on innovative science.”

Allergan CEO Brent Saunders, who claims a seat on the new company’s board, said the deal will create a group with “an industry-leading R&D pipeline and robust cash flows.”

The documentation on the merger spells out the reason why AbbVie and Allergan have diverged from the bolt-on deals that are fashionable in biopharma at the moment.

It says: “This transaction is designed to meet a different strategic imperative than smaller bolt-on acquisitions. Its ability to deliver immediate scale to the AbbVie growth platform with Allergan’s on-market diversified product portfolio meets our strategic goal to reduce reliance on Humira and allows us to continue expanding our focus on high-innovation science throughout the next decade.

“Smaller bolt-on acquisitions provide opportunities for future growth, but also require significant R&D investment amid scientific and clinical uncertainty. This transaction offers immediate compelling financial and strategic value to our shareholders with a much lower risk profile.”

Analysts at Scope Ratings have a positive take on the deal, calling it a “potentially shrewd response to the dangers of patent expiry which also exploits today’s favourable financial conditions for US drugmakers.”

US tax reform encouraging overseas earnings repatriation and continued robust cash generation have left American drug makers relatively well placed to make deals, said Scope’s Olaf Tölke.

“US drugmakers tend to have less conservative financial policies than their European peers, visible in more aggressive M&A, more generous shareholder remuneration, and higher average reported leverage ratios,” he commented.