Faced with a nosedive in revenues from the impending US patent expiry of $20bn-a-year blockbuster Humira, a mega-merger might always have been a case of ‘when’ and not ‘if’ for AbbVie.
Biosimilar versions of Humira won’t hit the US until 2023, but AbbVie is seizing the opportunity presented by Allergan, where shareholders have been chomping at the bit for a break-up or sell-off to unlock value.
That wish will now be fulfilled by a $63bn buyout – a 45% premium on Allergan’s market cap, driven up by investors who had been anticipating a major announcement last week.
Richard Gonzalez
AbbVie’s chief executive Richard Gonzalez says it is a ‘transformational transaction’ for both companies, and will help it overcome the loss of Humira.
The company says the deal will significantly expand and diversify its revenue base with new therapeutic areas, including Allergan’s leading medical aesthetics business, most notably Botox, which earned $3.7bn in revenues last year.
However AbbVie looks likely to face some push back on the logic of the transaction, as has been most recently seen with the slightly bigger $74bn merger of BMS and Celgene, where certain investor groups were strongly opposed to the deal.
Key to the AbbVie-Allergan merger will be the cutbacks made across the companies, which have been laid out today.
AbbVie says it expects annual pre-tax synergies and other cost reductions of at least $2bn in year three post-merger, which will require swingeing cuts, especially in R&D.
Cost saving in research and early stage portfolio, as well as overlapping R&D resources will generate around 50% of the total, with efficiencies in SG&A, including sales and marketing and central support function costs representing 40%, and manufacturing and supply chain, procurement spend accounting for around 10%.
AbbVie is promising shareholders that the financial benefits of the deal will include immediate 10% earnings-per-share accretion over the first full year of the combination, with peak accretion of more than 20%.
Allergan is domiciled in Ireland for tax reasons, but unlike in previous years, AbbVie hasn’t been tempted to conduct a ‘reverse merger’ in order to benefit from these lower taxes, and will continue to be incorporated in Delaware, with its HQ remaining in North Chicago.
Richard Gonzalez will remain as chairman and CEO, with two members of Allergan’s board, including its under-fire chairman and chief exec, Brent Saunders, to join AbbVie’s board once the transaction is complete.
The companies expect the deal to be completed by early 2020, but must first gain assent from shareholders and anti-trust regulators. Given BMS and Celgene’s ongoing problems, these are far from a given, especially as Allergan brings lots of baggage, including a sprawling business portfolio and debt of around $24bn.
Analysts have not been overly impressed with the bolt-on acquisitions AbbVie has paid for in recent years; the $21bn it spent acquiring Pharmacyclics and its lymphoma treatment Imbruvica was seen as a major overpayment.
AbbVie has had plenty of encouraging news from launches and late-stage pipeline read-outs in 2019, however, such as Skyrizi and upadacitinib, but these won’t come close to making up for Humira’s eventual loss.
Gonzalez and the board are now banking on the Allergan acquisition to smooth its path to a post-Humira future, with the hope of avoiding sustained years of revenue shrinkage.
Allergan also lacks a pedigree in drug discovery and development, but has tried to make up for this only in recent years, setting up an R&D presence in Cambridge, Mass earlier this year. This looks like a prime target for closure, however, given that AbbVie has its own facility already in the biotech hub.