AbbVie made a major splash Tuesday with its proposed $63 billion buyout of Allergan that’ll create a top-5 pharma giant. But analysts and investors were hardly impressed. One day after the announcement, feedback continues to pour in, with analysts questioning the fit and motivation for the tie-up.
The deal “essentially combines two challenged businesses,” one analyst wrote. Some were left “surprised." AbbVie shares, meanwhile, fell 15% in the hours after the news as Allergan’s shares jumped more than 25%. Here, we've dug into some of the prevailing themes from early industry-watcher feedback.
Numerous analysts understood the financial rationale for the deal but questioned the strategic side of the tie-up. In a note to clients, Piper Jaffray analyst Christopher Raymond praised numerous financial metrics, but wrote that the “lack of an obvious strategic fit or a clear line of sight toward substantially backfilling” Humira’s upcoming revenue loss … “and management’s assertions that the combined entity will have even more firepower to do midsized deals, give us pause.” AbbVie has said Humira's U.S. loss of exclusivity in 2023 was a big motivator for the deal, with CEO Richard Gonzalez putting it bluntly on Tuesday. "Essentially, Humira is buying the assets that replace it over the long term,” the helmsman said.
Raymond wrote that the tie-up “essentially combines two challenged businesses” and “feels to us like more of the same.” Raymond also raised concern over AbbVie’s plans to scout future deals with Allergan in hand because of challenges inherent with more M&A, including high valuations across biopharma. Wolfe Research analyst Tim Anderson wrote that the combined business will have flat revenues after 2023, according to his team's calculations.
For his part, UBS analyst Navin Jacob wrote that he also understands the financial reasons behind the megamerger, but the “primary driver” for the buy “appears to be the ability to offset” Humira’s loss of exclusivity in 2023. He called the Allergan purchase a “shift away from its positive momentum in innovation,” a sentiment shared by other analysts.
A rival bid?
There’s been some speculation about the possibility of a rival bid for Allergan, but RBC Capital Markets analyst Randall Stanicky and Wolfe's Anderson don’t see that as a likelihood. Among Anderson’s covered companies, AbbVie is the only one with a “substantially troubled future—by contrast, almost every other company we cover has an improving outlook.”
“It is precisely because of [AbbVie’s] troubled future (in 2023+) that we are not surprised they are doing a big deal, prior management commentary to the contrary notwithstanding,” Anderson wrote in his note dissecting the deal.
Market watchers have speculated Pfizer and Johnson & Johnson could make a bid, but Stanicky wrote that the companies aren't “obvious candidates” and that AbbVie’s deal price already “appears fair.”
Creating value, or not?
After the deal announcement, Allergan’s shares shot up while AbbVie’s sank. In all, the reaction destroyed about $8 billion in market cap in a day, RBC analyst Kennen MacKay pointed out. Allergan gained about $10 billion in value, while AbbVie lost about $18 billion.
Looking forward, John Rountree, managing partner at the consultancy Novasecta, told CNBC it’s “tough to find something good” in the deal. He said it’s “not creating value” and that instead it’s a defensive move. He doesn't see how AbbVie “can add any value to Allergan.”
The companies will look for $2 billion in cost cuts, with $1 billion expected to come from R&D.
While numerous analysts questioned the merits the proposed transaction, Leerink analyst Geoffrey Porges praised the deal—even after AbbVie’s shares sank considerably on Tuesday. He said there’s a “high probability” AbbVie can generate more than $2 billion in savings and that product revenue could “easily exceed expectations.”
AbbVie investors can benefit in several ways after Tuesday’s share price drop, he wrote. If the deal doesn’t happen, the stock will likely recover from Tuesday losses, he figures. Further, the deal “assumes very little opportunity from either company’s pipelines and future capital allocation.” The combined company should at minimum be able to generate $12 to $13 in annual earnings per share through 2024 and $58 billion in sales in 2023, the analyst wrote.
At least two analysts wondered how the companies’ cultures would fit under one umbrella. Wells Fargo analyst David Maris pointed out that Allergan initiated the “social contract” discussion on drug pricing years ago, while AbbVie has repeatedly raised Humira’s price and testified about the megablockbuster's price in Congress. Last year, Humira generated nearly $20 billion, or about 60% of AbbVie's sales.
For integration efforts, AbbVie intends to “ring fence” key Allergan meds and keep their current operations in place, Maris wrote.
Vamil Divan, an analyst with Credit Suisse, spoke with AbbVie management following the announcement and learned that the company plans to keep Allergan’s medical aesthetics business as a “self-contained” unit operating out of Southern California. He wrote that “integration risk” is his team’s main concern with large deals, but that AbbVie’s management is confident it can integrate Allergan because two-thirds of the purchased company is in traditional therapeutic areas rather than aesthetics.
A ‘graceful exit’
After years of struggles at Allergan and a declining share price, numerous analysts praised the deal from the perspective of Allergan investors. Maris called it a “graceful exit” as AbbVie’s offer represents a premium to Allergan’s current share prices, but he questioned if the deal is better for Allergan investors in the long run given the expected challenges for AbbVie after Humira’s loss of exclusivity in 2023. AbbVie is offering 0.866 AbbVie shares and $120.30 in cash for each Allergan share.
Stanicky also called the deal a “welcome exit” because Allergan was expected to pursue a break up to unlock value. The buyout will allow Allergan investors to realize the “rough value of what we see [Allergan] worth in a successful break-up much more quickly," Stanicky wrote.