There's some big M&A news in the pharma space for the second time in as many weeks. AbbVie (ABBV) announced it will acquire Allergan (AGN) in a cash and stock transaction worth $63 bln.
Recall that just last week Pfizer (PFE) announced that it will acquire Array BioPharma (ARRY). Of course, today's transaction is much larger at a total value of $63 bln vs a total value of $11.4 bln for the Pfizer/Array deal. However, both deals are significant. Also, in January, Bristol-Myers Squibb (BMY) announced that it would acquire Celgene (CELG) for $74 bln.
While this is a cash and stock deal, it's mostly cash. AGN shareholders will receive 0.8660 ABBV shares plus $120.30 in cash for a total consideration of $188.24 per share (AGN shareholders will own 17% of combined company). That's a big premium as AGN closed at $129.57 yesterday for a 45% premium. That's a nice return for a stock that has been trending lower for the past eight months, going from $197 in October to around $130.
So, what is AbbVie getting out of this deal? The main thing is that it branches Abbvie into new areas and it picks up some very well-known brands. Allergan focuses on medical aesthetics (Botox, Alloderm, CoolSculpting, Juvederm, breast implants); eye care (Alphagan, Lumigan, Ozurdex, Restasis); central nervous system (Viibyrd, Vraylar); and gastroenterology (Linzess, Zenpep, Carafate/Sulcrate). ABBV reported 2018 revenue of $32.8 bln, the combined company will have $48 bln in annual revenue.
Abbvie currently focuses on immunology, oncology, virology and neuroscience so as you can see it's pretty different from AGN. Its flagship drug is Humira, representing 61% of 2018 revs. It relieves pain/inflammation and is primarily prescribed for rheumatoid arthritis but it also used for chronic plaque psoriasis, Crohn's disease, and other ailments.
Humira is by far the largest pharmaceutical in the world. The problem is that ABBV is losing its exclusivity. Its Humira patents expired in October 2018 in the majority of EU countries and it will lose its patent exclusivity in the US in January 2023. There is generally a sizeable loss in revenue when drugs lose patent protection and face greater competition, including from generic drugs.
Our take on this deal is that Abbvie wants to restock its bench following its patents expiring in the EU and ahead of the loss of exclusivity of Humira in 2023 in the US. It also wants to branch out into new areas to diversify its revenue stream and have less reliance on Humira. After this deal closes in early 2020, ABBV estimates that Humira will fall from 61% of revenue to less than 40%. Also, this deal should provide a nice boost to AGN sales as its products will benefit from ABBV's scale and marketing muscle.
This is similar to the rationale for the Pfizer deal as Pfizer is about to lose its patent protection for its flagship/blockbuster Lyrica drug on June 30. It'll be sure to face stiff competition from generic options.
Buying companies like Array and Allergan makes a lot of sense. As we said with the PFE deal, we expect more deals to be announced in the future as large biopharmas look to bolster their pipelines to offset patent expirations and to benefit from economies of scale.