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The deal that weds the hottest-selling drug Humira with the perennially popular beauty treatment Botox will cost $63 billion in stock and cash. Specifically, AbbVie (ABBV - Free Report) will be paying Allergan 0.866 part of its own share (worth $67.94) and $120.30 in cash for each share of Allergan.
The purchase consideration of $188.24 per share therefore works out to a 45% premium to its last trading price on Monday. Allergan’s CEO, Brent Saunders, will join AbbVie’s board while AbbVie’s CEO Richard Gonzalez will continue as the CEO of the combined company.
Rationale for the Deal
Pharmaceutical companies make money by investing in R&D to develop drugs that they can then patent and sell at high prices. The problem is that patents aren’t granted for an indefinite term. So companies continue to earn handsome profits through the life of the patent while developing other drugs than can be patented to generate revenue that takes its place.
And so it continues. Because once the patent runs out, generics flood the market and then of course the increased competition ensures that prices and sales drop off sharply.
In this scenario, life naturally becomes really difficult when continued investments don’t yield the desired results. When new drugs don’t make it to final approval or do so only after significant increase in investment, the resources to continue development also start drying up. According to consultancy firm Deloitte, projected ROI on R&D for the top 12 pharmaceutical companies have fallen to 1.9% in 2018, from 3.7% in 2017 and 8.2% in 2010.
It’s currently expected that the industry will not be able to recover from the onslaught of significantly higher development costs related to big and relatively inefficient structures of the top companies, inordinately long time to develop a product and inadequate use of technological tools (like robotics, AI, etc) to date. While technology investments have stepped up of late, it typically takes a few years to feel the effect of these investments.
So basically, companies have to do all they can to get leaner and meaner in their operating structures. That’s where the AbbVie-Allergan merger makes so much sense. The companies expect the acquisition to be immediately accretive and to facilitate combined savings of $2 billion a year.
Also, since R&D investments yield a very low rate of return, deploying those resources instead to acquire a company that will generate revenue right from the start, seems like a very good deal. Particularly so because Allergan’s main product is yet to see significant competition (the deal makes sense for Allergan because it adds to its R&D and marketing resources).
Humira generated nearly $20 billion in sales last year, or around 60% of AbbVie’s revenue. Therefore, the company needed to find something that could take its place when the patent runs out in mid-2023. Already, it is seeing steep double-digit declines in Europe where generics are available. Therefore, the ability to add a relatively patent-proof (kind of) product like Botox to its product line sounds great.
Investor Concerns
It’s far from a done deal because the companies will need necessary approvals, although the lack of overlapping products likely means that there won’t be anticompetitive concerns.
The delay could come from a different quarter. Ireland-based Allergan has been trying to sell itself since 2016 but its $152 billion merger agreement with Pfizer fell through because that acquisition was designed to lower taxes and the government didn’t take a charitable view of the situation.
On Monday, Bristol-Myers hinted at a roadblock in its deal with Celgene. The company will now have to sell its multibillion-dollar anti-inflammatory drug Otezla before the deal can go through. The Federal Trade Commission (FTC) appears to be slowing things down here.
There’s also the consideration that the company may have overpaid for Botox, which is the main reason that shares slumped on the news. Especially because there’s also a slight concern that Evolus’ lower-priced Jeuveau, which the FDA approved in February could increase competition. Marketing and reach will be factors at play.
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020.
Image: Bigstock
Is Allergan a Good Deal for AbbVie?
The deal that weds the hottest-selling drug Humira with the perennially popular beauty treatment Botox will cost $63 billion in stock and cash. Specifically, AbbVie (ABBV - Free Report) will be paying Allergan 0.866 part of its own share (worth $67.94) and $120.30 in cash for each share of Allergan.
The purchase consideration of $188.24 per share therefore works out to a 45% premium to its last trading price on Monday. Allergan’s CEO, Brent Saunders, will join AbbVie’s board while AbbVie’s CEO Richard Gonzalez will continue as the CEO of the combined company.
Rationale for the Deal
Pharmaceutical companies make money by investing in R&D to develop drugs that they can then patent and sell at high prices. The problem is that patents aren’t granted for an indefinite term. So companies continue to earn handsome profits through the life of the patent while developing other drugs than can be patented to generate revenue that takes its place.
And so it continues. Because once the patent runs out, generics flood the market and then of course the increased competition ensures that prices and sales drop off sharply.
In this scenario, life naturally becomes really difficult when continued investments don’t yield the desired results. When new drugs don’t make it to final approval or do so only after significant increase in investment, the resources to continue development also start drying up. According to consultancy firm Deloitte, projected ROI on R&D for the top 12 pharmaceutical companies have fallen to 1.9% in 2018, from 3.7% in 2017 and 8.2% in 2010.
It’s currently expected that the industry will not be able to recover from the onslaught of significantly higher development costs related to big and relatively inefficient structures of the top companies, inordinately long time to develop a product and inadequate use of technological tools (like robotics, AI, etc) to date. While technology investments have stepped up of late, it typically takes a few years to feel the effect of these investments.
So basically, companies have to do all they can to get leaner and meaner in their operating structures. That’s where the AbbVie-Allergan merger makes so much sense. The companies expect the acquisition to be immediately accretive and to facilitate combined savings of $2 billion a year.
Also, since R&D investments yield a very low rate of return, deploying those resources instead to acquire a company that will generate revenue right from the start, seems like a very good deal. Particularly so because Allergan’s main product is yet to see significant competition (the deal makes sense for Allergan because it adds to its R&D and marketing resources).
Humira generated nearly $20 billion in sales last year, or around 60% of AbbVie’s revenue. Therefore, the company needed to find something that could take its place when the patent runs out in mid-2023. Already, it is seeing steep double-digit declines in Europe where generics are available. Therefore, the ability to add a relatively patent-proof (kind of) product like Botox to its product line sounds great.
Investor Concerns
It’s far from a done deal because the companies will need necessary approvals, although the lack of overlapping products likely means that there won’t be anticompetitive concerns.
The delay could come from a different quarter. Ireland-based Allergan has been trying to sell itself since 2016 but its $152 billion merger agreement with Pfizer fell through because that acquisition was designed to lower taxes and the government didn’t take a charitable view of the situation.
On Monday, Bristol-Myers hinted at a roadblock in its deal with Celgene. The company will now have to sell its multibillion-dollar anti-inflammatory drug Otezla before the deal can go through. The Federal Trade Commission (FTC) appears to be slowing things down here.
There’s also the consideration that the company may have overpaid for Botox, which is the main reason that shares slumped on the news. Especially because there’s also a slight concern that Evolus’ lower-priced Jeuveau, which the FDA approved in February could increase competition. Marketing and reach will be factors at play.
Allergan shares carry a Zacks Rank #3 (Hold), while AbbVie shares are ranked #2 (Buy). Merck (MRK - Free Report) and Novartis (NVS - Free Report) (both ranked #2) are other buys in the space. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020.
Click here for the 6 trades >>