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AbbVie to Buy Allergan: Prescribed ETFs

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The healthcare space is on an acquisition spree. The latest in the list is the biopharmaceutical company AbbVie Inc. (ABBV - Free Report) , which has agreed to buy Botox-maker Allergan (AGN - Free Report) for $63 billion in a cash-and-stock deal. This represents the second-largest  deal in the pharmaceutical space this year, after Bristol-Myers Squibb’s (BMY - Free Report) $74 billion proposed acquisition of Celgene (read: Bristol-Myers to Acquire Celgene: Healthcare ETFs in Focus).

Abbvie-Allergan Deal in Focus

Under the terms of the deal, Allergan shareholders will receive 0.8660 AbbVie shares and $120.30 in cash for each share held, for a total consideration of $188.24 per Allergan share. This represents a 45% premium to Allergan's closing price of Jun 24. The deal will own approximately 83% of AbbVie on a fully diluted basis and Allergan shareholders will own approximately 17% of AbbVie on a fully diluted basis.

The deal, which is expected to close in early 2020, will add fast-growing therapeutic businesses such as medical aesthetics and eye care to the AbbVie portfolio. The combined company will consist of several attractive franchises with leadership positions across immunology, hematologic oncology, medical aesthetics, neuroscience, women's health, eye care and virology (see: all the Healthcare ETFs here).  

The transaction is expected to be 10% accretive to adjusted earnings per share in the first full year following the close of the transaction, with peak accretion of greater than 20%. It will also provide annual pre-tax synergies and other cost reductions of at least $2 billion in year three. AbbVie is expected to generate significant annual operating cash flow, which will support a debt-reduction target of $15 billion to $18 billion before the end of 2021.

Market Impact

Following the megamerger announcement, shares of Allergan surged the most in 26 years. It jumped about 25.4% to close the day, crushing its average volume, as nearly 33 million shares moved hands compared with 2.6 million on average. Meanwhile, shares of ABBV dropped 16.2%.

The news has put the spotlight on a number of healthcare ETFs, especially biotech and pharma, which could be the best ways for investors to tap the opportunity arising from the ABBV-AGN deal. Investors should keep a close eye on the movement of these ETFs over the coming weeks.

SPDR S&P Pharmaceuticals ETF (XPH - Free Report)

This fund provides exposure to pharma companies by tracking the S&P Pharmaceuticals Select Industry Index. It holds 41 securities in its basket and Allergan occupies the top position with 4.9% share. With AUM of $204.1 million, the product trades in good volume of around 61,000 shares a day and charges 35 bps in fees a year. It has gained 2.4% following the deal and has a Zacks ETF Rank #3 (Hold) with a High risk outlook.

VanEck Vectors Biotech ETF (BBH - Free Report)

This fund offers exposure to 25 large biotechnology corporations by tracking the MVIS US Listed Biotech 25 Index. Here, Allergan is the eight firm accounting for 4.8% share. BBH has amassed $370.6 million in its asset base and charges 35 basis points in fees per year. It gained 0.8% on the day and has a Zacks ETF Rank #2 (Buy) with a High risk outlook (read: Why These Innovative Biotech ETFs Soaring).

iShares U.S. Pharmaceuticals ETF (IHE - Free Report)

This ETF provides exposure to 43 U.S. companies that manufacture prescription or over-the-counter drugs or vaccines by tracking the Dow Jones U.S. Select Pharmaceuticals Index. Allergan takes the third spot at 4.7% share. The product has $340.4 million in AUM and charges 43 bps in fees and expense. Volume is light as it exchanges about 11,000 shares a day. The fund gained 1.9% on the day and has a Zacks ETF Rank #3 with a High risk outlook.

VanEck Vectors Pharmaceutical ETF (PPH - Free Report)

This ETF follows the MVIS US Listed Pharmaceutical 25 Index and holds 25 stocks in its basket. Abbvie takes the eighteenth position with 4.13% share. The product has amassed $176.8 million in its asset base and trades in moderate volume of about 43,000 shares a day. Expense ratio comes in at 0.36%. The fund added 0.05% on the day and has a Zacks ETF Rank #3 with a High risk outlook (read: Pharma ETFs Down Despite Solid Q1 Results).

Invesco Dynamic Pharmaceuticals ETF (PJP - Free Report)

This is by far the most-popular choice in the pharma space that follows the Dynamic Pharmaceuticals Intellidex Index. Holding 30 stocks in its basket, AbbVie occupies the seventh position at 4.94% allocation, while Allergan takes the twelfth spot with 2.82% share. The product has AUM of about $387 million and sees a lower volume of around 35,000 shares a day. It charges 57 bps in fees and expenses and added 0.05% on the deal news. The fund has a Zacks ETF Rank #3 with a High risk outlook.

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