AbbVie to buy Allergan under deal worth $63 billion

AbbVie announced Tuesday that it entered into a definitive agreement to acquire Allergan in a cash and stock transaction with an equity value of approximately $63 billion as it looks to reduce its reliance on Humira. Under the agreed terms, Allergan shareholders will receive 0.8660 AbbVie shares and $120.30 in cash for each share they hold, for a total consideration of $188.24 per share, which represents a 45% premium to the former's closing price on June 24.

"This is a transformational transaction for both companies and achieves unique and complementary strategic objectives," remarked AbbVie CEO Richard Gonzalez, adding "this will have a profound impact on AbbVie's overall growth story." The executive suggested that the deal should ease concerns about future competition to Humira, noting that the the transaction "isn't highly dependent on pipeline." Meanwhile, Allergan chief executive Brent Saunders said the acquisition, which is scheduled to close in early 2020, "creates compelling value for Allergan's stakeholders."

The deal comes amid speculation that Allergan was considering a breakup of the company, splitting off its Botox franchise from the wider pharmaceutical division (for related analysis, see ViewPoints: Potential Allergan split gains investor traction). "This is a good alternative for Allergan versus the current share price," commented Wells Fargo analyst David Maris, while Jared Holz of Jefferies said it's "a major bailout for Allergan shareholders that before today were hoping for a split as a salvaging event."

However, shares in AbbVie fell as much as 15% on news of the transaction, with Cantor Fitzgerald analyst Louise Chen noting that it is unlikely that anyone else will step in and bid for Allergan at this point. CNBC, citing unnamed sources, suggested that AbbVie and Allergan have been holding discussions for the last six to seven weeks, with the talks initiated by Gonzalez.

AbbVie noted that the purchase will give it new growth platforms, with the combined company having franchises with leadershippositions across immunology, haematologic oncology, medical aesthetics, neuroscience, women's health, eye care and virology. AbbVie said that the deal will also boost profitability for its growth platform, which is expected to grow at a high-single digit annual rate well into the next decade, from more than $30 billion in 2020.

SVB Leerink analyst Geoffrey Porges said that Allergan remains an industry leader in aesthetics, with Botox generating sales of $868.4 million in the first quarter, and is likely to be the cornerstone of AbbVie's valuation. "This is yet another transaction driven by diversification, scale and low borrowing costs, rather than portfolio or top line synergies," Porges added.

The combined company will have annual sales of approximately $48 billion, with around 40% of the revenue coming from Humira, while its joint cash flow last year would have been about $19 billion. AbbVie said that the cash flow will be used to support a debt reduction target of $15 billion to $18 billion before the end of 2021.

Meanwhile, AbbVie indicated that the acquisition of Allergan is expected to be 10% accretive to adjusted earnings per share over the first full year following the close of the transaction, with peak accretion of more than 20%. The company added that the deal will provide annual pre-tax synergies and other cost reductions of at least $2 billion in year three, with approximately 50% of savings coming from the optimisation of the research and early-stage portfolio, and reducing overlapping R&D resources.

AbbVie said that following closing of the transaction, the drugmaker will continue to be incorporated in Delaware as AbbVie and have its main principal executive offices in North Chicago, Illinois. The combined company will be led by Gonzalez as CEO and chairman, who will continue in the role through 2023, while Saunders and another member of Allergan's board will join the board of the expanded drugmaker.

AbbVie's purchase of Allergan comes three years after the latter terminated its $160-billion merger with Pfizer in the wake of changes to tax laws in the US designed to curb tax-inversion deals. At the time, the stock transaction was valued at $363.63 per Allergan share.

For related analysis, see ViewPoints: AbbVie/Allergan - a deal built on Botox and inevitability.

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