AbbVie's $63 billion acquisition of Allergan "will have a profound impact on AbbVie's overall growth story," claimed CEO Rick Gonzalez, laying out the deal to investors and analysts Tuesday.
But the initial pages of that story were written in a way AbbVie probably didn't like: the pharma's stock dropped more than 15% Tuesday, erasing nearly $20 billion in market value in what was the company's worst trading day since spinning out from Abbott six years ago.
Despite Gonzalez's promises that the deal carries little risk, the market reaction suggests otherwise. AbbVie's stock now ranks as the third worst-performing in 2019 among large pharmas, ahead of only Teva and Mylan.
AbbVie executives spent an hour Tuesday detailing why buying Allergan was a compelling M&A opportunity. Five reasons stood out as key to the deal. Yet with Tuesday's stock price slide in mind, here's why those may not play out as rosily as expected.
Diversification away from Humira
By absorbing Allergan and its roughly $15 billion in annual sales, AbbVie's revenues will become less dependent on Humira. That is vitally important to AbbVie as entry of Humira copycats in the U.S. is set to substantially lower sales from the blockbuster biologic starting in 2023.
But the extent of that benefit hinges on how well the two businesses fit together. Piper Jaffray's Christopher Raymond worried that combining two businesses with distinct challenges won't automatically create a more stable company. "Two turkeys don't make an eagle," as he put it.
While Allergan has found success in aesthetics, eye care and neurology, AbbVie remains rooted in immunology and hematology. Unlike Bristol-Myers Squibb's similar-sized deal for Celgene earlier this year, which focused on creating a industry-leading oncology franchise, the two companies' products and pipelines aren't obvious complements.
"This is yet another transaction driven by diversification, scale and low borrowing costs, rather than portfolio or top line synergies," SVB Leerink's Geoffrey Porges wrote, adding he expects the new AbbVie to be seen as "an attractive financial asset, but not as an industry innovator."
Allergan was a cheap target
Allergan's battered stock has lost more than half its value from a 2015 peak. A failed Pfizer merger attempt in November of that year would have paid nearly triple the price AbbVie is now offering. Now, AbbVie's bid could be seen as an opportunistic bargain in a moment of weakness for Allergan.
But Allergan's decline has been warranted, although to what degree is up for debate. A string of clinical, M&A and legal failures have sapped investors' confidence in the company.
On the other side, AbbVie could face countering bids for Allergan from other pharmas if rivals found its value enticing. Several Wall Street analysts said this was unlikely, but did float Pfizer and Johnson & Johnson as two companies with the capacity to pull off a more compelling offer.
"J&J in particular is a company that we believe has the financial strength to step into this situation and make a bid for Allergan," wrote Vamil Divan, an analyst for Credit Suisse. Divan added that J&J's consumer business could allow them to extract more value from Allergan than AbbVie can.
When discussing $63 billion deals, of course, cheap is relative. Buying Allergan still requires $38 billion in financing, and integration of the two companies could require significant time and cost to complete.
Strong cash generation
AbbVie boasted the deal would add to its already impressive cash flow from Humira sales. The two companies generated $19 billion in operating cash flow last year, more than all other pharmas besides J&J and Roche when combined, according to AbbVie's presentation.
The benefits of that are clear, with cash providing capacity for dividends, share buybacks, debt payments and further deals. Speaking on Tuesday's call, Gonzalez reiterated AbbVie's desire to continue growing dividends following the acquisition of Allergan.
A good chunk of that operating cash flow will also go towards paying down debt, which the company plans to cut down by 45% to $18 billion by the end of 2021.
Committing to high dividends and steady debt payments further ties AbbVie to its Humira's success, though. Divan noted that there's an argument to be made that AbbVie is now "even more dependent on having Humira generate the near-term cash flows" required to keep the company's financial position solid.
Gonzalez insisted the company still has "plenty of capacity" to make small or mid-sized deals to boost its pipeline. Piper Jaffray's Raymond wrote that claim "made some investors cringe a little bit" given AbbVie's track record on such deals.
Moody's senior vice president Michael Levesque, meanwhile, called further acquisition capacity "rather limited" in the near term if AbbVie does fulfill its deleveraging plan of quickly paying down its debt. While very small deals could be feasible, reaching for larger deals that pushed the company's ability to fulfill its debt payback plan "would be a self-inflicted wound," said Levesque in an interview.
Durable sales from Botox
AbbVie plans to invest heavily in Botox to keep driving its growth, Gonzalez said. But Wall Street has begun to fret over potential competition the multi-use toxin may face.
Gonzalez, though, brushed off the idea of biosimilar Botox. "It's highly unlikely that we would see a biosimilar against Botox for a long, long time, if ever," Gonzalez said, citing a variety of technical reasons impeding developing of a copycat.
Still, Mylan and Revance Therapeutics said last year they are developing a biosimilar of Botox.
Botox could also face market competition from other toxins, analysts wrote. This February, Evolus gained an aesthetics approval for Jeuveau, a lower-cost alternative to Botox.
Additionally, Revance plans to file for approval of a long-acting toxin with the FDA this fall. That compound is also being evaluated as a therapeutic, with clinical readouts expected in the second half of 2020 for use in cervical dystonia, upper limb spasticity and plantar fasciitis.
Low deal risk
Gonzalez pointed to AbbVie's prior experience with large transactions, including AbbVie's split from Abbott, as reason to believe the company can smoothly handle integration of Allergan.
Part of that plan is to keep separate the growing franchises of medical aesthetics, immunology and hematology-oncology, the CEO said.
Yet for Moody's Levesque, integration is a key risk for this deal.
"Digesting a company as large as Allergan will require management time and energy, at a time when AbbVie is also attempting to execute on its own pipeline and prepare for Humira biosimilars in the US," he wrote in a research note.
Additionally, the Federal Trade Commission has appeared to more closely scrutinize recent pharma deals. Earlier this week, Bristol-Myers disclosed it would divest a blockbuster anti-inflammatory drug in response to FTC concerns, pushing back the timeline for that deal's close in the process.
And while the two companies have different focuses, analysts still expect some level of divestment will be required. Bernstein's Ronny Gal views their gastrointestinal businesses as overlapping, while Credit Suisse's Divan highlighted Allergan's experimental IL-23 inhibitor and Zenpep as two likely assets that could be sold off.