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AbbVie chooses revenue over innovation with Allergan takeout

AbbVie's Allergan takeout adds immediate revenue but little long-term value creation

Six years after splitting from Abbott to pursue innovative drug development, AbbVie has taken a clear about-face, choosing a certain immediate revenue stream in its proposed acquisition of Allergan rather than opting for a riskier, innovative play. AbbVie's investors appeared to want the latter as they trimmed $18 billion in market cap from the company while digesting the deal.

On Tuesday, AbbVie Inc. (NYSE:ABBV) proposed to acquire Allergan plc (NYSE:AGN) for $63 billion in cash and stock. Allergan shareholders will receive 0.866 shares of AbbVie and $120.30 per share of Allergan stock, representing a 45% premium to Allergan's close of $129.57 on June 24, the day before the deal was announced. AbbVie shareholders will own 83% of the combined company while Allergan shareholders will own 17%.

The mega-merger has the hallmark of many 20th century pharma deals where companies faced dramatic patent cliffs that could see half of their revenues wiped away and little in the pipeline to buttress against the loss. AbbVie is facing a potentially heavy loss of revenues from blockbuster Humira adalimumab when biosimilars enter the market.

A more recent, contrasting model is the 2017 bolt-on deal by Johnson & Johnson (NYSE:JNJ) in which it acquired Actelion Ltd. for $30 billion, gaining the biotech’s pulmonary arterial hypertension franchise and spinning out the discovery and early stage programs into a newco (see “Patience Pays Off”).

While AbbVie has added innovative technologies via a handful of licensing deals this year, it’s had mixed success on that front with its billion dollar acquisitions in the past few years.

The Allergan takeout adds revenue with little in the way of long-term value creation. AbbVie acknowledged on an investor call to discuss the deal that the value is almost entirely tied up in Allergan’s marketed products.

Mixed record on innovation

The proposed Allergan acquisition puts AbbVie on a much different trajectory than what was outlined when the company split from Abbott Laboratories (NYSE:ABT) in 2013.

At the time, AbbVie had three pipeline programs it believed would sustain the company beyond Humira patent expiries.

However, shifting treatment landscapes in multiple sclerosis along with safety issues hamstrung anti-CD25 mAb Zinbryta daclizumab, leading to its withdrawal from the market. Early clinical setbacks hampered chronic kidney disease candidate bardoxolone methyl, which is partnered with Reata Pharmaceuticals Inc. (NASDAQ:RETA) and is now in Phase III testing. The third program was in HCV where AbbVie launched two separate HCV regimens, but payer pressure and intense market competition has caused that market to sputter.

Other attempts to bolster its pipeline include a failed attempt to purchase rare disease company Shire plc, a $5.8 billion acquisition of Stemcentrx Inc. and a $21 billion acquisition of Pharmacyclics Inc. The latter deal still delivers growing revenues through Imbruvica ibrutinib, but the lead candidate from the Stemcentrx deal failed in the clinic (see“AbbVie’s Plan B”; “Bru-te Force” and “AbbVie Records $4 Billion Impairment”).

And although AbbVie has not had a strong engine for internal discovery to feed its late-stage pipeline, the pharma made clear it isn’t relying on that to come from Allergan.

“We haven’t built in a large contribution from the pipeline,” Michael Severino, vice chairman and president said on the Tuesday investor call. Instead, the Allergan pipeline provides “optionality for us right now.”

AbbVie launched its internally developed cancer drug Venclexta venetoclax with partner Genentech Inc., in 2016. Investors have high hopes that autoimmune agents in its pipeline can help replace revenues from Humira after biosimilars enter the market -- expected in the U.S. in 2023. Skyrizi risankizumab-rzaa was launched in April to treat psoriasis, and upadacitinib is under review to treat rheumatoid arthritis with a PDUFA date next quarter. Skyrizi is partnered with Boehringer Ingelheim GmbH (Ingelheim, Germany) and upadacitinib was developed internally (see “The Missing Piece”).

Still, AbbVie sees room to add innovative assets once the Allergan deal is done.

AbbVie said it expects to use the operating cash flow from the combined company to reduce debt, support a growing dividend and allow it to pursue “additional mid-to-late stage pipeline assets.” Based on 2018 sales, the combined operating cash flow was $19 billion.

Allergan shareholders come out ahead

The deal appears to have a more immediate benefit for Allergan’s shareholders than AbbVie’s. For 2017 and 2018, Allergan’s GAAP EPS was -13.19 and -15.26, respectively. Its projected five-year compounded annual growth rate (CAGR) is 3.3%, whereas AbbVie has a consensus CAGR of 6.8% and GAAP EPS of $3.66 in 2018 and $3.30 in 2017.

AbbVie has projected a “high single-digit” CAGR for the combined company from 2018-23.

The deal is expected to be 10% accretive to EPS over the first full year after closing with peak accretion of greater than 20%.

AbbVie Chairman and CEO Richard Gonzalez said that AbbVie, through discussions with its board over the past year, had considered three types of BD activities to drive growth through 2023: “string of pearls, two to three bolt-ons, or something like this.”

He said that with a string of pearls, “You have to increase R&D leading up to the event, which is dilutive,” adding that bolt-ons have similar characteristics and both are reliant on binary events. “If they play out positively, you get there, if they play out negatively, you haven't accomplished your goal,” Gonzalez said. He added, “It's hard to find a bolt-on to give you $10-$15 billion revenue” up front to advance the platform rapidly.

“We haven't built in a large contribution from the pipeline.”

Michael Severino, AbbVie

According to AbbVie, the deal will add $15.7 billion based on Allergan's 2018 revenues and should help AbbVie sustain itself through 2023 when Humira biosimilars can enter the U.S. market.

For 2018, Humira had $19.9 billion in sales, comprising 60% of AbbVie's $32.8 billion in total net revenues. That will drop to 41% after Allergan’s product revenues are added to the top line.

The crown jewel in Allergan's portfolio is its $4.3 billion aesthetics franchise led by Botox onabotulinumtoxinA, which posted $2 billion in 2018 sales. Gonzalez said that AbbVie would “invest heavily in the business to continue to drive growth.” He added that it’s “highly unlikely that we would see a biosimilar of Botox for a long, long time, if ever.”

But at least three products could threaten that position.

FDA approved competing product Jeuveau prabotulinumtoxinA from Evolus Inc. (NASDAQ:EOLS) in February.

Revance Therapeutics Inc. (NASDAQ:RVNC) plans to submit Daxibotulinumtoxin A for Injection (RT002) for regulatory approval this year to treat moderate to severe glabellar lines. Revance also partnered with Mylan N.V. (NASDAQ:MYL) in 2018 to create a Botox biosimilar, and Mylan said on its 2018 earnings call that it believes there is a viable path forward to develop and commercialize a biosimilar of Botox, based on a 1Q19 advisory meeting with FDA.

AbbVie’s deal with Allergan is expected to close in 1Q20.

Gonzalez will be Chairman and CEO of the combined company, and two members of Allergan's board, including current chairman and CEO Brent Saunders, will join the board.

While Allergan is an Irish-domiciled company, AbbVie will remain incorporated the U.S.

Since Tuesday, Allergan has gained $38.18 (29%) to $167.75, and AbbVie has fallen $5.74 to $72.71, ending the week at a market cap of $107.5 billion.

Companies and Institutions Mentioned

AbbVie Inc. (NYSE:ABBV), North Chicago, Ill.

Allergan plc (NYSE:AGN), Dublin, Ireland

Evolus Inc. (NASDAQ:EOLS), Irvine, Calif.

Johnson & Johnson (NYSE:JNJ), New Brunswick, N.J.

Mylan N.V. (NASDAQ:MYL), Canonsburg, Penn.

Reata Pharmaceuticals Inc. (NASDAQ:RETA), Irving, Texas

Revance Therapeutics Inc. (NASDAQ:RVNC), Newark, Calif.

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