After Bristol-Myers Squibb Co. (BMY) announced plans for a $74 billion acquisition of Celgene Corp. (CELG) earlier this year, followed shortly thereafter by Eli Lilly and Co.'s (LLY) planned $8 billion purchase of Loxo Oncology Inc. (LOXO) , many surmised it was the start of a sending spree in the sector.
"Big drug companies are looking at the prices of stocks that have been shelled and deciding: let's take advantage of all the chaos that comes from the ETFs and the worries about inflation and the downward push that comes from the macro funds and the machines, and let's do some buying," Action Alerts PLUS portfolio manager Jim Cramer said of the trends at the start of 2019. "The companies that have cash are looking at what has happened to this stock market and saying that it is cheaper to buy the science of another company, trim the cost and run it through their own company."
While it may have taken longer than expected for another big player to jump into the merger-and-acquisition (M&A) pool, the latest deal by AbbVie for Allergan suggests the appetite for acquisitions is indeed real.
Takeda Pharmaceuticals (TAK) CEO Christophe Weber said acquisitions of this size do make sense in the drug industry in an interview with TheStreet in the first quarter.
"You need scale to conduct R&D," Weber explained. "R&D is very expensive if you want to deliver innovative medicine. You need financial and global scale to really finance your R&D."
On the back of the big M&A motivation, analysts actually homed in on Allergan as an interesting player on both ends of the M&A acceleration.
A report from Chicago-based international law firm Baker McKenzie and Oxford Economics predicted that deals in the sector will increase to $331 billion in 2019, fueling speculation on what big deals remain on the horizon as the M&A mania may not be over.
"The announcement of this [Allergan] deal is good for the pharma space because it reinforces large-cap pharma's willingness to acquire assets," Cantor Fitzgerald analyst Louise Chen said. "The announcement of this deal could drive the Street to question what Merck (MRK) may acquire, since they have a patent cliff coming with Keytruda in 2028. Also, the Street may think about whether Perrigo (PRGO) could be acquired given their move toward pureplay consumer and an activist shareholder in the stock."
Chen added that Amgen Inc. (AMGN) could be a player in the space as well in a note earlier this year.
Terms of the Takeover
AbbVie will pay $188.24 in cash and stock for each of Allergan's common shares outstanding, a 45% premium to Allergan's Monday closing price, in a deal that would value the Botox maker at around $63 billion. AbbVie said the deal will add around 10% to its adjusted earnings in the first year and it will be incorporated in Delaware upon completion.
The incorporation in Delaware is particularly interesting as Allergan only a few years ago shifted its domicile to Ireland for tax purposes only to see corporate taxes cut under President Trump.
AbbVie's Richard Gonzalez will continue as chairman and CEO, the company said, and its main headquarters will remain in North Chicago, Illinois. Allergan CEO Brent Saunders will join the combined group's board when the deal is closed in early 2020.
"This is a transformational transaction for both companies and achieves unique and complementary strategic objectives," Gonzalez said. "The combination of AbbVie and Allergan increases our ability to continue to deliver on our mission to patients and shareholders. With our enhanced growth platform to fuel industry-leading growth, this strategy allows us to diversify AbbVie's business while sustaining our focus on innovative science and the advancement of our industry-leading pipeline well into the future."
Allergan shares were up nearly 32% before Tuesday's opening bell following news of the deal, a notable jump but still below the deal premium. AbbVie shares, meanwhile, were indicated about 8% lower.
The move in share price is a relief for Allergan shareholders who were down slightly year to date as management fielded calls to split the company. In contrast, the deal appears to be adding pain for AbbVie investors as its shares already were down nearly 15% year to date before the Allergan deal was announced.
Presenting some upside to the deal, Allergan posted stronger-than-expected first- quarter earnings and boosted its full-year profit guidance as Botox sales drove top-line growth of 2%, to $3.6 billion, for the Dublin-based pharmaceutical group.
Allergan also was forecasting 2019 non-GAAP revenues in the range of $15.10 billion to $15.40 billion, around half percent better than its prior forecast, with non-GAAP earnings of around $16.55, 20 cents ahead of its prior forecast.
However, Botox will be facing competition from rival Evolus Inc. (EOLS) and its wrinkle treatment, called Jeuveau, which received U.S. Food and Drug Administration (FDA) approval earlier this year after the agency first rejected the application, citing deficiencies in its manufacturing and chemical composition. Evolus has said it plans to price the treatment at discount of between 20% and 25% to Allergan's Botox.
For more details on the terms of the deal and the pipeline acquired in the transaction, the companies are holding a joint press conference at 8:30 a.m. ET.