AbbVie, nearing the end of Humira's historic run, scoops up a struggling Allergan for $63B

Rumors have been swirling that after years of turmoil and resistance, Allergan could be getting ready to split. But it looks like the drugmaker had other ideas.

AbbVie, looking for new medicines to supplant its aging megablockbuster Humira, has stepped in to buy the floundering drugmaker in a $63 billion deal that ranks as one of the year's largest. With the Illinois pharma giant offering 0.866 AbbVie shares and $120.30 in cash for each Allergan share, the deal represents a 45% premium to Allergan’s share values after Monday’s close. That premium would’ve been larger if Allergan shares hadn’t been rallying lately due to split-up speculation. 

AbbVie CEO Richard Gonzalez will run the combined company after an expected close in early 2020. He plans to stay on until Humira’s loss of exclusivity in 2023.  

On a conference call Tuesday morning, Gonzalez said the megadeal provides the combined company "immediate standalone scale" and "best-in-industry growth prospects." It'll be the fourth-largest drugmaker globally, with leadership positions in several treatment areas, he said. AbbVie has identified $2 billion in potential cost cuts.

AbbVie investors didn't seem to share Gonzalez's enthusiasm on Tuesday. The company's shares were down about 14.5% shortly after market open.

For Allergan, the sale represents a "welcome exit" for investors following a tumultuous few years, RBC Capital Markets analyst Randall Stanicky wrote in a Tuesday morning note to clients. After write-downs, R&D stumbles and more, the company’s shares fell to $115.73 earlier this month from a high of more than $330 in the summer of 2015. Allergan has faced pressure to split up to boost its fortunes, and analysts recently indicated the company would pursue that path.  

Amid the struggles, the company’s management has faced criticism. Hedge fund Appaloosa this spring campaigned for the company to split the roles of chairman and CEO, both currently held by Brent Saunders. The proposal seamed to gain some steam, but Allergan investors ended up voting against the idea. Saunders will take a board seat in the combined company, along with another Allergan representative.  

For his part, Wolfe Research analyst Anderson wrote Tuesday that the deal is a "comparatively graceful exit" for Allergan because it’s a "beaten-up name with an out-of-favor management team that has often disappointed investors."

While a breakup could’ve taken 12 to 18 months, the buyout will be a faster process to unlock Allergan’s value, Stanicky wrote. Even still, he wrote that the deal is a "surprise" because at an investor event yesterday, experts viewed Pfizer and Johnson & Johnson as the only "remote suitors" to purchase Allergan. Another analyst, Evercore ISI’s Umer Raffat, also recently wrote that he believed Allergan would split up.

Meanwhile, AbbVie will significantly expand with the transaction, diversifying beyond its existing focus areas to bring in the industry's top player in medical aesthetics.

AbbVie has been prepping for Humira’s biosimilar decline—coming in the U.S. in 2023—by advancing R&D projects and scouting for M&A prospects. The drugmaker also bought Pharmacyclics in 2015, getting Imbruvica, a cancer drug with numerous indications that AbbVie shares with J&J. AbbVie also attempted to buy Shire, now part of Takeda, for $55 billion back in 2014, but stricter new tax inversion rules from the U.S. Treasury thwarted that deal.

While Tuesday's deal largely took the industry by surprise, Wolfe Research analyst Tim Anderson wrote in a note there are several reasons it makes sense. He said AbbVie has a "big hole to fill" in its upcoming Humira loss of exclusivity, but "there is a paucity of good, big targets out there," especially at a "reasonable valuation." Allergan is "big enough," Anderson wrote, "but whether it is ‘good’ is in the eye of the beholder." Allergan has not been an "expensive name" on valuation, he added.

AbbVie already faces Humira competition in Europe, but it’s advancing new meds Skyrizi for psoriasis and upadacitinib for rheumatoid arthritis to help keep revenues growing. Humira generated nearly $20 billion last year, or around 61% of AbbVie's sales. Last year, Allergan generated $15.8 billion in global sales.

Providing more rationale, Gonzalez said Tuesday the deal provides AbbVie an opportunity to "fortify" its position while using Humira sales to pay down debt before biosimilars hit. He called it an "incredibly compelling opportunity and one we didn’t want to pass up."

"Essentially, Humira is buying the assets that replace it over the long term," the helmsman said.

It's not the first time Allergan has brought in a pharma suitor for a takeout. Previously, the company was set to merge with Pfizer in a $160 billion tax inversion, but the companies called it off in the wake of new Treasury rules. That deal valued Allergan at $363 per share, or about double Tuesday's offer from AbbVie.