Among recent megamergers, only AbbVie-Allergan looks like a winner

When AbbVie announced its planned $63 billion takeout of Allergan last month, Wall Street blanched. Several analysts questioned whether the two companies were a good fit, blasting AbbVie for doing the deal solely to stave off the loss of revenues when its megahit Humira faces biosims in 2023.

But one analyst was a standout: SVB Leerink’s Geoffrey Porges. He praised the deal. And now he’s put out a new report explaining why he believes AbbVie will not only generate better-than-expected synergies from its purchase of Allergan but will ultimately prove it's a smarter deal than the two other recent mergers—Bristol-Myers Squibb’s $74 billion buyout of Celgene and Takeda’s $63 billion Shire takeout.

Why is combining AbbVie and Allergan a good move? AbbVie will benefit from diversifying into a new therapeutic area, aesthetics, Porges suggests. Neither BMS nor Takeda will add any new significant therapeutic areas to their portfolios in doing their respective deals, he said.

Specifically, the wrinkle-eraser Botox, in a nutshell, could pay off big time for AbbVie, SVB Leerink predicts. And aesthetics products in general—typically paid for by patients, not insurance—face fewer of the problems now plaguing pharma.

"Allergan’s aesthetics business is one of the most enduring franchises in the industry, and is unlikely to be adversely affected by many of the risks facing the traditional branded drug business (patents, pricing, reimbursement, importation, etc.)," Porges wrote in the note.

In 2018, 82% of AbbVie’s $33 billion in revenues came from its top three brands, Porges pointed out. They were Humira, cancer drug Imbruvica and hepatitis C treatment Mavyret. Nearly 40% of Allergan’s $15.8 billion in revenues, by contrast, came from Botox, Juvederm and dry-eye treatment Restasis. Therefore, Porges wrote, "the combined company is expected to substantially diversify away from its heavy reliance on Humira, and the top three brand concentration will go down to 68%."

AbbVie shares have lost 10% of their value since the Allergan deal was announced, while BMS and Takeda are down 16% and 32% respectively since they made their big M&A moves. SVB Leerink analysts believe investors are punishing the acquirers for the huge premiums they laid out for their targets: 64% over the prior 30-day average for Shire, 54% for Celgene and 45% for Allergan.

Given the diversification gained by acquiring Allergan, though, AbbVie could very well make the deal worth it for investors, Porges wrote. The combined company should deliver mid-single-digit revenue growth through 2023, he said. What’s more, adding Allergan "dilutes AbbVie’s exposure to Humira" from 46% to around 30%, "which is positive, and offers the company significant opportunities for operating efficiencies over and above the [$2 billion] in synergies already disclosed."

As for BMS, it’s facing considerable uncertainties post-merger with Celgene. The two were forced to put Celgene’s $1.6-billion-a-year psoriasis drug Otezla on the block to win the Federal Trade Commission’s blessing—a negative surprise, Porges wrote.

BMS will still be a top player in oncology, cardiovascular disease and hematology, but the loss of Otezla, coupled with patent expirations, will slow top-line growth and put considerable pressure on late-stage pipeline drugs from Celgene, including luspatercept to treat myelodysplastic syndromes.

Takeda, for its part, has strengthened its presence in gastroenterology and neuroscience with the Shire purchase. But it’s facing considerable challenges, SVB Leerink analysts wrote. The company’s presence in the U.S. falls behind that of its rivals, so the combined company will need to "fully leverage Shire’s U.S. commercial infrastructure and experience to increase sales of legacy Takeda brands," they said.

SVB Leerink ranked all three combined companies based on diversification potential, loss-of-exclusivity mitigation and the ability to reduce their leverage, given the high debt they took on to finance the acquisitions. AbbVie came out on top on all but one measure: debt. Still, Porges and colleagues predict the company will repay the majority of its new debt in three years.