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AbbVie looks beyond Humira with $63 billion deal for Botox-maker Allergan

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AbbVie has long been under pressure to diversify its portfolio and its shares have lost more than a third of their value since January 2018 over concerns about Humira

Drugmaker AbbVie said that it would acquire Allergan for about $63 billion, giving AbbVie control over the lucrative wrinkle treatment Botox and buying time to seek new growth before its blockbuster arthritis treatment Humira loses US patent protection.

AbbVie has long been under pressure to diversify its portfolio and its shares have lost more than a third of their value since January 2018 over concerns about Humira.

The world’s top-selling drug brought in sales of $20 billion last year. But it now faces competition from cheaper versions in Europe and a 2023 expiration of its patents in the United States, by far the most profitable market.

AbbVie Chief Executive Richard Gonzalez said the company was able to buy Allergan because of the massive amount of cash that Humira generates. A US corporate tax overhaul under the Trump administration, which helped companies bring back revenue earned overseas, also helped, he said.

“Humira is buying the assets that replace it over the long term,” said Gonzalez, who plans to lead the combined company and remain chairman and CEO through 2023.

Chief among those assets is Allergan’s Botox, an injection of a purified form of botulinum toxin that paralyzes muscles, smoothing frown lines and wrinkles in the forehead and around the eyes. It is also approved to treat chronic migraine headaches, overactive bladder and other medical uses.

But when used as a cosmetic treatment, patients must pay for Botox out of pocket, buffering it from the pricing pressure that health insurers and government health agencies have put on prescription medicines. Gonzalez said he does not expect a biosimilar version of Botox “for a long, long time, if ever.”

Botox had 2018 sales of about $3.6 billion, with $1.55 billion coming from cosmetic uses. Both therapeutic and cosmetic Botox are expected to keep growing, with analysts forecasting total 2019 sales of $3.9 billion and reaching nearly $6 billion by 2025, according to Refinitiv data.

“We believe the increasing concern about AbbVie’s growth potential following the US. Humira biosimilar competition in 2023 will be partially alleviated with the increased portfolio of assets that Allergan brings,” said Morningstar analyst Damien Conover.

The deal, coming months after Bristol-Myers Squibb Co agreed to buy Celgene Corp for $74 billion, also highlights renewed interest in major acquisitions by the pharmaceutical industry.

Shares of other specialty drugmakers and potential targets Mylan NV, Bausch Health Co Inc and Teva Pharmaceutical Industries Ltd rose, with Teva up 7.6 per cent.

AbbVie shares were down 15.7 per cent at $66.11, while Allergan shares were up 26.7 per cent at $164.20.

Major acquisition needed

AbbVie’s board decided about a year ago that the company needed a major acquisition ahead of Humira’s US patent expiration, Gonzalez said.

He said he first approached Allergan CEO Brent Saunders six or seven weeks ago. In late April, Saunders traveled to Chicago for a meeting and returned a few weeks later to discuss valuation.

AbbVie was looking for a partner with $10 billion to $15 billion in durable revenue that was not expected to decline. Allergan 2019 sales are forecast to be about $15 billion.

The motivation for this deal differs significantly from AbbVie’s unsuccessful bid in 2014 to buy Irish drugmaker Shire. At that time, AbbVie was looking to take advantage of lower corporate tax rates in Europe, Gonzalez said.

Allergan, formerly based in California, itself was part of a tax “inversion” deal, after European generic drugmaker Actavis bought Allergan for $66 billion in 2015 and adopted the Botox-maker’s name, moving its headquarters to Dublin.

The combined AbbVie and Allergan will be based in AbbVie’s home of North Chicago.
“The fact that we had tax reform (in the United States) allowed us … to take the company back to the US. It reinforces the benefit of tax reform,” Gonzalez told reporters.

Allergan issues

The deal follows a string of acquisitions for Allergan under Saunders, who will join AbbVie’s board. Over the last decade, Saunders remade Allergan into one of the world’s biggest pharmaceutical companies, but also saddled it with debt, leaving it less able to invest in research and development

His efforts culminated in a proposed $160 billion purchase by Pfizer Inc. But Pfizer walked away from the transaction in 2016 after the Obama administration cracked down on US companies’ ability to rebase in countries with lower tax rates.

Allergan has since struggled to find new growth. Its shares have lost around half their value and shareholders have pressured Saunders to break up or sell the company. Activist investor David Tepper also ran a campaign urging Allergan to hire an independent chairman.

Under terms of the deal, Allergan shareholders will receive 0.8660 AbbVie shares and $120.30 in cash for each share held, for a total of $188.24 per Allergan share, a premium of 45 per cent to the stock’s Monday close. Including debt, the deal values Allergan at $83 billion.

The transaction is expected to add 10 per cent to AbbVie’s adjusted earnings per share over the first full year following the close, the companies said.

AbbVie said it expects annual pretax savings and other cost reductions of at least $2 billion in its third year after the deal closes in early 2020. Some cost savings are likely to come cuts to Allergan’s research and development operations.

“This is yet another transaction driven by diversification, scale and low borrowing costs, rather than portfolio or top line synergies,” SVB Leerink analyst Geoffrey Porges said in a note.

Morgan Stanley and PJT Partners were financial advisers to AbbVie, while Kirkland & Ellis provided legal advice. JP Morgan Chase & Co was Allergan’s financial adviser, and its legal counsel were Wachtell, Lipton, Rosen & Katz and Arthur Cox.

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