WASHINGTON: Big news Tuesday morning on the M&A front: AbbVie (trading symbol: ABBV) announced it would acquire fellow pharmaceutical giant, the perpetually ailing Allergan (AGN), in a massive cash and stock deal. As is typical in such massive deals, AbbVie shares promptly tanked, while Allergan shares soared to heights most of its beleaguered shareholders never thought they’d see again.
Last week, evidence emerged that the game was afoot with the shares of ailing Allergan
Signs that something was afoot with Allergan started to appear last week. After watching their shares tumble relentlessly for over two years, remaining Allergan stockholders noted a mini buying spree and mysterious rise in the company’s share price last week.
By Monday, this high-volume buying binge totaled over $15 per share, with the share price hovering around $130 per share on generally high volume. That boosted shares upward from a recent all-time low of $114 and change – this in a stock that was worth over $280 shares just a couple of years ago.
It was clear to the ailing shareholders of ailing Allergan — including this writer — that something was afoot. And now we know: it was that deal with AbbVie. Traders with inside information were already aware of at least some details, which is why the stock began to catch a bid last week after its lengthy, slo-mo near-death behavior.
AbbVie and Allergan announce massive pharma M&A deal
CNBC reported some of the details in a Tuesday morning report.
“Drugmaker AbbVie said on Tuesday it would buy Botox-maker Allergan for about $63 billion, grabbing control of by far the biggest name in medical aesthetics to help reduce its reliance on blockbuster arthritis treatment Humira.
“The two companies have been in talks for the last six to seven weeks, sources told CNBC’s David Faber. The talks were initiated by AbbVie Chief Executive Richard Gonzalez, sources said.
“AbbVie has been under pressure to diversify its portfolio as Humira, the world’s best-selling drug, is already in competition with cheaper versions in Europe and faces expiration of its patents in 2023 in the United States, its most important market.
“Humira, which brought in revenue of about $20 billion last year, reported the first fall in quarterly sales in years in the January-March period.
“AbbVie’s Gonzalez, 65, will helm the combined company and remain chairman and chief executive through 2023, the companies said. The deal will effectively re-domicile Allergan as a U.S. company.”
Saunders “wheeling and dealing” at Allergan proved less than impressive
Reuters “Breakingviews” columnist Robert Cyran provided a largely critical breakdown of the deal in a report flashed to our brokerage accounts Tuesday morning. (No available public link.)
“Allergan, under wheeling-and-dealing Chief Executive Brent Saunders, has led a dramatic existence. The company was originally a roll-up of generic-drug firms with roots in Iceland. In 2014 it purchased the Botox maker for $66 billion and took the company’s name. Saunders sold the generic business at the top of the cycle, then agreed in 2015 to sell itself to Pfizer for $160 billion – only to have that tax-driven deal fall apart. Then came a series of questionable purchases, a failed attempt to transfer key patents to a native American tribe, a sliding stock price and attention from activist investors demanding a breakup.
“That makes the deal announced on Tuesday a great one for the seller, but not for the buyer. AbbVie is paying a roughly $20 billion premium. The value of projected annual savings of $2 billion, taxed and placed on a multiple of 10, is worth $4 billion less than that, at best. And it’s adding a hefty $60 billion in assumed and newly raised debt to its balance sheet.
“Sure, Botox delivers lots of revenue treating everything from flabby skin to incontinence. And Allergan’s aesthetics business collects its money straight from patients’ pockets, which is helpful when insurers and governments are cracking down on pricing. But the two companies don’t have much overlap and Botox, somewhat like Humira, has new rivals. Cutting Allergan’s feeble R&D effort should produce cash flow to reduce leverage, but that won’t help find new drugs.”
Ailing Allergan always showed promise, but seemed always to blunder in execution
Cyran, in my opinion, is being just a bit too cynical. Part of the lousy recent performance of ailing Allergan was due to the extraordinarily negative press treatment of the company’s nervy legal maneuvers to transfer the patents to its blockbuster topical eye treatment Restasis to a New York Indian tribe. It was the company’s attempt to hold on to its Restasis patents for a few years longer before generic competitors were allowed to come to market.
Both the U.S. court system and a Federal agency blew Allergan’s move out of the water, generating massive negative publicity as well as the first major crash in the Irish-domiciled company’s high-flying stock.
In successive months, then years, the company’s vaunted R&D backlog of new drugs has either progressed more slowly than expected; or, in at least one case, failed to make the grade. But a number of them still show impressive near-term chances of success.
That said, each hit to the company seemed to generate another 10-20 point drop in the price of the company’s shares before the per share price bottomed last week, well over 150 points down from its previous all-time high. This prolonged, miserable performance brought plenty of criticism to its Chairman and CEO, Brent Saunders. It also brought pressure from outside shareholders to split Saunders’ authority in two by appointing an independent chairman.
Saunders and the board successfully fought off that attempt. Allergan shares resumed their relentless slide.
But the failure of Saunders’ more recent wheeling-dealing hinted that something was going to happen. And now it has.
What the AbbVie / Allergan deal could be worth
CNBC tallied the dollars and cents of the ABBV/AGN deal for existing Allergan shareholders.
“Allergan shareholders will receive 0.8660 AbbVie shares and $120.30 in cash for each share held, for a total consideration of $188.24 per Allergan share, a premium of 45% to the stock’s Monday close. Including debt, the deal values Allergan at $83 billion.
“AbbVie shares were down 8% at $72.20, while Allergan shares were up 31.6% at $170.46 in early trading.”
ZeroHedge provides additional color.
“Abbvie will pay most of the price, [which] represents a 45% premium over Allergan’s closing share price Monday of $129.57, in cash. If it wasn’t for the recent surge in Botox-maker Allergan’s shares over rumors that the company might be breaking up – an eventuality favored by Wall Street – Abbvie would be paying an even larger premium.”
Tuesday’s Allergan chart doesn’t lie
In addition to reproducing the companies’ joint announcement on the deal, ZH’s report includes Allergan’s current stock chart reflecting the huge price leap at Tuesday morning’s opening bell. Look carefully. It’s the “island” jump / reversal pictured in the upper right corner of the chart, which is reproduced below.
You don’t see this too often, but it’s fun when you happen to own the target shares. Our large account will make a tidy bundle on this one. If we play our cards right going forward. And although we still have to take into account the 100 Allergan shares we gradually sold off over the past quarter.
Buy, sell or hold?
The final question in this Big Pharma deal is this one: Do we sell the shares now, or soon and just take today’s nifty and unexpected profit? Or do we hold on, wait for a higher bid, or just wait for the deal to close and collect the maximum profit and the cash?
Big deals like this can take up to a year to close, and a lot can happen between now and then. Not all of it positive. The deal could possibly be renegotiated if those ailing Allergan shares resume their lengthy swan dive to oblivion. Or any number of other things can go wrong.
Long-suffering AGN shareholders already know this. They’re likely among the large number of sellers on today’s news, as these shares are already off their opening high. But holding on to the shares to the completion of the transaction could provide maximum return. Plus a few more of Allergan’s decent dividends in the meantime.
We’ll hold for now. But obviously, we’ve endured over two years of endless bad news in this stock. One we foolishly over-invested in. We’ll be glad when we finally get rid of our remaining AGN position.
What’s Mr. Market up to?
The market as a whole is modestly off Tuesday. Treasury bonds are acting weird again. Consumer confidence is down more than the “experts” thought. Iran continues its bloviation initiative with more rhetorical provocations. And the U.S. is considering a highly provocative move against China’s major banks.
Finally, just announced, the Fed has muddied the financial waters once again. The Fed Chair noted that a 50 basis point interest rate cut might be too much to hope for.
Leave it to Jolly Jerry Powell to figure out new ways to give the finger to President Trump. Dow stocks are now down 100 points as of 1 p.m. ET as we complete this article. Smart move, Mr. Chairman.
And Congress still refuses to help President Trump build his wall. But the Wall Street Wall of Worry continues to grow higher these days. It little matters how trivial the provocation may prove to be. Headline risk still towers above every traditional market influence.
— Headline image: Allergan facility in Westport, Republic of Ireland. (Photo courtesy of Allergan website)