AbbVie Makes 'Transformational' Move with $63 Billion Acquisition of Allergan

This morning, Illinois-based AbbVie announced it will acquire Ireland-based Allergan for $63 billion in a cash and stock deal. The acquisition is expected to be “transformational” for both companies, AbbVie said.

Richard Gonzales, chairman and chief executive officer of AbbVie, said the acquisition of Allergan achieves “unique and complementary strategic objectives” for both companies. In a statement outlining AbbVie’s proposal, Gonzales said combining the two companies will allow AbbVie to diversify is business, while “sustaining our focus” on scientific research and the company’s pipeline, which includes the top-selling drug, Humira.

In its announcement, AbbVie noted that a deal this size, in comparison to smaller “bolt-on” deals, is designed to deliver immediate scale to the company’s growth platform and also meets its strategic goal to reduce reliance on Humira, which has been the primary cash cow of the company.

“Smaller bolt-on acquisitions provide opportunities for future growth, but also require significant R&D investment amid scientific and clinical uncertainty. This transaction offers immediate compelling financial and strategic value to our shareholders with a much lower risk profile,” AbbVie said.

For Allergan, which includes the tent-pole of Botox and a strong migraine treatment pipeline, an acquisition has been years in the making. At one time, Allergan was a target for acquisition by Pfizer. However, that deal was called off due to the implementation of new regulations from the U.S. Department of Treasury regarding tax inversions. Since the 2016 termination of that deal, Allergan has repeatedly been rumored to be the target for acquisition, particularly as its stock slipped for several quarters in 2018, in large part due to generic competition in the U.S. As a result, some shareholders have called for changes to its board of directors.

Brent Saunders, chairman and CEO of Allergan, said the acquisition will lead to a company with combined revenue of approximately $48 billion this year. The combined companies generated $19 billion in operating cash flow in 2018. The two companies will have a strong pipeline in multiple therapeutic areas and “robust cash flows.” Saunders also said the combined companies will be able to make larger contributions to global health than either company could on their own.

“Our fast-growing therapeutic areas, including our world-class medical aesthetics, eye care, CNS and gastrointestinal businesses, will enhance AbbVie's strong growth platform and create substantial value for shareholders of both companies,” Saunders said in a statement.

AbbVie said the combined companies will have several strong franchises across immunology, hematologic oncology, medical aesthetics, neuroscience, women's health, eye care and virology. Allergan's product portfolio will be enhanced by AbbVie's commercial strength, expertise and international infrastructure, the company said.

AbbVie also noted that the acquisition of Allergan will benefit shareholders through significant cash flow generation and said the deal is expected to be 10% accretive to adjusted earnings per share over the first full year following the close of the transaction, At peak, Allergan said accretion could be greater than 20%. AbbVie's enhanced growth platform is expected to grow at a high-single-digit annual growth rate well into the next decade, from more than $30 billion in 2020, the company added.

Unlike the proposed Pfizer deal that would have seen that company move its headquarters to the U.K. for tax benefits, the combined AbbVie and Allergan will maintain principal executive offices in North Chicago, Ill. Gonzales will continue to helm AbbVie as chairman and CEO. Two members of Allergan's Board, including Saunders, will join AbbVie's Board upon completion of the transaction.

Under the financial nuts and bolts of the deal, Allergan shareholders will receive 0.8660 AbbVie shares and $120.30 in cash for each Allergan share they hold. That will provide a total value of $188.24 per share of Allergan. When the deal is finalized, AbbVie shareholders are expected to have an 83% stake in the combined companies and Allergan shareholders will have a 17% ownership. AbbVie is expected to generate significant annual operating cash flow, which will support a debt reduction target of $15 to $18 billion before the end of 2021.