AbbVie made a major splash Tuesday with its proposed $63 billion buyout of Allergan that’ll create a top-5 pharma giant. But analysts and investors were hardly impressed. One day after the announcement, feedback continues to pour in, with analysts questioning the fit and motivation for the tie-up.
The deal "essentially combines two challenged businesses," one analyst wrote. Some were left "surprised." AbbVie shares, meanwhile, fell 15% in the hours after the news as Allergan’s shares jumped more than 25%. Here, we've dug into some of the prevailing themes from early industry-watcher feedback.
Strategic fit
Numerous analysts understood the financial rationale for the deal but questioned the strategic side of the tie-up. In a note to clients, Piper Jaffray analyst Christopher Raymond praised numerous financial metrics, but wrote that the "lack of an obvious strategic fit or a clear line of sight toward substantially backfilling" Humira’s upcoming revenue loss … "and management’s assertions that the combined entity will have even more firepower to do midsized deals, give us pause." AbbVie has said Humira's U.S. loss of exclusivity in 2023 was a big motivator for the deal, with CEO Richard Gonzalez putting it bluntly on Tuesday. "Essentially, Humira is buying the assets that replace it over the long term," the helmsman said.
Raymond wrote that the tie-up "essentially combines two challenged businesses" and "feels to us like more of the same." Raymond also raised concern over AbbVie’s plans to scout future deals with Allergan in hand because of challenges inherent with more M&A, including high valuations across biopharma. Wolfe Research analyst Tim Anderson wrote that the combined business will have flat revenues after 2023, according to his team's calculations.
For his part, UBS analyst Navin Jacob wrote that he also understands the financial reasons behind the megamerger, but the "primary driver" for the buy "appears to be the ability to offset" Humira’s loss of exclusivity in 2023. He called the Allergan purchase a "shift away from its positive momentum in innovation," a sentiment shared by other analysts.
A rival bid?
There’s been some speculation about the possibility of a rival bid for Allergan, but RBC Capital Markets analyst Randall Stanicky and Wolfe's Anderson don’t see that as a likelihood. Among Anderson’s covered companies, AbbVie is the only one with a "substantially troubled future—by contrast, almost every other company we cover has an improving outlook."
"It is precisely because of [AbbVie’s] troubled future (in 2023+) that we are not surprised they are doing a big deal, prior management commentary to the contrary notwithstanding," Anderson wrote in his note dissecting the deal.
Market watchers have speculated Pfizer and Johnson & Johnson could make a bid, but Stanicky wrote that the companies aren't "obvious candidates" and that AbbVie’s deal price already "appears fair."
Creating value, or not?
After the deal announcement, Allergan’s shares shot up while AbbVie’s sank. In all, the reaction destroyed about $8 billion in market cap in a day, RBC analyst Kennen MacKay pointed out. Allergan gained about $10 billion in value, while AbbVie lost about $18 billion.
Looking forward, John Rountree, managing partner at the consultancy Novasecta, told CNBC it’s "tough to find something good" in the deal. He said it’s "not creating value" and that instead it’s a defensive move. He doesn't see how AbbVie "can add any value to Allergan."
The companies will look for $2 billion in cost cuts, with $1 billion expected to come from R&D.
Upbeat take
While numerous analysts questioned the merits the proposed transaction, Leerink analyst Geoffrey Porges praised the deal—even after AbbVie’s shares sank considerably on Tuesday. He said there’s a "high probability" AbbVie can...
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