AbbVie has set into motion what would be the year’s second-largest biopharma merger—and one of the largest of all time—with its planned approximately $63 billion acquisition of Allergan.

The megadeal, announced yesterday, would create a $48 billion biopharma giant, based on 2019 revenues, by strengthening AbbVie’s topline with the up-to-$15.425 billion in annual revenue projected this year by Allergan. The extra revenue would come as AbbVie is three years away from losing U.S. market exclusivity for its longtime top-selling drug Humira® (adalimumab).

No fewer than eight biopharmas are planning to launch biosimilar versions of the multi-indication blockbuster treatment in 2023. The U.S. launches are actually a victory for AbbVie, since competition for Humira has already begun in Europe following the loss of patent protection there in October 2018.

The onset of European competition explains why first-quarter net revenues of Humira fell 5.6% year-over-year, to $4.446 billion, after years of significant increases. AbbVie has blamed European biosimilar competition for a 27.9% drop in international net revenues of $1.231 billion, which was only partially offset by a 7.1% increase in U.S. net revenues for the drug.

Last year, Humira generated $19.936 billion in global sales, up 8.2% from $18.427 billion in 2017—placing Humira atop GEN’s A-List of the Top 15 Best-Selling Drugs of 2018.

“We believe the increasing concern about AbbVie’s growth potential following the U.S. Humira biosimilar competition in 2023 will be partially alleviated with the increased portfolio of assets that Allergan brings,” Damien Conover, healthcare sector director at Morningstar, said yesterday in a note to investors.

Those assets include Allergan’s top-selling cosmetic and medical drug Botox®, which in the first quarter saw its net revenues rise 5.8% year-over-year, to $397.6 million, on top of the $3.577  billion racked up for all of 2018, of which $1.55 billion was generated by cosmetic uses.

In particular, we view Allergan’s leading product Botox as well positioned in both the therapeutic and cosmetic settings based on strong clinical data and powerful brand power,” Conover said.

Allergan has two other drugs that generated more than $1 billion in 2018 sales. One is Restasis® (cyclosporine ophthalmic emulsion), an eye drug indicated for increased tear production in patients whose tear production is presumed to be suppressed due to ocular inflammation associated with keratoconjunctivitis sicca. The other is Juvéderm®, a cosmetic drug indicated for facial volume loss.

In acquiring Allergan, AbbVie cited Allergan’s numerous specialty drug franchises—which include eye care, hematologic oncology, immunology, medical aesthetics, neuroscience, virology, and women’s health. “We see Allergan’s presence in women’s health as particularly helpful for AbbVie’s launch of endometriosis drug Orilissa,” Conover observed.

“Transformational transaction”

In a statement, AbbVie chairman and CEO Richard A. Gonzalez declared the deal nothing less than “a transformational transaction for both companies and achieves unique and complementary strategic objectives.”

“The combination of AbbVie and Allergan increases our ability to continue to deliver on our mission to patients and shareholders. With our enhanced growth platform to fuel industry-leading growth, this strategy allows us to diversify AbbVie’s business while sustaining our focus on innovative science and the advancement of our industry-leading pipeline well into the future,” Gonzalez said.

Gonzalez will serve as chairman and CEO of the combined company through the Humira loss of U.S. exclusivity in 2023. AbbVie’s board would include two Allergan board members, including Allergan’s current chairman and CEO Brent Saunders.

AbbVie would continue to be incorporated in Delaware as AbbVie Inc., and retain its principal executive offices in North Chicago, IL, where the company is now based.

AbbVie noted that Allergan’s areas of therapeutic focus mostly aligned with its four areas of immunology, oncology, virology, and neuroscience—areas that the buyer is counting on to deliver “high-single digit annual growth” well into the next decade, from more than $30 billion in revenues projected for 2020.

“We are encouraged by the focus that ABBV [AbbVie] is placing on AGN [Allergan]’s neurology/psychiatry assets,” Canaccord Genuity analyst Sumant Kulkarni wrote in a note to investors.” He noted that on one hand, commercialization of neuroscience drugs could get more competitive with the AbbVie-Allergan combination putting significant financial muscle behind migraine and schizophrenia/bipolar depression candidates, where the combined giant would face competition from numerous neuropsychiatric drug developers.

“On the other hand, though, we believe this deal brings some attention back to the scarcity value of later-stage/filed neuro-related assets,” Kulkarni wrote. “While several major pharmas have deemphasized neuroscience, ABBV is one that has a presence in neuroscience, which will get even larger if the AGN acquisition closes.”

$2B in annual synergies

AbbVie and Allergan also acknowledged that the combined company would generate annual pre-tax synergies and other cost reductions of at least $2 billion in the third year following closing of the deal.

Half of the cost cuts are expected to come from R&D, with another 40% are to come from lowering selling, general, and administrative (SG&A) expenses, including sales and marketing and central support function costs. The remaining 10% is expected to come from eliminating redundancies in manufacturing and supply chain, and leveraging procurement spending, AbbVie and Allergan said.

“From a synergy perspective, the $2 billion in annual savings projected by management looks reasonable,” Conover added.

Allergan shareholders would receive 0.8660 AbbVie Shares and $120.30 in cash for each Allergan share that they hold, for a total $188.24 per Allergan share. The transaction represents a 45% premium to Allergan shares’ closing price on Monday, a day before the deal was announced.

Allergan shareholders appeared to endorse the acquisition, with a buying surge that sent its shares up 25% to $162.43. The company was set to be acquired in 2016 for $160 billion by Pfizer—which scuttled that deal two days after the Obama administration issued new rules designed to discourage the deal and other tax-slicing “inversion” mergers; Allergan is domiciled in Dublin, Ireland.

“Allergan has been looking for a change whether it be a new investment opportunity, potential acquisitions, a company split up or a sale for some time now as their top-line appears to be stalled. This acquisition comes at an opportune time,” Daniel Laboe of Zacks Equity Research wrote yesterday.

However, AbbVie investors signaled initial unease with the deal, as shares of the buyer fell 16% yesterday to $65.70—the worst one-day performance for the stock since the company was spun out of Abbott Laboratories in 2013. Laboe said investors consider the deal’s 45% premium to be excessive, given its timing at the end of an economic cycle.

The deal is expected to close in “early 2020,” AbbVie and Allergan said, subject to regulatory and Allergan’s shareholder approvals. Soon after the closing of the acquisition, AbbVie shareholders would own approximately 83% of the combined company, with the remaining 17% to be owned by shareholders of Allergan.

AbbVie and Allergan also said the combined company is expected to generate enough cash flow to support a debt reduction target of $15 to $18 billion before the end of 2021, while also enabling a continued commitment to Baa2/BBB or better credit rating and continued dividend growth.

“Our combined company will have the opportunity to make even bigger contributions to global health than either can alone,” Saunders stated. “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.”

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