AbbVie’s $63 billion Acquisition of Allergan

By Gustaf Baavhammar and Chris Leung (University of Warwick) (University of Warwick) - Date: 27/07/2019

Overview of the deal

  • Acquirer: AbbVie (NYSE: ABBV)

  • Target: Allergan (NYSE: AGN)

  • Estimated value: $63 bn

  • Announcement date: 25/06/2019

  • Acquirer Advisors: Morgan Stanley, PJT Partners

  • Target Advisors: J.P. Morgan

Amidst the backdrop of unprecedented levels of M&A activity in the healthcare space, AbbVie’s $63 bn acquisition of Allergan is the second largest takeover in the pharmaceutical industry this year, trailing behind Bristol-Myers Squibb’s $74 bn purchase of Celgene. According to the terms of the deal, AbbVie will shell out 0.866 of its shares and $120.30 per share of Allergan in a cash plus stock deal worth $188.25 per share – a 45.28% premium to Monday 22nd June’s closing price and which is expected to finalise early 2020.

M&A in the pharmaceutical industry has gained tremendous momentum where $310 bn worth of deals for American healthcare companies have already been announced thus far in 2019 – a record high for the first 6 months of a year according to Dealogic. AbbVie’s deal represents a rather traditional response to the perennial but inevitable challenge faced by the healthcare industry – loss of patent protection; further signalling big pharmas’ willingness to dig deep into their pockets for resolution and clarity over sustained future growth coupled alongside belief that even the world’s most dominant drug makers can aspire to become even bigger. The takeover will result in the world’s fifth largest drug company by valuation, with estimated consolidated revenues of $48 bn for 2019 at a market equity valuation of $153.3 bn.

“This is a transformational transaction for both companies and achieves unique and complementary strategic objectives,” -AbbVie’s Chairman and Chief Executive, Richard Gonzalez

Company Details (Acquirer - AbbVie)

Having spun off from Abbott Laboratories in 2013, AbbVie operates as a research-based pharmaceutical manufacturer, predominantly focused on treating chronic autoimmune diseases in rheumatology, gastroenterology, dermatology and oncology. Its main products include HUMIRA – which mainly treats rheumatoid arthritis and Crohn’s disease, and IBRUVICA – which treats B cell cancers.

- Founded in: 2013

- CEO: Richard Gonzalez

- Number of employees: 29,000

- Market Cap: $101.33 bn - EV: $133.58 bn

- LTM Revenue: $32.65 bn - LTM EBITDA: $13.95 bn

- LTM EV/Revenue: 4.09x - LTM EV/EBITDA: 9.58x

Company Details (Target - Allergan)

Allergan is a pharmaceutical company that resulted from a merger with Actavis in 2014. It acquires, develops and commercialises pharmaceutical products in 6 broad therapeutic areas: medical aesthetics, central nervous system, eyecare, rrology, gastroenterology and cardiovascular disease with Botox its headline product.

- Founded in: 1983

- CEO: Brenton Saunders

- Number of employees: 17,800

- Market Cap: $53.49 bn - EV: $75.41 bn

- LTM Revenue: $15.71 bn - LTM EBITDA: $7.06 bn

- LTM EV/Revenue: 4.80x - LTM EV/EBITDA: 10.68x

Projections and Assumptions

Short-term consequences

AbbVie has strategically built HUMIRA into the world’s bestselling drug today, treating autoimmune diseases such as rheumatoid arthritis and Crohn’s disease, through expanding its approved uses and price hikes. With sales at $19.9 bn in FY18, this accounted for 61% of AbbVie’s $32.8 bn revenue, and such dangerous dependence on a single revenue driver has forced AbbVie to make a statement move as means of reinvigorating an otherwise stagnating business. In the same vein, Allergan has also struggled for growth beyond its portfolio of aesthetic medications and Botox which drove top line revenue growth of 2%, ultimately bringing in $3.6 bn last year.

Since shedding more than a third of its market value since January 2018, AbbVie has been under pressure for diversification. The proposed takeover bears sound strategic rationale that offers a solution to long-standing challenges in both companies. The deal will help Allergan find stability following a 4-year slide in market price and offers a profitable exit for shareholders. With regard