AbbVie (ABBV 0.73%) investors leery about the company's acquisition decisions quickly sliced $18.8 billion from the pharmaceutical company's market cap after AbbVie announced it's getting into the business at their expense. You might expect Allergan (AGN) shareholders to be pleased with a $60 billion buyout offer that pushed the stock 26% higher, but they're fuming, too.
To sort out which camp has the most to gripe about and which got lucky, let's weigh the reasons these companies want to get together against investors' concerns.
AbbVie still relies on one product, Humira, for 57% of total revenue, and this anti-inflammatory injection will begin losing ground to biosimilar competition in 2023. If we were to include Allergan's revenue results, the merged company's dependence on Humira would drop to just 39% of total sales.
AbbVie also tried appealing to shareholders with expectations of a 10% bump to adjusted earnings per share over the first year, and perhaps as high as 20% down the line.
Since these companies have a lot of overlapping departments, a lot of Allergan employees will probably receive a severance package and a box for their personal items before the end of the year. Altogether, AbbVie expects to trim more than $2 billion annually from Allergan's operations. That shouldn't be too difficult -- over the past year, operating expenses for the pair reached $18.7 billion and $13.0 billion, respectively.
Why Allergan investors aren't happy
Over the past four years, investors have watched the benchmark S&P 500 index deliver a 50% return while Allergan's stock price fell 58% lower. Allergan made the right call selling its generic drug business to Teva Pharmaceuticals, but the company soon regretted accepting stock instead of all cash. Shares of Teva were decimated before Allergan was able to sell any.
Allergan investors aren't too happy about the price AbbVie's offering despite the 45% premium compared to the previous day's closing price. Assuming Botox sales don't succumb to competition from new versions of botulism toxin injections, Allergan is worth around $83 billion in today's dollars, or around $20 billion more than AbbVie's offering.
Why AbbVie investors aren't happy
AbbVie investors are probably getting the short end of the stick here. If the deal is completed as announced, AbbVie's shareholders will own just 83% of AbbVie, with Allergan shareholders in control of the rest. That's a lot to give up for a late-stage development pipeline that isn't terribly exciting and two leading revenue streams in deep trouble.
Restasis is a simple cyclosporine solution that people with dry eyes have been using to promote tear production since 1983. It's had a good run, but generic competition from Teva Pharmaceuticals and its peers should begin taking shots at Allergan's highly profitable brand any day now. In April, the Supreme Court refused to hear Allergan's appeal of a lower court ruling that decided against the company's bold attempt to transfer Restasis patent rights to the Saint Regis Mohawk Tribe.
Allergan's lead product, Botox, could face competition from Revance Therapeutics (RVNC -2.74%) and its next-generation botulism injection. Revance's lead candidate, called DaxibotulinumtoxinA, or Daxi, uses a proprietary stabilizer meant to keep facial muscles from forming wrinkles a lot longer than the Botox brand.
Sadly for Allergan, and soon AbbVie, patients treated with one dose of Daxi were significantly more likely to still lack frown lines at 16 and 24 weeks than those injected with Botox. Restasis and Botox sport much wider profit margins than the rest of Allergan's product lineup, which means AbbVie could struggle just to break even with this deal.
Revance plans on submitting an application to the FDA later this year, which means it could begin competing with Allergan for customers concerned with frown lines before the end of 2020. The company recently began phase 2 studies with Daxi as a treatment for upper limb spasticity, forehead lines, and crow's-feet. If the results come in positive, Allergan and AbbVie could fall further.
Buying Allergan when Restasis and Botox are entering the final chapters of their respective growth stories probably isn't the best way to offset Humira losses that will accelerate a few years from now. If the $4 billion writedown AbbVie recorded in 2018 following its ill-fated acquisition of Stemcentrx didn't convince you to dump your shares already, now is probably a good time to let go.