Are AbbVie and Allergan Really Better Together?

The news that AbbVie (ABBV -0.48%) had inked a $63 billion deal to buy Allergan (AGN) was not met with applause on Wall Street Tuesday. Given that the share price of Allergan is now trading far below the bid price, there are clearly questions about whether the acquisition will go through. And the response reflected in AbbVie's stock move makes it clear that investors think it's overpaying -- though the deal price is less than half of what Pfizer intended to pay just three years ago.

In this segment of the MarketFoolery podcast, host Chris Hill and senior analyst Jason Moser discuss why these two companies might be better off together, why they might not, the value of Allergan's powerhouse Botox franchise, the market's views, and the possibility that we might be at the start of a societal shift away from such heavy use of prescription drugs.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on June 25, 2019.

Chris Hill: We're going to start with a big deal, this time in the healthcare space. I'm saying healthcare. The huge umbrella of healthcare. AbbVie buying Allergan. Allergan, the maker of Botox. This is a $63 billion deal, cash and stock. Allergan, if you're a shareholder, you're having a heck of a good day because the buyout price is 45% higher than yesterday's close. I am curious, though, at the fact that Allergan is now only trading up about 25%-28% higher. We'll get to whether or not this deal goes through. This is yet another big deal.

Jason Moser: Whether it goes through is going to be interesting, just from the perspective that it wasn't all that long ago that there was an offer made for Allergan for quite a bit more than today's offer. But then also, the recent calls have been for the company actually to split up and spin off some of its assets to realize more value that way. And then you find yourself where you are today as a shareholder, the deal, is that going to be the best way to realize value for Allergan shareholders? I don't know. Maybe. I feel like it is a deal that brings together two companies that can likely do more together than separately. There's not a lot of overlap there.

I look at this space, it feels like the chip maker space in the sense that they're always stuck on this wheel of never-ending innovation. You've always got to come up with something new, the next big thing. If you don't come up with that next big thing, the fall from grace can be pretty severe.

Allergan, I think most people probably know it for Botox. I'm a little bit conflicted there. I know there's some therapeutic implications there with migraines. It seems to be more something people associate with wrinkles and cosmetic stuff. You have to wonder how necessary that is, other than just someone's vanity, and I don't have a lot of sympathy for that. But it's a difficult line of work. Drugs face a lot of scrutiny. There are going to be plenty of failures. It's questionable, honestly, today, whether you should be using some of them. Interesting to see how this all plays out.

Hill: Yesterday, Dan Kline and I talked about the merger in the casino industry with Eldorado and Caesars. That's one that, at least to hear Dan Kline tell it, over the long term, he feels good about that deal. Clearly, based on what's happening with shares of AbbVie today, it looks like there are plenty of people who don't like this deal, or at least think that they are paying too much for Allergan, because shares of AbbVie are down about 15%, and it's not like this stock's been lighting the world on fire the last 18 months.

Moser: Yeah. We talk about that a lot. The acquirer usually feels a little bit of a pinch on the day of a deal. The acquired feels a little bit of a bump. It does seem like these are heavier reactions than we might normally see. I do get that. When you look at Allergan, its overall business, you're talking essentially, between Botox cosmetics and therapeutics, that's more than $2.5 billion of the company's overall sales, and that growth is clearly slowing down, if you look at those numbers. But then, when you look at the two companies combined, there are risks out there when it comes to generics. A lot of these drugs that they've been benefiting from for so long are starting to come off patent now. Generics are a common threat. There was a depression drug recently that Allergan had trouble with.

I do think we are hitting a new generational mentality that is going to question whether we need a lot of these drugs, whether it's depression -- I mean, they're serious problems. I'm not making light of something like depression. Any of these things require attention. But these commercials for these drugs, it takes more time for them to read off the side effects and potential implications as opposed to the benefits of the drug. Remember that Simpsons -- God, I'll always go back to the Simpsons. Remember that Simpsons a while back, where Homer was approached to be the spokesman for Viagragain? Remember that? "It gives you a lot of hair and what you need down there." [laughs] But then, "Possible side effects include loss of scalp and penis." That's what was said next, and that's what these drugs always feel like! You see this little benefit, and you're like, "That's nice!" Then you hear about the side effects, and you're like, "Why the hell would I take that thing? It sounds like I may die! Maybe I'd rather do it on my own terms." There is something they have to figure out there. I'm not sure it's so simple. It does feel like this space is only becoming more pointed in that direction, where you question the benefits vs. the costs. So, the consolidation is not terribly surprising. But two companies with slowing growth doesn't necessarily make one company that can then accelerate growth.