Ever since Abbott Laboratories spun off AbbVie (ABBV 5.13%) as a stand-alone entity approximately six years ago, the biotech has generated industry-leading levels of earnings, revenue, and dividend growth. In response, AbbVie's shares have also produced market-beating returns for its early shareholders.
However, AbbVie's status as biotech's top large-cap growth stock -- and one of the best dividend growth plays in all of healthcare -- abruptly ended in early 2018. A disappointing clinical readout for its experimental cancer therapy dubbed "ROVA-T" sent shock waves through the investing community, causing AbbVie's shares to lose around a quarter of their value in the past 16 months.
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The big deal is that AbbVie paid a noteworthy $5.8 billion to acquire ROVA-T and this particular cancer treatment also happened to be a key centerpiece in the biotech's pivot to immuno-oncology as a means to diversifying its revenue stream ahead of Humira's patent expiration. This singular clinical setback, in effect, caused Wall Street to hit the panic button over Humira's eventual decline.
Pouring salt onto the wound, Humira's sales dropped faster-than-expected following the drug's initial bout with biosimilars in Europe during the most recent quarter. This wake-up call, in turn, appears to have played a central role in AbbVie's decision to merge with struggling Botox maker Allergan (AGN +0.00%) in an enormous cash-and-stock deal valued at $63 billion.
Should investors buy into this planned megamerger, or is it a better idea to stick to the safety of the sidelines? Let's break down the benefits and potential drawbacks of this blockbuster deal to find out.
This megamerger has one clear upside
On the plus side, this merger instantly achieves AbbVie's core goal of diluting Humira's impact on its top line. Historically, Humira has made up around 60% of the drugmaker's annual revenue, but this figure should drop to around 38% once this deal closes early next year. And by 2024, Humira is slated to make up no more than a quarter of the combined entity's annual sales.
That's a big improvement over prior forecasts that called for around a third of AbbVie's annual sales emanating from Humira in 2024. So this megamerger does address AbbVie's biggest weakness. As an added bonus, Humira should remain a healthy cash cow for the company for the better part of the next decade, even with the entrance of biosimilars in the all-important U.S. market in 2023. AbbVie should thus have sufficient free cash flows to address its massive debt in the wake of this deal.
Two major drawbacks
The first major drawback is that this new megapharma would sport a jaw-dropping debt load of $73 billion. While AbbVie reportedly plans to reduce its debt load by $15 billion to $18 billion by 2021, the company won't have much room to maneuver in terms of business development activities for perhaps most of the next decade. Now, this limited financial capacity may not ultimately matter. But Teva Pharmaceutical Industries' implosion following its massive deal with Allergan shows what can happen when biopharmas box themselves in with too much debt.
Secondly, AbbVie might not be able to maintain its appeal as a top dividend growth stock over the course of the next decade. The biopharma, after all, will be dealing with declining sales for both Humira and Allergan's top-selling eye treatment Restasis, as well as a highly leveraged balance sheet. There's also serious concern that Botox sales could fall off due to the entrance of new competitors in the not-so-distant future. In short, investors may want to think twice before buying AbbVie solely for its prospects as a dividend growth play. AbbVie, after all, will be an entirely different animal after this deal officially closes.
Verdict
The bottom line is that AbbVie and Allergan are tying the knot out of necessity -- not because this is a match made in biopharma heaven. There are few, if any, natural synergies between these two large-cap biopharmas after all. Unfortunately, AbbVie's elite dividend program may take a big hit from this merger, and the new entity won't be able to change course -- at least not quickly -- if an unexpected hiccup arises thanks to its sky-high debt load. Put simply, investors are probably best served by taking a wait-and-see approach with AbbVie following this merger with Allergan.
