AbbVie's (ABBV 2.57%) third-quarter earnings call reminded investors about the transformative potential of the Allergan acquisition for the pharma giant. Management reiterated that they continue to expect the deal to close by the end of the first quarter of 2020. This is promising for investors, as the combined entity will allow AbbVie to gain a more diversified foothold in faster-growing therapeutic areas such as Botox and neuroscience while expanding its immunology portfolio with the addition of Allergan's Linzess and Viberzi.
AbbVie CEO Richard Gonzalez said on the earnings call that "the Allergan transaction will make us even stronger and more diversified." Let's see why.
A formidable edge
The new AbbVie will have a strong market leadership position in a number of therapeutic areas. AbbVie would be No. 1 in immunology, supported by its flagship arthritis treatment, Humira, but investors are also excited about potential approvals following results of ongoing Phase 3 clinical trials of Skyrizi in psoriasis and Upadacitinib in rheumatoid arthritis before the end of 2020. Not surprisingly, AbbVie will also have a market leadership position in medical aesthetics, with a product suite covering Botox, the CoolSculpting fat removal system, and Juvederm dermal fillers, which are used to help conceal wrinkles. Medical aesthetics is still a rapidly growing market, especially internationally. Management cited a Markets and Markets Medical Aesthetics report from September 2018 that cited the aesthetics addressable market being $12B at the time and "growing."
Investors should be encouraged by Gonzalez's comments on the call that, "Based on the uniqueness of this particular molecule, we have come to the conclusion that it would be extremely difficult to create a biosimilar version of Botox, and I would tell you, we looked at this very extensively with a lot of outside expertise and we feel very confident that that's the case." This should create a steady stream of earnings and cash flow to AbbVie to help support other therapeutic areas without the worry of generic competition.
Balance sheet nip-and-tuck
The scale and synergies of the acquisition are another bright spot for investors in a world where size matters more than ever to fend off competition.
Let's start with scale. Using full-year 2018 financials, adding AbbVie and Allergan gives us an entity that would have trailed only Johnson & Johnson, Roche, and Pfizer in revenue, lagging only the first two in operating cash flow. With the company's new scale, management believes it can achieve high-single-digit revenue growth.
With respect to the synergies, management expects the combined entity to lower costs and increase returns. Total savings are expected to top $2 billion over a three-plus-year period: 50% from R&D efficiency; 40% from selling, general, and administrative expenses as the footprint of the combined organization becomes leaner; and 10% from greater manufacturing efficiency. Those savings should show up quickly: Earnings per share are expected to get a 10% boost in year one and eventually top 20%. This will help support the increase of an already generous 5%-plus dividend yield, coupled with the promise of further shareholder-friendly actions as the company reduces its debt load. Gonzalez said that "combined, we will generate significant earnings and cash flow to enhance our innovative R&D platform support a strong and growing dividend and rapidly pay down debt."
If that's not enough
Year to date, AbbVie's stock price has been more or less flat, lagging the S&P 500. As a result, it's sporting a forward price-to-earnings multiple of roughly 10 times consensus estimates. That's not a steep price for an attractive dividend yield coupled with the prospect of accelerating revenue and earnings growth.
As closure of the acquisition draws near, any negative investor sentiment should begin to abate, allowing for the prospects of multiple expansion. Gonzalez said on the call, "Our model is more conservative than what the Allergan current performance is and certainly more conservative than their longer-range forecast, but it still does project growth for Botox going forward." Thus, this multiple expansion should be led by reduced fears around competition, realized cost synergies, and potential for increased earnings guidance.