Before the novel coronavirus took over pretty much all of the financial headlines, the pharmaceutical industry was buzzing about the takeover of Allergan (NYSE:AGN) by AbbVie (NYSE:ABBV). Since the spread of the virus, Allergan stock has slipped but recovered much of the share-price loss.
Circumstances are quite different since the initial announcement of the acquisition back in June of last year. It might have been tempting to ignore Allergan in light of the pandemic since the company is famous for manufacturing Botox, which is often used for cosmetic purposes.
Discounting Allergan as the “Botox company” would be a mistake, however. Even with the takeover by AbbVie expected to take place in May, you can still buy Allergan stock shares with confidence. In fact, there’s no time like the present to start a position as this merger is still a pharma-biz game changer.
Two Giants Merge Into One
Even without the expected merger, Allergan is a massive and well-recognized company. The reality is there’s much more to this company than Botox. Allergan provides solutions and treatments for the central nervous system, eye-care and gastroenterology products, along with a broad array of medical-aesthetics products.
AbbVie also boasts an extensive and diverse product lineup. Just like Allergan is mostly known for Botox, AbbVie is famous for Humira. That’s a drug designed to treat rheumatoid arthritis, plaque psoriasis, Crohn’s disease and other conditions.
The upcoming acquisition will combine the revenue streams generated by the two blockbuster pharmaceutical success stories of Botox and Humira. Plus, the product pipelines of these two giant companies will combine.
AbbVie’s press release from June of 2019 summed up the synergistic value proposition succinctly and compellingly:
“The success and scale of the combined commercial business ensures funding capacity and flexibility for simultaneous robust pipeline investment, debt reduction and capital return to shareholders. The combined companies generated $19 billion in operating cash flow in 2018.”
A Great Deal at Just About Any Price
At the time of the deal’s announcement, some financial gurus might have been amazed that the price tag that AbbVie agreed to pay for Allergan. After all, $63 billion in stock shares and cash isn’t exactly chump change.
However, the acquisition should be viewed as a bargain, as the expected revenue boost is massive. As AbbVie explains, it shouldn’t take long at all before the capital expenditure is recouped:
“This transaction is expected to be 10% accretive to adjusted earnings per share over the first full year following the close of the transaction, with peak accretion of greater than 20%. ROIC is expected to exceed AbbVie’s cost of capital within the first full year.”
With the value proposition ensured, there was little if any reason to prevent the deal from proceeding. However, life isn’t always as simple as it ought to be. Deals of this magnitude have to be approved by the government.
The Green Light, at Long Last
It took a long time, but in March of this year it was finally announced that AbbVie had entered into a consent-decree agreement with the United States Federal Trade Commission in regard to the Allergan buyout. It’s because of this agreement that the two companies can confidently expect the deal to close in May.
In layman’s terms, the consent decree is the two companies’ agreement to agree to the government’s demands. And the main demand is that the combined post-merger company can’t be too big. Hence, AbbVie/Allergan agreed to give a few of its products:
“Under the terms of the consent decree, the companies have agreed to divest brazikumab, an investigational IL-23 inhibitor in development for autoimmune diseases, to AstraZeneca and Zenpep, a treatment for exocrine pancreatic insufficiency due to cystic fibrosis and other conditions, to Nestle. Nestle also will be acquiring Viokace, another pancreatic enzyme preparation, as part of the same transaction.”
All things considered, those are pretty small concessions to make. It’s not as if AbbVie/Allergan relied heavily on brazikumab, Zenpep or Viokace. Investors should be thankful that they didn’t have to give up Humera or Botox.
The Final Word on Allergan Stock
It was a long time in the making, no doubt about it. But don’t let distractions prevent you from appreciating the significance of this acquisition. There’s no need to wait until it’s in the rear-view mirror, as Allergan stock is absolutely worth buying before the deal goes through.
Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
