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AbbVie, Allergan, Ugh

News broke yesterday morning (first at the Wall Street Journal, I believe) that Abbvie has agreed to acquire Allergan. This is one of the larger pharma mergers of recent years, and regular readers of this site will have a pretty good idea of the sigh and roll of the eyes with which I greet it. I think Ed Silverman at Stat‘s Pharmalot does a good job capturing the mood:

Over the past couple of years, AbbVie (ABBV) executives have struggled to convince investors they had a long-term strategy for growth. Now, something resembling a plan has emerged: The drug maker agreed to pay $63 billion in cash and stock for Allergan (AGN), which has had even more difficulty appeasing critics over some of its own ill-fated moves that pummeled its stock and sapped confidence in management.

And he quotes stock analyst Christopher Raymond, who nailed it in one sentence: “Two turkeys don’t make an eagle”. That’s about the size of it. Abbvie has been looking at the upcoming loss of protection for its Humira, their biggest single source of revenue, and Allergan is still riding along selling Botox and Restasis, despite a number of attempts to make money selling something else. I was sympathetic to Allergan back when they were being pursued by Valeant (as who wouldn’t be), but they escaped by doing a deal with Actavis, which put Brent Saunders in charge. And that is not an unmixed blessing. About a year later Pfizer made a run at the new company, and it’s easy to have sympathy for anyone being pursued by Pfizer, right? That deal was then bigfooted by the US Treasury (in a move that I didn’t appreciate much, either) but any accrued sympathy is long gone. It was wiped out by Allergan’s later attempted end-around of some of their own patent troubles by doing a rather bizarre deal with the St. Regis Mohawk Nation after legal advice that this would protect their IP from a PTO review procedure. That advice proved oddly unsound, and the entire strategy fell apart rather quickly, leaving Allergan with an even worse public image than before (some of which has naturally spread to the rest of the industry – thanks, guys). So that’s what AbbVie is getting.

And as has been pointed out, AbbVie itself seems to have structured this new deal so that they don’t even have to ask their own shareholders about it, which is a sign of confidence in much the same way that some movies don’t provide early screenings for the critics to review them. I will quote Peter Green here (fixed attribution as an edit!), whose song “Oh Well” provides the ever-pertinent advice “Don’t ask me what I think of you – I might not give the answer that you want me to“. I suppose that both AbbVie and Allergan can’t help it, ’bout the shape they’re in, either, come to think of it. Or so they’d say.

When it comes time to explain these situations, management in general tends toward a mode of speech that might be called “Third Person Impersonal”. Lots of passive voice, lots of things happening from somewhere else (space aliens?)  that are affecting the company and its earnings, lots of trends and issues that seem to have no particular source – they just sort of appeared, you know. You’re not going to see many drug companies come out and say something like “Despite years of advance warning and many attempts to do something about it, we have been unable to get around the fact that too much of our revenues still come from Single Product X. Now it’s too late to do anything except buy somebody else to goose earnings – beats nothing, right folks?” Alternatively, you can make that second sentence read “get bought by somebody else“, and you have the whole AbbVie/Allergan picture.

As for how the numbers for this exercise in can-kicking will work out, well, you know how that’s going to happen. Lisa Jarvis of C&E News shared this slide on Twitter, and its just-shoot-me heading of “Synergies Generate Significant Value” says it all. “Optimize overhead”, it says, “reduce overlapping resources”, and anyone who doesn’t know how you do that is about to find out. 50% of the cost reductions are coming from R&D this time – a bit higher percentage than normal, I think, but that probably represents all of Allergan’s R&D contribution being thrown over the side. AbbVie isn’t buying them for their ability to generate an interesting pipeline. That’s not to say that they might not clear out some of their own people, resources, and costs while they’re at it; a lot of companies take that opportunity, too. But overall, I expect AbbVie to rummage through Allergan’s assets, pick out whatever is generating money right now, maybe hold on to a couple of things that plausibly might start doing so real soon (if such exist), and toss the rest aside as quickly as possible.

I hate sounding like that, but I don’t see any other way it plays out. This isn’t an interesting deal, it isn’t transformative in any way you’d want to experience, it’s none of that stuff. It’s a cash grab by two companies who can’t think of anything better to do. Look away.

52 comments on “AbbVie, Allergan, Ugh”

  1. Not that hard says:

    “hard to to have sympathy” doesn’t seem quite right

  2. Not that hard says:

    “a lot of companies that that opportunity” seems a bit strange too

    1. Derek Lowe says:

      Fixed both of those – this piece took shape in several directions on the train ride in this morning, so some of the seams still needed to be restiched! Thanks. . .

      1. Not that hard says:

        You still have “to to” in that

      2. Nick K says:

        “Stitched” in lieu of “stiched”.


  3. drsnowboard says:

    Isn’t this the Pfizer model? Acquire, extract, demolish, discard, move on and repeat? Or perhaps the combine harvester model – convert a field of slightly decaying wheat into a couple of bales of allegedly tasty hay and burn the rest.
    When AZ reorganised, as soon as we saw ‘global footprint’ on a slide, we knew half the legacy Astra & Zeneca sites were toast, even if they didn’t fully realise it until 2 years later.
    My condolences to the R&D folk affected.

    1. still_here says:

      Still living the dream…

    2. MagickChicken says:

      This isn’t Pfizer’s strategy. This is late-stage capitalism’s strategy.

  4. Hap says:

    Cutting R+D for money now or soon has had a consistent appeal for investors, so that the fact that there’s no likely sources of long-term revenue and that AbbVie doesn’t want their shareholders to have any say in the deal implies that this is a really bad deal (for everyone other than management?).

  5. regdoug says:

    drsnowboard, you may have (accidentally, perhaps?) hit the nail on the head. The funny thing about a field a wheat is that it cannot produce any hay. It only produces straw. Sterile, inedible straw.

  6. Isidore says:

    Two “reduce”, two “optimize”, and one “leverage” on the slide, but no “impact” (as a verb), “disrupt” or “fulfill.” No imagination there! At least they left the “delayer” out.

  7. John Wayne says:

    The phrase “two turkeys don’t make an eagle” is bloody brilliant.

  8. JSN says:

    I don’t want to be seen as too pedantic, but “Oh Well” was written by great Peter Green the lead guitar and singer of Fleetwood Mac of that period.

    1. Derek Lowe says:

      Yikes, you are so right. Fixing that right now!

      1. anon the II says:

        I can’t seem to get the guitar solo followed by two whacks on the cowbell out of my head now. I’m looking it up now to see if this use of the cowbell predated Mountian’s on “Mississippi Queen”.

        Thanks for this afternoon’s earwig.

        1. MTK says:

          The Beatles “I Call Your Name” has Ringo really exploring the space with his cowbell. 1964.

          1. johnnyboy says:

            More cowbell !!!

  9. metaphysician says:

    So, silly question time:

    How much further before so much R&D has been eliminated from the industry, that R&D becomes so scarce that its actually profitable again?

    1. Philip says:

      R&D will be done by small pharma and then the drug or the company will be bought by a larger pharma. IIRC United Therapeutics bought a drug just out of phase II for $800 million upfront payment and another $400 million in milestone payments. This looks like the model going forward.

      1. Sken says:

        It’s honestly not THAT bad, as it gives the R&D team a quicker and easier out than actually trying to get a drug all the way to market. Yeah the grand payout isn’t as lucrative, but it mitigates a decent amount of the risk

        1. Hap says:

          As long as you don’t work there. I wonder if there will be too many people to do the R+D if the only pot of gold at the end of the rainbow is a pink slip.

          1. Sken says:

            I think as long as the VC money is flowing it’s a pretty good deal.

            I’m sure my tune will change a lot during the next recession/correction.
            Being acquired also comes with the perk that when your drug/lead/science crashes and burns in a late stage clinical trial you get a severance package instead of nothing….

          2. Poor banker says:

            So, does anyone know what’s the return on the investment for these VCs? We’re all aware of the splashy biotech that goes public or gets bought… but how many of these quietly disappear or become successful failures?

          3. drsnowboard says:

            @poor banker Invest equally in 10 biotechs. 5 will die without returning anything, 3 will limp along and you might be able to reverse them into something else and at least minimise your losses by passing the bag to someone else, 1 will make modest return in your timeframe x2or 3. 1 may make x10.
            Do you feel lucky, punk?

  10. anon says:

    Developing a drug is too difficult: buying one is far more easier.

  11. Eugene says:

    “two turkeys don’t make an eagle”, more like vultures circling over carrion, but that comparison denigrates the essential role vultures play in nature.

  12. mallam says:

    What struggling Pharma groups will be next?

  13. phil says:

    I used to work for Warner Chilcott, which was an Irish company. This is how Actavis, then Allergan, became Irish. Which is why Pfizer wanted to buy Allergan with all of the tax perks. Will the new company also be Irish? Not as desirable, but I haven’t seen any one mention this.

    1. david says:

      It will be a US company (Abbvie, the acquirer is US). No need to invert since the tax rate for corporations has been lowered significantly in the US.

  14. Hap says:

    “AbbVie, Allergan, Ugh” might be a better deal than the one actually offered – Ugh might have better management and more potential drugs.

  15. Wavefunction says:

    “We are the Borg. Your biological and technological nothingness will be added to our own existing biological and technological nothingness. Resistance is quartile.”

  16. Palo says:

    And what happens to Allergan’s Tax Inversion now? Is Ireland losing a big chunk of their tax revenues and GDP?

    1. Nameless says:

      They might lose their GDP but no tax revenue will be lost.

  17. SW Engineer says:

    I like the turkey/eagle metaphor. I’ve also heard mergers of this sort described as “tying two rocks together to make them float”.

  18. Derek Freyberg says:

    @ SW Engineer:
    Thank you for another nice metaphor – I hadn’t heard either the turkey/eagle or the two rocks ones before.
    But there’s an old one that probably applies here too: “We’re losing money on every sale, but making it up on volume”.

  19. RandomWok says:

    Prepare them for a swift, firm kick in the Botox.

  20. AlloG says:

    Yo Merging Cats!

    I’ll sell you da domains I just bought for 15M pounds each- and

    I also got Pfizgilea and Novaron too, but I’ll sell those cheaper

  21. PhotoDeTox says:

    Abbvie should invest their money more creatively and more sustainably. Their shareholders will loose on the long run. But probably a few people will profit from this deal.

    1. Jim Mowreader says:

      PhotoDeTox, “the long run” hasn’t been in vogue in decades. “Get through the quarter” is more like it.

  22. The Synergist says:

    Our daily synergy give us today
    and optimize our overhead
    as we optimize our recent acquisition’s overhead

    1. Hap says:

      and lead us not into insolvency
      and deliver us from activist investors
      for ours is the power and the glory and the profit forever

      1. Anon3 says:

        Amen. We now conclude our Passover merger. Manischewitz anyone?

  23. Scott says:

    Any Merger&Acquisition that doesn’t allow the shareholders to vote on it should be referred to the court system for corporate malfeasance and breach of fiduciary duty by the Board.

    1. Me says:

      …and to the blogosphere for ridicule

  24. Iatrochem says:

    Remember Allegan CEO is protege of Fast Freddy. The pearls Merck bought didn’t seem worth the price.

  25. Vader says:

    Two corpses shackling themselves to each other?

  26. Greg Hlatky says:

    The way I’ve seen it is, “Let’s tie a brick to a rock so they float better.”

  27. P4j45 says:

    Really boring topic!

    1. Barry says:

      I would remind you that this is Derek’s blog. If you find it interesting, read it. If you have something to contribute, contribute. If you don’t find it interesting, you can start your own blog, or not. But if you suffer some delusion that it’s your place to tell Derek what to post or not post, you should consult a psychiatrist.

  28. loupgarous says:

    The Bloomberg article on Allergan’s botox operation Derek showed us in “There’s Toxicity, and There’s Toxicity” yields perhaps the biggest clue to why AbbVie wants Allergan (apart from the snazzy name, which Actavis adopted after buying Allergan):

    “Some of the world’s largest pharmaceutical companies have tried and failed to develop their own neurotoxin-based drugs. In 2009, Johnson & Johnson paid $1.1 billion to purchase Mentor Corp., which among other things was developing PurTox, an experimental drug also derived from botulinum. Five years in, J&J stopped work on it. Potential competitors have since been encouraged by the Food and Drug Administration to develop so-called biosimilar drugs, compounds that are almost biologically identical to the reference drug. But no one has taken up the challenge with Botox. Mylan NV, which is in one of the strongest positions of any company to attempt a Botox biosimilar, signaled an interest to investors in March but has not fully committed to trying.

    Part of what protects the Botox empire is the sheer complexity of the drug. The recipe isn’t patent-protected—it’s a trade secret, like the formula for Coke. As long as Allergan can protect it, would-be duplicators have to start from scratch. Even if the procedure were out in the open, Brin likens Botox manufacturing to making a fine wine—a winemaker can’t necessarily replicate a rival’s vintage. “The fundamental process is an anaerobic fermentation process,” he says. “The amount of time, the purification process, the reagents that are used with it, these are very, very important, and they’re heavily controlled.”

    was bought in 2015 by Actavis Plc for about $66 billion. Actavis took the Allergan name, a testimony to the strength of the Botox brand. The new company has had its troubles. A year ago, CEO Brent Saunders had emerged as the affable face of an enlightened Big Pharma when he promised to cap drug price increases. That ended in October, when Allergan paid an American Indian tribe, which enjoys sovereign immunity, to hold the intellectual property on its second-biggest drug, the dry-eye treatment Restasis, a move designed to thwart one type of patent challenge. Critics jumped all over Allergan. Bloomberg View’s Joe Nocera labeled it “sleazy … sneaky, unscrupulous, and just plain wrong.” For a profit-minded corporation, this is when it’s especially comforting to have a drug like Botox, whose monopoly is made unassailable by government-assisted operational secrecy.”

    If you’ve already got a vertically-integrated process for making a Select Agent which is protected not just by being a trade secret, but a trade secret the US government wishes to remain obscure, and you have 90% of the neurotoxin market for botox, as well as 75% of the “cosmetic” market for the drug, you have something that mere patent protection can’t buy. As Bloomberg noted, even with FDA encouragement, the hill to making and selling biosimilars to botox is so steep Johnson & Johnson decided not to climb it (although others are game).

  29. Design Monkey says:

    That Bloombergs article contains a couple of silly myths and lies. First, the old advertising bulshit about seeeecret cola formula. Nobody actually cares about slight taste variations of that oversugarized mix of caffeine and phosphoric acid. One could swap coke with pepsi and most drinkers wouldn’t even notice any significant difference. Also todays coca-cola definitely is not the original seeeeecret cola. That one had honest cocaine in it and truthfully said so in its name. Second, about that aaah, oooh, impossibly complicated process of production of botulinium toxine. Well, german company Merz (not to be mixed up with Merck) did it and it was no big deal science wise. (If one likes Bloombergs style conspiracy theories, then Merz most likely had seeecret help from Nazi base in Antarctica). Selling it, though, involved certain legal battles and finest US judges, that Allergans money could buy.

  30. mjs says:

    One small batch of stock voted against Saunders of Allergan for the Cisco board of directors. Won’t do any good but at least it’s a vote on the side of right. Thanks for the info.

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