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.