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What AbbVie’s $63 Billion Deal to Buy Allergan Says About the Drug Industry

AbbVie announced on Tuesday that it will buy Allergan in a deal valued at about $63 billion, a 45% premium on Allergan’s most recent closing stock price. The proposed M&A will be one of the largest health care mergers of the year and bring together a portfolio that includes AbbVie’s Humira, the world’s best-selling drug, and Allergan’s flagship beauty treatment Botox.

The reaction from investors was mixed. Allergan shareholders rejoiced as shares shot up more than 26% in early Tuesday trading. AbbVie stock, for its part, was down more than 15%.

But the AbbVie Allergan deal isn’t just a story about health care consolidation – it’s one about the state of innovation among big, legacy biopharma companies scurrying to find ways to plug future holes in their revenue streams. Both companies have bled market value in the past year as investors questioned whether AbbVie can make up for falling sales of its blockbuster psoriasis and arthritis treatment Humira, which rang in nearly $20 billion in 2018 revenues alone, and pushed for a breakup of Allergan amid pipeline struggles.

AbbVie CEO Richard A. Gonzalez heralded the deal as “transformative.”

“This is a transformational transaction for both companies and achieves unique and complementary strategic objectives,” he said in a statement. “[T]his strategy allows us to diversify AbbVie’s business while sustaining our focus on innovative science and the advancement of our industry-leading pipeline well into the future.”

Allergan chief Brent Saunders will join AbbVie’s board if and when the deal closes while Gonzalez will remain chairman and CEO of the combined company. While Saunders has a reputation as a prolific deal maker who chases bolt-on acquisitions, growth from recent drug pipeline additions has been hard to come by.

For AbbVie, the rationale for the acquisition is clear – expand the portfolio and preserve the bottom line ahead of Humira’s patent expiration in the U.S. in 2023. Several of AbbVie’s experimental drug hopefuls have hit hitches in the past year, and Humira has already faced increased competition in markets like Europe.

Put another way: “AbbVie has near-term growth but faces a cliff, or more like a canyon, problem with the loss of Humira to [generic] biosimilars in the U.S. beginning mid-2023 while Allergan… has struggled to generate growth but doesn’t face any key near-term exclusivity loss,” wrote Raymond James analyst Elliot Wilbur in a research note.

Wilbur went on to state that AbbVie’s expected role as “the key R&D decision maker” could present several advantages, including “accelerated investment behind Botox therapeutics as well as simply better pipeline decision making than what Allergan management has demonstrated in the past.”

Humira and Botox are such quintessential elements of their respective companies’ portfolios that the firms have done everything possible to safeguard their patents and ward off potential rivals from entering the market. And Gonzalez was quick to note Botox’s immunity from competition as a rationale for the deal.

“It’s very unlikely we’ll see a Botox biosimilar for a long, long time, if ever,” he said on Tuesday of Allergan’s efforts to protect the product.

Legacy pharmaceutical giants have resorted to deal-making and preserving patents in recent years as their return on investment in new R&D plummeted to 10-year lows in 2018. One recent trend has been a focus on niche therapies with high price points and a reliance on list price hikes, alongside bolt-on acquisitions and in-licensing products from leaner biotechs. The AbbVie Allergan acquisition may prove a $63 billion case study in how some large drug makers are grappling with the reality of an innovation gap.