Medical merger: AbbVie’s acquisition of Allergan given US regulatory green light
Wednesday 20th May 2020
The publicly traded American pharmaceutical giant AbbVie was granted approval by US regulators to move forward with its $63 billion acquisition of Ireland-based pharmaceutical company Allergan. Although the deal was agreed in June last year, both parties were waiting for FTC approval before going ahead and finalising the acquisition.
The blockbuster acquisition was the third largest of 2019 and will see AbbVie pay $188.24 for each Allergan share – $120.30 in the form of cash and the remainder in AbbVie stock – with Allergan being acquired at a 45% premium overall. The deal will also include AbbVie inheriting approximately $20bn of Allergan’s debt, bringing the overall value of the deal to around $83bn.
Kirkland and Ellis LLP and McCann FitzGerald acted for AbbVie while Wachtell Lipton Rosen & Katz and Arthur Cox acted for Allergan with Weil Gotshal & Manges acting as their antitrust counsel. Furthermore, Debevoise & Plimpton advised J.P. Morgan Chase as financial advisor to Allergan.
Background to the deal
AbbVie was founded in 2013 after Abbott Laboratories announced that it would separate into two publicly traded companies. Abbott Laboratories would specialise in diversified medical products such as medical devices and diagnostic equipment and AbbVie would focus more on research-based pharmaceuticals, intending to profit through innovation and the production of medicines such as Humira – its flagship drug for rheumatoid arthritis.
Companies operating in the pharmaceutical industry have to incur high research and development (R&D) costs as they usually invest in multiple potential drugs which they then sell and profit from. Developing new drugs that eventually make it into the marketplace takes on average 10 years and costs on average $2.6 billion. Innovation and R&D are crucial for firms operating in the pharmaceutical sector to remain competitive and develop drugs that are profitable. Many large pharmaceutical companies utilise mergers and acquisitions (M&A) to grow their R&D capabilities and expand into medical markets where it is most profitable.
Why buy Allergan?
AbbVie is heavily reliant on sales of Humira, which is expected to earn around $21bn in sales by 2020, accounting for 70% of the company’s turnover. AbbVie faces pressure from declining future sales of its bestseller. Particularly, AbbVie is preparing for the expiry of its exclusivity over the Humira drug. This means that other pharmaceutical companies will be able to enter the market with cheaper, biosimilar drugs to Humira, driving down its price and therefore reducing the profitability of the drug. As a result, AbbVie is under pressure by its investors to innovate and create drugs that can replace the revenue that Humira has provided the company for the past decade.
AbbVie’s acquisition of Allergan follows a string of other buys by AbbVie; it bought the biopharmaceutical company Pharmacyclics for $21bn in 2015 and Stemcentrx in 2016 for nearly $10bn to bolster its drug pipeline. This will increase the probability for AbbVie to develop profitable medicines to counter falling sales from medicines like Humira, whose exclusivity will be lost soon, and enjoy the increased R&D capabilities through inheriting skilled personnel and intellectual property, for example. AbbVie seems to be adopting a long-term approach, using its current success with Humira to finance its growing portfolio of acquisitions that will provide it with a strong base for a sustainable chain of profitable medicines.
In an industry where aggregate production costs are high, investors are more forgiving of the high debt levels pharmaceutical companies accrue, but this is provided that the debt burden is sustainable and the company will be able, as it has promised its investors, to reduce its debt burden in the coming years. Both Allergan and AbbVie hope to cut costs initially by $2bn through job cuts and reductions in some of their research programmes, for example.
Practice area focus: Banking & Finance
AbbVie financed this Allergan buyout through a variety of ways. Firstly, it utilised equity finance, selling some of its shares at an agreed price in addition to cash. Also, AbbVie sold $30bn worth of bonds to investors to partially finance its acquisition, with demand for the notes being particularly strong at the time, with the order book peaking at $77 billion. This illustrates both investor confidence and appetite for AbbVie’s potential future gains. Morgan Stanley and Barclays Bank managed the bond sale.
In addition, Morgan Stanley and MUFG committed $38bn to finance the transaction through bridge loans and J.P. Morgan Chase is set to collect $123 million for its role in advising Allergan through the entire acquisition in general.
The various ways in which AbbVie financed this deal is an example of how companies allocate and spread risk to calm investor concerns. No single bank will be willing to take on all the financial risk to finance a deal of this size, but by securing funding from several different sources, AbbVie is able to pay off the debt over long periods of time and make it sustainable. For example, with some of its bond notes, AbbVie will pay investors back over a period of 30 years, and through capitalising from an era of historically low interests rates, the bridge loans it got from Morgan Stanley and MUFG will not become extremely expensive to pay off in the long-run because of the relatively low amount of interest.
Practice area focus: Intellectual Property
Patents and exclusivity rights are instrumental to most large pharmaceutical companies. Patents are licences that confer onto entities, for a set time period, property rights such as the right to exclude others from making, procuring or selling an invention. Exclusivity refers to certain delays and prohibitions on the approval of competitor drugs.
Pharmaceutical companies – through legal counsel – use various strategies to extend their patent rights and/or exclusivity. AbbVie, for example, has subjected Humira to 247 different patent applications in the US alone, of which 132 were approved – with 89% being filed after the company obtained marketing approval for the product. However, such extensions work for limited time periods and the more sustainable option is the diversification of a company’s portfolio – and AbbVie is doing just that. Legal counsel specialising in intellectual property most likely worked closely with AbbVie in the planning of the company’s long-term strategy. This is reflected by the string of acquisitions that AbbVie has executed since its founding in 2013; there is a strong emphasis on moving away from reliance on one drug and a greater focus towards the diversification of the company’s medicinal portfolio.
Practice area focus: Competition and antitrust
Although the deal was agreed in June 2019, it was put on hold as it awaited US Federal Trade Commission approval. In the interim, the deal faced fierce opposition from unions and public interest organisations who put pressure on the FTC to thoroughly scrutinise the deal. They cited concerns over previous anti-competitive behaviour by both Allergan and AbbVie. The FTC issued a “second request” for information on the deal within weeks of public opposition to the deal.
However, both companies and their counsel managed to reach an agreement with the FTC. To comply with the FTC’s regulations on the deal, AbbVie and Allergan will divest some of Allergan’s assets – EPI drugs Zenpep and Viokace will go to Nestlé SA and a further offloading of Allergan’s late-stage gastrointestinal candidate brazikumab to AstraZeneca was agreed. They were also helped by the Republican Party’s domination of the Commission that gave its approval. The Commission voted in favour 3-2, with two Democratic Commissioners voting against the measure. After gaining FTC approval, legal counsel for both parties sought and obtained approval for the deal in Ireland, meaning the deal will be officially closed this month.
Conclusion
AbbVie’s acquisition serves as a good example to illustrate the complexities and various interests that are at play in any given M&A deal. Law firms will have to operate across multiple legal systems and regulatory climates in order to close a deal. Time will tell if AbbVie’s acquisition and its current strategy will prove successful, and this will depend on it being able to develop a consistent flow of profitable medicines, while deleveraging without sacrificing R&D capabilities.
