AbbVie ABBV stock fell over 15% through Tuesday morning trading. The significant drop came after the company announced that it will acquire Allergan PLC AGN in a deal worth approximately $63 billion. The drop brought AbbVie stock to a new 52-week low of $66.56 per share. Meanwhile, Allergan stock jumped about 27% after the news.
AbbVie and Allergan agreed on compensation of $120.30 in cash and 0.8660 ABBV shares per AGN share. This valued AGN stock at $188.24, a 45% premium from its closing price on Monday. AbbVie is the producer of the world’s best-selling drug Humira and Allergen is the producer of Botox.
Allergan shareholders still need to vote to approve the deal, but it looks to be a great one for Allergan as many analysts believed the company was headed toward a split to increase shareholder value. AbbVie, in its press release, stated that it expects “the Acquisition will provide annual pre-tax synergies and other cost reductions of at least $2 billion in year three.” Combined R&D resources as well as a reduction in supply chain and manufacturing redundancies are said to be the main sources of these synergies.
Along with synergies, AbbVie expects the acquisition to provide significant cash flow generation. AbbVie and Allergan generated a combined operating cash flow of $19 billion in 2018. AbbVie is looking to use the new cash flow to reduce its debt and continue its dividend growth, which are reasons for investors to be happy.
AbbVie is heavily reliant on revenue from Humira, which brought in $20 billion in revenue last year. But AbbVie has been looking to diversify its portfolio as cheaper alternatives are already becoming available in Europe. Plus, AbbVie’s patent on the drug will expire in 2023 in the U.S. Adding Botox, the most popular cosmetic procedure in the U.S., to its portfolio is a good way for AbbVie to diversify.
Allergan also has products in other major sectors. These sectors include neuroscience, eye care, women’s health, cystic fibrosis, and cardiovascular and infectious diseases. Allergan’s stock has struggled since an attempted merger with Pfizer PFE failed in 2016 in which Pfizer valued AGN at $363.63 per share, nearly double the amount AbbVie is set to pay.
Before Tuesday’s announcement, AGN stock had fallen around 32% over the past 12 months, while ABBV was down over 15%. The acquisition could provide a boost for AbbVie’s stock down the road as it is projected to increase the company’s cash flow as well as diversify its product portfolio.
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