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Why politicians should not savage the $63 billion Abbvie-Allergan deal

Brian Sozzi
Editor-at-Large

Big drug hating politicians may want to think twice before hopping on the boob tube or working behind the scenes to attack and prevent a fresh wave of pharma industry consolidation.

In some respects, the need to cost effectively develop the next blockbuster drug for an aging population has caused big drug companies to consider joining forces as seen in Tuesday’s news of Abbvie buying Allergan. So while tempting, politicians seeking re-election should consider leaving their usual whipping boy — Big Pharma — alone for now say people Yahoo Finance has chatted up.

“When all is said and done, you need pharmaceutical companies to do research and development. The fact is look who needs these drugs, it’s Baby Boomers. Baby Boomers vote. Baby Boomers want to look good and they want to be healthy,” explained Prudential Financial Chief Markets Strategist Quincy Krosby on Yahoo Finance’s The First Trade.

“If you start to see the inability to do research and development or you can’t buy a new product, there will be a price to pay politically,” Krosby added.

Others on Wall Street agree on the premise for the latest pharma deal activity.

“With Abbvie now the key R&D decision maker, advantages of the deal will likely include accelerated investment behind Botox therapeutic as well as simply better pipeline decision making than what Allergan (AGN) management has demonstrated in the past,” points out Raymond James analyst Elliot Wilbur.

Despite the merits of bulking up R&D capabilities, the two whale deals out there in Big Pharma are still likely to be heavily scrutinized in Washington. And boy are they big deals.

Pharma M&A catches fire

Scientist Dixie Shurland working in her the lab at Allergan in Irvine. (Photo by Mark Boster/Los Angeles Times via Getty Images)

Botox maker Allergan said Tuesday it will be bought by Abbvie in a cash and stock deal valued at about $63 billion. The purchase price represents a 45% premium to Allergan’s closing price on Monday. A source close to the matter told Yahoo Finance the talks between the two companies began six to seven weeks ago and were initiated by Abbvie (ABBV).

The deal brings Allergan’s popular Botox under the same roof as Abbvie’s drugs for cancer and arthritis (namely the blockbuster Humira).

Allergan’s stock popped 25% to $162 on the news, below the $188 a share offer price perhaps on worries about regulatory approval. Recall both companies have been savaged by lawmakers for raising prices on many of their most popular drugs.

Raymond James’ Wilbur doesn’t think regulators will take issue with the transaction.

Meanwhile, Abbvie’s stock cratered 15% Tuesday, likely on fears that it’s overpaying for the struggling Allergan.

"This deal will help alleviate concerns on our reliance on Humira," said Richard Gonzalez, Abbvie CEO, on a conference call with analysts. Gonzalez is expected to run the combined company through 2023, which is when Humira loses exclusivity in the U.S.

On a conference call with analysts, Gonzalez hyped the potential for the combined company to bring drugs to market quicker.

Similar hype was spewed by management at Bristol-Myers (BMY) when it revealed its massive deal for Celgene back in January.

Unfortunately for Bristol-Myers, it’s now smack in the middle of getting ripped apart by lawmakers for its $74 billion deal for Celgene (CELG). Bristol-Myers’ stock tanked 7% on Monday after it said its splashy transaction will close later than expected. It will also involve a divesture of Celgene’s psoriasis drug Otezla in an effort to address antitrust concerns by the Federal Trade Commission (FTC).

Even still, most market observers believe the deal will get approved. And similar to Abbvie-Allergan, a Bristol-Myers-Celgene deal could combine R&D efforts to improve drug discovery.

Brian Sozzi is an editor-at-large and co-host of ‘The First Trade’ at Yahoo Finance. Follow Brian Sozzi him on Twitter @BrianSozzi