Merger Math: Allergan + AbbVie – Searching out out Alpha
There is plenty of discussion about AbbVie's (ABBV) recent proposal to acquire Allergan (AGN). The deal appears to be highly polarizing: some love it, some hate it. Which camp you fall into seems to depend on how much of a cynic you are. Those who love the deal see two companies with enormous cash flows…

There is a range of dialogue about AbbVie’s (ABBV) most contemporary proposal to manufacture Allergan (AGN). The deal looks to be highly polarizing: some prefer it, some abhor it. Which camp you fall into looks to rely on how grand of a cynic you is possible to be. These that just like the deal leer two corporations with enormous cash flows and histories of beneficiant shareholder returns. These that abhor the deal leer “melting ice cubes” combining out of desperation and taking on extra leverage than they’ll take care of. Which side is staunch? Entirely the future is aware of. But every side possess legit arguments. Sooner than you manufacture up your tips, a nearer behold at the numbers is warranted.

First, the proposed transaction: $120.30 in cash and Zero.866 ABBV shares for every portion of AGN. With 327.8M AGN shares outstanding, this means 283.9M shares of ABBV will most certainly be issued, bringing ABBV to 1.764B shares outstanding. Fresh AGN shareholders will personal 17% of the mixed firm. To fund the cash a part of the offer (which works out to $39.4B), ABBV has secured a $38B bridge mortgage and could presumably well consume cash on hand. As a minimal $30B is regularly refinanced into longer-time length bonds.

What is going to the mixed firm behold like?

Earnings

ABBV has guided to 2019 EPS of $eight.Seventy three-eight.Eighty three. AGN steering requires EPS elevated than $sixteen.fifty five. Using the most contemporary shares outstanding for every firm, we are in a position to estimate mixed earnings of roughly $18.4B. Taking away additional pastime expense of $1.2B (30B @ four% pastime), we obtain earnings of $17.2B. With the anticipated portion count of the new firm, this works out to an EPS of $9.75, an immediate accretion of over 10% as described by administration. Including in $2B of synergies would enhance EPS to about $10.88, a 24% develop over most contemporary ABBV earnings. This does now now not take into memoir any increases because of sing of product gross sales or decreases because of loss of exclusivity.

Synergies

How realistic are the proposed $2B synergies? The investor presentation allotted 10% to manufacturing and provide chain, forty% to SG&A, and 50% to R&D. This works out to $200M, $800M, and $1B respectively.

ABBV and AGN had mixed label of revenues of $9.99B in 2018. $200M is simplest 2% of this quantity and looks achievable. (Price of revenues is extra than staunch manufacturing and provide chain, however this feels like a cheap quantity).

Combined SG&A for the two corporations used to be $eleven.7B in 2018. An $800M reduction represents now now not up to 7% of the total, which is all as soon as more a moderately diminutive quantity which needs to be with out concerns achievable. If anything, we ought to question a higher quantity of synergies here.

Combined R&D used to be $7.5B in 2018. A $1B reduction represents a lower of thirteen%. This looks doable, however will most certainly be a miniature bit excessive, as R&D is severe for continued product pattern. $6.5B is set thirteen% of total gross sales of $49B, which is on the lower discontinuance compared to diverse pharmaceutical corporations.

Overall, the synergies proposed seem sensible and achievable, even even though less reducing of R&D and additional in SG&A would be most smartly-appreciated.

Revenues

2018 mixed revenues for ABBV and AGN possess been $48.5B. Each corporations are going through loss of exclusivity on key merchandise: Humira (initiate air US) for ABBV and Restasis for AGN (extra on this beneath).

Money Flows

2018 cash from operations used to be $thirteen.43B for ABBV and $5.64B for AGN for a mixed $19B. For 2019, ABBV does now now not provide cash circulation steering, however it is going through Humira LOE in Europe. The firm anticipated a 30% decline in revenues for global Humira gross sales, which pulled in $6.25B in 2018. This is possible to be offset by sing in ABBV’s diverse segments, so I will estimate cash flows preserving real at $thirteen.4B. AGN has guided to 2019 cash flows of $5-5.5B, reducing because of generic opponents for Restasis, which introduced $1.2B gross sales in 2018. Combined, the corporations could presumably well question cash from operations of about $18.7B for 2019.

Capex in 2018 used to be $638M for ABBV and $235M for AGN. This used to be a miniature bit higher than traditional for ABBV, however a piece on the low side for AGN. Combined, we would question $700M every yr.

An additional $30B in debt at four% charge would add $1.2B in pastime expense.

Subtracting these items from operational cash circulation leaves $sixteen.8B in free cash circulation for the mixed firm.

Debt

At the discontinuance of 2018, ABBV had total debt of $forty.3B and EBITDA of $thirteen.68B for a Debt to EBITDA ratio of 2.ninety five. AGN had total debt of $23.8B and EBITDA of $7.13B for a ratio of three.33. Using these numbers, the mixed firm would possess $Sixty four.1B debt and $20.8B EBITDA for a ratio of three.08, which looks manageable. Alternatively, we ought to take into memoir that ABBV is taking on now now not now now not up to $30B prolonged-time length debt in whisper to pay for the cash a part of the merger offer. Including that to the combine brings total debt to $ninety four.1B and the debt ratio to round four.5, which is possible quiet investment grade, however uncomfortably excessive. On the diverse hand, I truly possess now now not accounted for the corporations’ most contemporary cash holdings and any deleveraging they’ll also gain in 2019, so the on-line debt to EBITDA can even discontinuance up a miniature bit lower by the time the merger is executed.

Searching at maturities, we are in a position to leer that the debt is effectively staggered over the following couple of a long time, with the superior amounts due in 2020 and 2022. This does now now not memoir for the new debt that will most certainly be added, however if those maturities occur later than 2025, ABBV will ought to possess no major debt partitions to address.

Administration has promised to reduce debt by $15-18B by 2021, which is a miniature bit extra than what’s at the moment scheduled to passe.

Dividends

With 1.764B shares outstanding, the mixed firm would require $7.55B every yr to duvet the dividend primarily primarily based mostly on ABBV’s most contemporary dividend charge. We estimated $sixteen.8B in free cash circulation above, which leaves $9.25B free cash circulation after dividends to pay down debt. Here is sufficient to duvet the $eight.3B debt maturing in 2020, with some room to develop the dividend. Alternatively, we ought to question this kind of develop to be a low-single-digit percentage, as there is now now not grand room for error.

Future Forecast

Here is the tricky phase and certain a predominant recount in investment choices. I’m for certain no expert and develop now now not possess a factual bewitch of the total addressable markets for the total medication or their opponents. Alternatively, primarily primarily based mostly on a search through firm displays and articles on Searching out out Alpha, here’s what I’m responsive to:

Declining gross sales

AbbVie

Humira is the most crucial loss here. With loss of exclusivity initiate air the US, administration expects global gross sales to divulge no by 30%. Within the first quarter, global gross sales possess been down by 23% yr over yr. With $6.25B global gross sales in 2018, up to $1.9B in gross sales are anticipated to be misplaced. This can even even be partly offset by continued sing in the US, now now not now now not up to till 2023. Total Humira gross sales declined 5.6% yr over yr in Q1 2019.

The diverse anguish is the hepatitis C franchise. Here, Mavyret has been cannibalizing gross sales of Viekira and gaining market portion, however the total HCV market is anticipated to divulge no, because the remedy is a remedy in desire to managing symptoms. One simplest needs to behold at Gilead (GILD) to leer the challenges on this market.

Allergan

In its most most contemporary earnings call, Allergan presented this dash, which highlights upcoming anticipated loss of exclusivity for medication in its portfolio:

Searching at section recordsdata in AGN’s 2018 10-K, we are in a position to leer the following breakdown of gross sales for medication anticipated to lose exclusivity in the attain future:

Drug

LOE

US

Global

Total

Restasis

2019

1,197

Sixty four.5

1,261.5

Delzicol

2019

one hundred thirty.eight

forty five.7

176.5

Saphris

2020

139.7

139.7

Taytulla

2020

Seventy two.four

Seventy two.four

Viibryd

2021

342.four

342.four

Bystolic

2021

583.eight

583.eight

Combigan/Alphagan

2022

375.four

176

551.four

Ozurdex

2023

111

187.7

298.7

Total

three,426.four

The superior of those is Restasis, which used to be anticipated to face generic opponents beginning in Might per chance per chance 2019. Restasis represented $1.26B in gross sales for 2018. All the design through the Q1 earnings call, administration smartly-known that a two-month prolong in the initiate of generics ended in a $100M upward revision in revenues, implying that it expects gross sales to lower by $600M (50%) on a fleshy-yr basis.

Searching at the leisure of the list, losses needs to be manageable in 2020, however beginning in 2021, a entire lot of excessive income medication are anticipated to lose exclusivity, including Viibryd, Bystolic, Combigan, and Alphagan, which possess mixed revenues higher than Restasis.

The diverse procedure of anguish is Botox, which represents over 20% of income:

US

Global

Total

Botox Cosmetics

907.three

641.2

1,548.5

Botox Therapeutics

1,638.5

390.four

2,028.9

Botox does now now not possess patent safety and depends on branding to preserve up market portion. Though Botox has been step by step increasing, there are new opponents coming into the market, most seriously Evolus (EOLS) and Revance Therapeutics (RVNC). I question that in the attain time length, Botox can even lose some market portion, however the market will proceed expanding, taking into account real revenues or low sing.

Rising Franchises

AbbVie

The most crucial memoir for AbbVie is the sing in the hematologic oncology portfolio, namely Imbruvica and Venclexta. Imbruvica has been increasing above 30% every yr, with 2018 revenues at $three.59B. Venclexta is at the moment grand smaller, with 2018 revenues at $344M, however has been doubling in yr-over-yr comps. Diverse notables comprise Creon, which ended 2018 with $928M revenues and eleven% sing, and Duodopa with $430M revenues and 21% sing.

Allergan

Botox remains the foremost sing memoir. Despite concerns about opponents, the label has been increasing at mid- to excessive-single-digit charges with total 2018 revenues at $three.5B. Juvederm is also a prime sing heart, with $1.16B in 2018 gross sales and sing of round 10%. Also of present are Vraylar, a $487M franchise with 70% sing, Linzess with $761M gross sales and eight% sing, and Lo Loestrin, with gross sales of $528M and 14% sing.

Pipeline

AbbVie

Recently approved expanded indications for Imbruvica and Venclexta ought to allow both medication to preserve up or speed sing charges. Skyrizi, at the moment at a $150M flee charge, can even cannibalize Humira gross sales, however this needs to be seen as a honest pattern as gross sales will most certainly be less inclined to biosimilar opponents. Initiate of Orilissa is progressing effectively and at the moment at a $60M flee charge.

Allergan

Fresh approvals for expanded makes consume of for Vraylar, Botox, and CoolSculpting ought to allow continued sing. Approval is also anticipated for Cariprazine, with product initiate scheduled for 2nd 1/2 of 2019.

Conclusion

There could be a range of tantalizing components desirous about these two corporations. The mixed entity will possess to address excessive leverage and faces slowing gross sales because of loss of exclusivity on key merchandise – Humira and Restasis. Diverse merchandise such as Botox and Mavyret are doing beautiful for now, however can even face declining gross sales in some unspecified time in the future. Offsetting these are a range of new merchandise with wholesome sing charges, however lower most contemporary gross sales. If cash circulation can even even be maintained, the mixed firm will ought to possess no arena paying off debt and supporting a modestly increasing dividend for the following couple of years. It remains to be seen if the more moderen medication in the portfolio can grow sufficient to offset the upcoming Humira loss of exclusivity in 2023.

Disclosure: I’m/we’re prolonged ABBV. I wrote this text myself, and it expresses my very personal opinions. I’m now now not receiving compensation for it (diverse than from Searching out out Alpha). I truly possess no industry relationship with any firm whose inventory is mentioned listed here.