Botox is a popular treatment that uses a toxin to temporarily reduce wrinkles. AbbVie has decided to spend $63 billion on Botox to try to conceal their own wrinkles.
AbbVie isn’t exactly a household name like the biggest pharmaceutical companies are, but the $32 billion that they made in revenue last year should tell you that this is no small company. AbbVie was spun off from Abbott Laboratories, which are a much better-known company, although AbbVie is the bigger of the two now.
AbbVie’s main claim to fame is their Humira drug, which accounts for half of their sales by itself. The worry with companies that rely so much on one drug like AbbVie does is that once the patent expires on it, the party might be over if they don’t fill the big hole that this creates. In the case of AbbVie, we’re talking about a huge gap indeed.
You don’t get a hit like Humira very often, and while the company does make a number of other drugs, this is their only blockbuster. As the clock has been ticking toward 2023 when the patent expires on Humira, AbbVie’s stock has been dropping lower and lower.
Stocks are much more about the future than a lot of people realize, especially those who pore over past business results and expect to see a good part of the picture at least. Pharmaceutical companies are particularly about the future given their business model and shelf life of their products.
This is not difficult to understand, as if you were looking to buy a stock long term, would you really want one that is going to have such big question marks beyond 2023 when you are looking to hold it past that?
As we approach the big day, and as we fail to really get much clarity on how the company will do anything but take a big hit to their products, this brings in the shorter term investors as well, who see the stock price declining more and more and certainly won’t be feeling good about now until 2023, let alone beyond it.
This is the state that AbbVie finds themselves in now. Over the last year and a half, their stock has given back 40%, and still is in the midst of this downtrend. They were down 15% this year alone, a year which has been positive overall for stocks, as of June 24. Then they decided to do something more drastic.
They made a bid to buy Botox maker Allergan for $63 billion in stock and cash, and structured the deal in such a way that their own shareholders wouldn’t have a say in the acquisition. That was probably a good idea because their shareholders may have not preferred this ultra-expensive Botox treatment.
The Mating of Two Ugly Stocks
Allergan is, if anything, an even uglier stock, and at the very least they have been ugly for a lot longer, dropping 65% over the last 4 years at the time this deal got put together. This is not a stock that investors would have wanted to own over the last four years, including now, at the price it has traded at. They certainly would not have wanted to pay a 45% premium for it, 45% more than it was traded at, as that would simply be crazy.
AbbVie was more than willing to do this though and the thinking seems to be to seek to keep revenues up to a decent amount after the death of their baby. Paying way too much for what is a real dog as far as the stock goes anyway just doesn’t seem to be a good plan though.
Piper Jaffray analyst Christopher Raymond may have put it best, when he remarked right after this acquisition was announced that “two turkeys don’t make an eagle.” Two sick birds don’t make one healthy one either.
To be fair though, there’s always the old saying that two heads are better than one, and two pharmaceutical companies whose stocks are struggling mightily might be able to put their heads together and at least struggle a little less collectively. This acquisition may look weak, but the pieces just might fit together enough for AbbVie to make sense of it.
We do know that insiders are optimistic enough to go out and buy more shares of AbbVie, although they did wait until the announcement and the dip their stock took as a result.
Botox is a real success story and a real good earner, but it is set to face some stronger competition and the expectation is that they will lose market share as their competitors ramp up the marketing on their substitutes. Botox actually works by poisoning cells and in their toxic state your skin firms up enough to be able to tell in the mirror, making the user look younger.
This is just a temporary fix though as the poison does wear off in time, and this might be a good way to look at the $63 billion prescription for it that AbbVie is about to get filled. Both companies have a huge amount of debt, and although AbbVie CEO Richard Gonzalez is predicting better times for his company as a result of this huge purchase, there is much skepticism outside the company.
Pharmaceutical acquisitions also don’t tend to work out that well for the acquiring company’s stock, with loss in share price with these deals that total $10 billion or more averaging 10%. Building shareholder value is what a public company is supposed to be doing, not frittering it away with expensive deals that are of questionable value either now or long-term.
Integration with these big pharma deals doesn’t always go as smoothly as we would hope, and present what we call integration risk, the risk that the companies will do more colliding than integrating. It’s not hard to imagine why this would happen, with the changes that this can bring to an organization.
AbbVie Hasn’t Been Hurt That Much More by This, At Least Yet
AbbVie has rebounded a bit since the news of this became public, and they have gained back $4 of the $10 per share that was lost, so it’s not that the market hates the move that much. Allergan is up huge from this as we might expect from such a sweet offer, so it’s hard to imagine their shareholders not loving this, although the same can’t be said for AbbVie’s shareholders.
They aren’t doing that much bailing though, so that’s a good sign, but those who have stuck around for this 40% plunge aren’t the sort to be shaken out of their positions all that easily. Still though, this stock bears watching if it does go below $160, which would mean that it has broken well below the line in the sand drawn last week that it bounced off of.
The word is well out though and it’s not that people can just jump on Allergan and rake in this premium because it’s already well priced in to their stock. AbbVie doesn’t look particularly bullish either even though it did bump up a bit, but that’s just from the overreaction of the sell-off which we often see, together with the word that company insiders are buying it, which can help stabilize it.
The biggest takeaway here is the message that AbbVie doesn’t really have any better solutions in the pipeline than this and has had to resort to this massive dose of Botox to have them feeling better about themselves. This really shouldn’t have us feeling all that good about them, as we need to look beyond the façade of this treatment, as beauty is not just skin deep.