Allergan acquisition to strengthen AbbVie’s economic moat

AbbVie was both opportunistically taking advantage of Allergan’s low valuation and looking to diversify its cash flows away from Humira, Morningstar analyst believes

Damien Conover, CFA 26 June, 2019 | 10:21AM

Abbvie-Allergan

 

Earlier this week, AbbVie (ABBV) announced its plans to acquire Allergan (AGN), the maker of Botox, in a US$63 billion deal. We believe that adding Allergan’s portfolio of branded drugs should help strengthen AbbVie’s narrow economic moat, that was partly dependent on immunology drug Humira.

Damien Conover, healthcare sector director at Morningstar, said “From a valuation perspective, Allergan’s pipeline and strong entrenchment with Botox did not seem fully factored into the stock price, and we believe AbbVie was both opportunistically taking advantage of Allergan’s low valuation and looking to diversify its cash flows away from Humira, which is currently facing international biosimilar competition and will face U.S. biosimilar competition in 2023.”Conover is still reviewing the details of the acquisition, but at present does not expect any major change in his fair value estimate for AbbVie, and he continues to view the stock as undervalued.

“We believe the increasing concern about AbbVie’s growth potential following the U.S. Humira biosimilar competition in 2023 will be partially alleviated with the increased portfolio of assets that Allergan brings. In particular, we view Allergan’s leading product Botox as well positioned in both the therapeutic and cosmetic settings based on strong clinical data and powerful brand power,” he says. From a synergy perspective, the US$2 billion in annual savings projected by management looks reasonable with the majority stemming from research and development as well as sales and marketing. Conover believes Allergan’s presence in women’s health as particularly helpful for AbbVie’s launch of endometriosis drug Orilissa.

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Damien Conover, CFA

Damien Conover, CFA  Damien Conover, CFA, is director of healthcare equity research and equity strategy for Morningstar.