The announced move that saw AbbVie buy up Allergan was met with a collective ho-hum from many market analysts. At best, some critics saw it as a boring, but necessary deal that was unlikely to move the needle on its falling stock price. Harsher critics see the move, which has AbbVie taking on $60 billion in debt from Allergan as a desperate Hail Mary pass by a company that is buying Allergan low (i.e. catching a falling knife).
The reality of what this deal may do for AbbVie may take several years to fully shake out, but even assuming that the deal gets done, there’s a lot to like about this deal.
Humira's Revenue Will Help Pay the Debt
One of the reasons behind the decline in AbbVie’s stock for the last year is concern over the expiring patent for Humira in 2023. It’s impossible to understate the revenue generator that Humira is for AbbVie. It is the world’s best-selling drug ever and accounts for approximately $16 billion in revenues. When it loses its exclusive rights, that number is projected to drop by 40%. Many analysts have been waiting to see what move AbbVie would make to hedge this forecasted loss of revenue. While taking on over $60 billion in debt for a company that has also seen its stock price shredded over the last four years may seem less than ideal, AbbVie has three years in which they can use the revenue generated from Humira to help pay for the acquisition of Allergan. When you also consider that AbbVie is almost certain to refinance the debt to take advantage of interest rates that are almost certain to fall, it’s not difficult to understand the company’s strategy of using the revenue from Humira to help finance the assets that will eventually replace it. At this point, Moody’s and other credit rating agencies tend to agree as AbbVie’s credit rating remains in the BBB range (Baa2), which would keep them on track to have a higher rating by the time the Humira patent expires.
A strong dividend will get stronger
With a dividend yield approaching 6%, there is some concern that AbbVie will be cutting its dividend in order to service the debt from this deal. One reason that this is unlikely is our earlier point about Humira. The timing of this deal is significant because AbbVie has three more uninterrupted years for Humira to be their cash cow. AbbVie is also a dividend aristocrat, meaning they have been increasing their dividend for over 25 years. Does this mean they can’t cut their dividend? Of course not, but a quick look at the company’s balance sheet should dispel any thoughts of a dividend cut. In the first place, even without the Allergan deal, AbbVie’s cash payout ratio on their dividend was under 50 percent. And with projections that AbbVie will be generating over $19 billion in operating cash flow (with $18 billion of that as free cash flow) they should have more than enough room to pay down debt and still deliver a modest dividend increase.
Allergan is a great value
On the one hand, Allergan’s stock has dropped nearly 50% over the last four years, and there are reasons for that – many of them warranted. However, when a stock drops this far recency bias can kick in. Instead of investors looking for reasons to buy the stock, all they can see is the falling price. However, when you peel back the layers and look at the company’s fundamentals, a clearer picture emerges. The company’s revenues are increasing and its debt is decreasing. The acquisition of Allergan is giving AbbVie four multi-billion franchises and $30 billion in non-Humira revenue. With a trademarked drug like Botox, Allergan gives AbbVie the ability to generate revenue that is not patent-dependent. This is a move that investors have been waiting for, but now that it has arrived does not appear to have enough sizzle.
Is AbbVie's Glass Half-Empty or Half-Full?
The question for investors is where will AbbVie’s stock go now. In the short term, it may still have some room to drop. Health care will almost certainly be an issue in the 2020 presidential race and there is no greater foil for politicians than “big bad pharmaceutical companies”. From its current price of around $70 per share, some analysts are saying it could go as low as $60 per share. However, despite its failed merger with Rova-T Stemcentrx and a failure to generate excitement about its post-Humira pipeline, AbbVie has taken a huge step towards addressing investor’s fundamental concern … how to make up for the revenue the company will lose when Humira’s patent expires. Traders looking for momentum may not be ready to reward AbbVie, but investors who are looking for a bargain would be hard-pressed to find a better one than AbbVie at this point.