AbbVie's $63 Billion Acquisition of Allergan
Deal Overview
Acquirer: AbbVie
Target: Allergan
Total transaction size: $63 billion
Closed date: 5th November 2020
The acquisition was announced as a friendly transaction in June 2019 with the agreement being negotiated and contracted soon after. Pursuant to the financial terms contained in the transaction agreement, each share of Allergan common stock was converted into the right to receive 0.8660 shares of AbbVie common stock and $120.30 in cash. Based on the closing price of AbbVie's common stock at $84.22 as of 7th May 2020, this represented a total consideration of $193.23 per Allergan share. Although, on the face of it the transaction was a straightforward one with little dispute or contention arising between the two parties themselves, the year-long wait resulted from issues presented by the Federal Trade Commission (FTC) and the European Commission (EC) in relation to granting swift regulatory clearances.
Company Details: Acquirer – AbbVie
AbbVie, headquartered in Chicago and listed on the New York Stock Exchange, was founded in 2013 as a spin-off from Abbott. The company has a long-standing history of acquisitions and strategic deals, traceable to its purchase of ImmunoGen in 2014. However, its acquisition of Allergan in 2019 is particularly significant in being one of the largest acquisitions in the pharmaceutical industry. It is especially crucial to AbbVie as it followed from the abandonment of the company's 2014 attempt to acquire UK-based Shire.
As a global biopharmaceutical company, AbbVie is dedicated to innovative research and development. It focuses on advancing therapies for chronic and complex diseases across areas such as immunology, oncology, neurosciences, and aesthetics. Especially renowned for the blockbuster drug 'Humira', AbbVie applies a scientific approach to improving patient outcomes and delivering better health solutions worldwide.
Company Details: Target– Allergan
Allergan was a multinational pharmaceutical corporation domiciled in Dublin, Ireland, known for its strategic focus on the research, development, manufacturing, and commercialisation of branded pharmaceutical products. Prior to its acquisition by AbbVie Inc. in May 2020, Allergan maintained a substantial presence in the global healthcare industry, with operations in approximately 100 countries. The company's wide portfolio and research initiatives mainly revolved around four core therapeutic areas: medical aesthetics, ophthalmology, central nervous system disorders, and gastroenterology. Allergan was particularly renowned for its leadership in the medical aesthetics market, where it marketed several high-profile products, including Botox and Juvederm.
Legal Contentions
Although ultimately both the FTC and the EC did grant clearances for the acquisition to go through, this was conditional upon Allergan divesting some of their products to other pharmaceutical companies. The reasons underlying the initial reluctance and the eventual compromise are crucial to consider in that they are inherent to the nature of the pharmaceutical industry and the nature of competition within this field. Particularly, the low elasticity of demand in the pharmaceutical industry can be attributed to the necessity for many drugs, which is also then exacerbated by the lack of alternatives on the market for a given drug due to the time it can take to develop even one. Moreover, the supply of brand drugs is largely defined by market power because of the prevalence of patents in the industry. These essentially reward the extent of temporal and financial investment that is made in research and development by different pharmaceutical companies. Although they encourage the market exclusivity in the sector, they serve as a crucial incentive to these companies to keep bringing new drugs onto the market, which is of considerable public health interest. Nonetheless, it is the temporary nature of these patents which leads not only to the distinctive market exclusivity many large BigPharma companies can sustain but also subsequently the pressure of their expiration which inclines companies to constantly consider large M&A transactions to remain profitable.
Given the nature of the industry as well as the strong positions of both the companies, when the FTC conducted a comprehensive antitrust review to assess the transaction's potential impact on market competition and consumer welfare, it was hesitant to swiftly approve. The FTC alleged that the acquisition, as initially proposed, would likely result in substantial harm to competition in violation of U.S. antitrust laws. Specifically, the FTC identified significant competitive concerns for drugs treating exocrine pancreatic insufficiency (EPI), a medical condition that impairs the body's ability to properly digest food. At the time, market analysis revealed that only four pharmaceutical companies were active in the U.S. EPI treatment market. AbbVie and Allergan, together, accounted for approximately 95% of total market share, raising concerns that the proposed transaction would eliminate key competitive dynamics and thereby adversely affect consumers. In addition to the EPI market, the FTC expressed concerns regarding the potential elimination of future direct competition between AbbVie and Allergan for interleukin-23 (IL-23) inhibitor drugs which constituted therapies under development for the treatment of moderate-to-severe Crohn's disease and moderate-to-severe ulcerative colitis.
Essentially, two pancreative enzyme replacement therapies, Zenpep and Viokace were divested to Nestlé's subsidiary 'Nestlé Health Science' as they were rendered the most suitable by the FTC's Bureau of Competition in terms of having the necessary expertise, commercial infrastructure and financial resources to maintain the needed competitive conditions. The same was seen with the EC who also made their approval conditional upon the divesture of Allergan's late-stage gastrointestinal pipeline candidate brazikumab to AstraZeneca.
However, it is only Allergan's products that were seen to be the subject of these divesture conditions which raises potential questions about each company's motives and comparative needs for succeeding with the transaction. Notably, the transaction was heralded as being 'transformative' especially for AbbVie in lieu of their patent for Humira expiring in 2019 alongside expectations of its generic versions entering the market by 2023. As such the transaction was seen as AbbVie's strategy to reposition itself by leveraging the complementary capabilities of Allergan in mitigating some of the resulting risk to their sales. Their need for the transaction was especially strong given their overreliance on Humira, with the drug having constituted 60% of its sales in 2018. Comparatively, Allergan's motives were more so attributed to the general economic benefits of such transactions as well as pressures inherent to the industry. While this comprised of general operational synergies and significant immediate shareholder value, it also included the competitive advantage of broader diversification in their market portfolio alongside the enabled expansion of research and development funding which AbbVie equally desired.
Nonetheless, despite the agreed divestures and the eventual completion of the transaction in November 2020, there were still some concerns raised as to anti-competitive practices being undertaken by the entity, namely in relation to 'rebate walls'. The rebate system can be a crucial mechanism in ensuring affordability of prescription medications and healthcare premiums in the US where the discount is passed directly onto the consumer. However, 'rebate walls' occur where drug manufacturers pay list price discounts to health plans or pharmacy benefit managers based on meeting market share targets which means these discounts are not passed onto the consumer at all. Rebate walls are hence subject to extreme concern as they keep competition low and prices high. The particular concern here was that the acquisition would be used by AbbVie to restrict competition to Allergan's migraine drugs, specifically Ubrelvy, by using a 'rebate wall' with Humira to effectively negotiate that the migraine drug is ensured a preferred position on payors' drug formularies for the treatment of migraines. This concern arguably may have held true as despite the introduction of ten alternative biosimilars on the market in 2023, AbbVie was seen to retain most of the U.S. market for Humira in 2024. This eventually led to three of the largest U.S. pharmacy benefits managers, including UnitedHealth, to exclude Humira from its formularies of preferred drugs for reimbursement. This is hence more broadly emblematic of the extent of pressures generated within the pharmaceutical industry because of patents and the extent of time and costs exerted on one product which then renders the need for excessive regulatory scrutiny more critical by bodies such as the FTC and the EC.
Impact and Future Implications
After completion, AbbVie experienced a significant expansion in its operational scale and market positioning. The transaction elevated AbbVie to the status of the fourth-largest pharmaceutical company globally by revenue. The acquisition also served to diversify the entity's therapeutic portfolio beyond its historical concentration in immunology and hematologic oncology, achieving the mutually held goal for both parties. A key asset acquired through the transaction was Allergan's flagship product, Botox, which generated approximately $3.8 billion in global revenue in 2019. Furthermore, following the acquisition, AbbVie has dedicated itself to scientific innovation and the development of novel therapeutic solutions. The combined entity has reported an aggregate investment exceeding $50 billion in research and development initiatives, directed toward the discovery and advancement of new treatment modalities across a broader spectrum of medical indications.
On a broader level, this acquisition was part of a larger 'merger boom' which had risen in 2015. Although, the transaction itself did not give rise to any new precedent or unique implication on the industry, it does serve as an indication of the importance of such transactions in the industry and how acquisitions can specifically enable the sustenance of market power due to its compatibly with the type of products and practices characteristic of the market. Nonetheless, if this transaction does raise any realm for further consideration, it relating to the broader notion of 'Public Choice Theory' which follows that powerful pharmaceutical companies may be able to exert influence on policymakers, leading to anti-consumer regulations. This transaction may be particularly relevant in this regard given the rebate wall concerns as well as the continued market power AbbVie retained with Humira despite its patent expiring, with the transaction being seen as a mechanism for enabling this. Although, both the FTC and the EC did exercise considerable scrutiny, especially in imposing the divesture conditions, this transaction has nonetheless demonstrated the continued need for regulatory bodies to equally demand transparency in not only the competition in the market but also in terms of broader pricing strategies.
References
AbbVie (2020). AbbVie Completes Transformative Acquisition of Allergan. [online] AbbVie News Center. Available at: https://news.abbvie.com/2020-05-08-AbbVie-Completes-Transformative-Acquisition-of-Allergan.
AbbVie (2022). Three factors that drove the transformational integration of AbbVie, Allergan. [online] www.abbvie.com. Available at: https://www.abbvie.com/who-we-are/our-stories/three-factors-that-drove-transformational-integration-abbvie-allergan.html.
AMCP (2024). Pharmaceutical Manufacturer Rebates | AMCP.org. [online] Amcp.org. Available at: https://www.amcp.org/legislative-regulatory-position/pharmaceutical-manufacturer-rebates.
Clarivate (2019). The AbbVie-Allergan Acquisition and the Road Ahead | Clarivate. [online] Life Sciences & Healthcare. Available at: https://clarivate.com/life-sciences-healthcare/blog/abbvie-allergan-acquisition-road-ahead/.
Press Reference, F.T.C. (2020). FTC Imposes Conditions on AbbVie Inc.’s Acquisition of Allergan plc. [online] Federal Trade Commission. Available at: https://www.ftc.gov/news-events/news/press-releases/2020/05/ftc-imposes-conditions-abbvie-incs-acquisition-allergan-plc.
Sagonowsky, E. (2019). Analysts rip into AbbVie, Allergan’s $63B deal, citing culture clash, strategy concerns and more. [online] Fierce Pharma. Available at: https://www.fiercepharma.com/pharma/a-culture-clash-questions-over-strategic-fit-and-more-analyst-feedback-63b-abbvie-allergan.
Wieczner, J. (2015). The real reasons for the pharma merger boom. [online] Fortune. Available at: https://fortune.com/2015/07/28/why-pharma-mergers-are-booming/.