ABBV AbbVie Inc

By Jared S. Hopkins 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (June 26, 2019).

Pricing pressures and patent expirations for top-selling drugs are opening up opportunities for pharmaceutical companies to make major deals at relatively bargain prices. But questions remain about whether the transactions will lead to long-term growth.

AbbVie Inc.'s $63 billion planned acquisition of Allergan PLC announced Tuesday is the latest example of two challenged pharmaceutical companies hoping to be more successful as a combined entity. Similar scenarios helped bring together Takeda Pharmaceutical Company Ltd. and Shire PLC last year, as well as Bristol-Myers Squibb & Co. and Celgene Corp. in January.

AbbVie is facing pressure to navigate the end of patent protection for the world's top-selling drug, Humira, a rheumatoid arthritis treatment that accounts for more than half of its revenue. Allergan, which dominates the $8 billion-plus market for anti-wrinkle drug Botox and other beauty drugs, is losing patent protection for its No. 2-selling drug Restasis and has struggled with its drug-development program, sowing doubts that have pressured shares.

The Allergan deal surprised analysts, who said AbbVie's acquisition reflected diversification and short-term growth, rather than advancing innovative science like recent deals that have largely focused on the cancer space. Both companies have suffered from disappointing clinical outcomes outside of their core franchises.

"This is a play from the traditional playbook of 'when facing challenges, go and buy someone,' " said David Maris, an analyst at Wells Fargo & Co. who covers the industry.

In that sense, much of the deal's logic followed the industry's two other recent big mergers.

Bristol-Myers Squibb Co.'s blockbuster $74 billion deal to buy rival Celgene Corp. created a cancer-drug powerhouse, but it was largely driven by each player's need to find new revenue. Bristol-Myers had lost its advantage in immunotherapy treatment of lung cancer to rival Merck & Co. And Celgene struggled to find new products whose sales could offset the looming patent expiration of Revlimid for multiple myeloma.

Japan-based Takeda's $62 billion deal to buy Shire and its rare-disease treatments -- its biggest deal ever -- made Takeda one of the world's largest global pharmaceutical companies and enabled it to expand its footprint as Japan became more vigilant in drug-price controls. At the time, Shire's deal making saddled it with debt and left some analysts and investors questioning whether it overpaid for questionable assets, including a $32 billion takeover of Baxalta Inc.

All three recent deals involved a large company buying a smaller one that was reliant on a single dominant franchise, with few drivers of short-term growth and trading at valuations lower than normal, said Ronny Gal, an analyst at Sanford C. Bernstein & Co. That suggests an emphasis on near-term benefits, which presents an attractive opportunity for the buyer, Mr. Gal said.

"That was enough for strategic buyers to come in," Mr. Gal said.

It has been a busy year in deal making for the health-care sector, with deals in 2019 valued at more than $307 billion, trailing only the computer and electronics sector, according to data from Deal Logic.

In addition to the recent bigger deals, companies like Pfizer Inc. and Merck & Co. have been acquiring smaller companies in a race to bulk up their development pipelines.

Major deals came when the acquired companies were in severe slumps after peak share prices. Celgene had fallen over 50% from more than a year earlier when Bristol made its move. Allergan's shares were down more than 50% from a peak in 2015.

Last year was quieter, in part because many potential targets' valuations were out of reach, many analysts and industry officials have said. The Takeda deal alone accounted for about half of the drug industry's total deal value through the first nine months of 2018, according to EvaluatePharma.

Some industry observers believe that smaller and midsize deals are likely to dominate the rest of the year. "I would guard against thinking this is a trend that we should be expecting -- all of these large pharma companies going out and gobbling up people," said Ambar Boodhoo, a partner at Ernst & Young who heads its U.S. life-sciences deal making practice.

If the major deals this year aren't enough to boost longer-term growth, companies will be going back to the trough for smaller deals, some observers said.

Geoffrey Porges, an analyst at SVBLeerink LLC, said that by the mid-2020s, both Bristol and AbbVie "better pull some rabbits out of the hat" through deals or their pipelines in order to grow.

Meanwhile, some pharmaceuticals deals are drawing scrutiny from the Federal Trade Commission over anticompetitive concerns -- and even over drugs still in the pipeline.

On Monday, Bristol-Myers said its merger with Celgene would be delayed as Celgene seeks to sell its blockbuster anti-inflammatory drug Otezla to appease regulators. Otezla treats psoriasis, and Bristol doesn't market a psoriasis drug currently, but it does have an experimental drug in late stage trials.

Roche Holding AG said the FTC had asked for more information regarding its planned takeover of Spark Therapeutics Inc. Regulators may be focusing on overlap between Roche's hemophilia treatment Hemlibra and Spark's experimental gene therapy for the disease, analysts speculated.

While there is little in common between AbbVie and Allergan's core franchises, overlapping gastrointestinal franchises will likely need to be shed, according to Mr. Gal, the analyst. Allergan currently sells Viberzi and Linzess, both of which are approved to treat gastrointestinal ailments; AbbVie's Humira is also approved to treat GI ailments including Crohn's disease.

(END) Dow Jones Newswires

June 26, 2019 02:47 ET (06:47 GMT)

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