ABBV - Immunogen's AbbVie Deal: Key Insights For Investors And Traders

2023-12-01 14:45:02 ET

Summary

• AbbVie Inc. is acquiring ImmunoGen, Inc. at a 94.6% premium, with shares now trading at a 6.6% upside to the deal's successful closing.
• The likelihood of an overbid is low due to a high termination fee and the current state of the biotech industry.
• The deal is expected to close in the middle of 2024, but historical data suggests it could close within 100-250 days.

ImmunoGen, Inc. ( IMGN ) is being acquired by AbbVie Inc. ( ABBV ) at a 94.6% premium or $31.26 per share. The IMGN shares now trade at $29.32, which means there is around a 6.6% upside to the deal's successful closing. The question is whether it is still an attractive proposition.

My first question is how likely it is to see an overbid here. I don't think it is very likely at all. That buyer would need to pay a termination fee of $350 million, and that's a lot. In addition, the entire biotech space has been in the tank for an extended period. This helps explain the sizeable premium, meaning there are likely plenty of attractive things to look at for other big pharma.

I previously wrote an article about the possibility this might get taken out. There was a rumor about a European pharma circling the company. This now looks entirely plausible, and I guess it makes it slightly more likely another higher bid materializes. Overall, it seems like a long shot to me. This doesn't happen that often in biotech, to begin with. Option markets don't seem to discount the possibility entirely because July 2024, $30 calls have been going for $1.57.

Another question is how long this is going to take to close. There are a lot of antitrust cases in the news, and the FTC seems to be firing on all cylinders. There's some truth to that, but I think the deals that are getting done aren't shut down at a much higher clip than historical norms. The number of deals the government can practically affect is somewhat limited by budget and hours in the day, and I think investment bankers and companies are anticipating what are currently hot-button concerns and either not bringing those deals or working to mitigate the concerns.

From the company's internal memo about the deal:

The transaction is expected to close in the middle of 2024, subject to ImmunoGen shareholder approval, regulatory approvals, and other customary closing conditions. At the time of closing, ImmunoGen will become a wholly owned subsidiary of AbbVie. Until then, ImmunoGen remains a separate public company and will operate as a standalone business. In other words, it’s “business as usual” for Team ImmunoGen until further notice. Patients are waiting, and it’s up to us to continue to make progress with purpose as we work to bring ELAHERE to patients in Europe, expand the label in the US, and advance our earlier-stage clinical programs and research platform.

In my experience, company guidance tends to be a bit pessimistic regarding when deals close. I delved into the data of biotech mergers and the vast majority close between 0–200 days.

Something peculiar is that the time to close didn't increase much by market cap. I think this could be because biotechs tend to get bought based on one approved therapy, and it takes a certain amount of time to figure out whether it is anti-competitive for a certain pharma to buy it.

The companies are probably small (physically in terms of employees, facilities, processes, etc.) across the market cap spectrum, too. The value is probably mostly a reflection of the total addressable market of the approved therapy.

Tender offers tend to close deals a bit quicker. Private buyers also tend to get things across the line a little faster. I was surprised when I filtered these out there were still quite a few deals in the 50-100-day range. Some of the worst outliers were removed.

It makes sense to assume this closes in 100-250 days. That's considerably faster compared to management's indication of halfway through 2024.

Another thing to consider is how often these types of deals close. I again looked at historical data for biotech deals and baseline these deals close ~83% of the time. Closing rates are not static through time, and I think it is okay to assume they are slightly higher.

I also listened to the deal presentation , and I don't see a good reason to be very concerned about regulatory meddling. There are two reasons why regulators may get involved in a pharma deal. If a company tries to dominate a therapeutic area, that isn't the case here. The company adds to its oncology pipeline, but there's a lot of competition. The other thing regulators don't like is kill deals. That's when a firm buys another company (usually biotech or tech) to let it bleed out to prevent competition with its existing product line.

This deal doesn't fit that profile. AbbVie also genuinely appeared to want to invest in the long term. Also, it's not a great front-page story for regulators to stall oncology deals that pharma wants to accelerate.

Finally, if the deal breaks for regulatory reasons, Immunogen gets an incredible $600 million+ from AbbVie. I rarely see such hefty break fees. For early-stage biotechs, it can be very awkward if a deal breaks after many months of continuing to burn cash, and suddenly the deal is gone, and they're out of money, too. This enormous break fee ensures that Immunogen can continue working on its therapies at full speed, especially because it already has a comfortable cash position (see my previous article).

Here's an overview of a few scenarios of the annualized returns if the deal closes between 100 days and 250 days.

If the deal reaches 250 days, we are more than halfway through 2024. But remember, this isn't the real expected yield because there is also a (small) percentage of times when the deal ultimately fails, and you are staring at a big loss of ~50%. Overbids are unlikely to compensate for this risk fully. Taking everything together, I think the current ImmunoGen, Inc. price leaves enough room to be attractive, and I'm happy to hold or buy at around this price.

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