Theexpected cost savings from the deal will buy both companies moretime, but not solve their long-term issues as both company'sblockbuster drugs have begun to face pressure from competition.(Photo: Shutterstock)

AbbVie Inc. has agreed to pay $63 billion for rival drugmakerAllergan Plc, the latest huge merger in a pharmaceutical sectorrapidly being reshaped by deals.

Allergan will get $188.24 a share in cash and stock, a45 percent premium to its closing price on Monday.Allergan shares rose 31 percent to $170.25 in premarkettrading in the U.S. early Tuesday. AbbVie was down8.2 percent to $72.

The takeover offers a solution to long-standing challenges bothcompanies have grappled with. AbbVie finally gets a set of productsbig enough to diversify its revenue from Humira, the top-sellingrheumatoid arthritis injection that dominatesits sales. And Allergan, which is heavily reliant on Botox, willwill get a profitable exit for shareholders after a four-yearslide.

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“This is a good alternative for Allergan versus the currentshare price,” said David Maris, an analyst with Wells Fargo.

The expected cost savings from the deal will buy both companiesmore time, but not solve their long-term issues. Both of theirblockbuster drugs have begun to face pressure: AbbVie may benearing the limits of how far it can raise Humira's price ascheaper competitors come to market, a problem Allergan is alreadyfacing as more rivals to Botox emerge. Neither company has acquiredor developed a major new product to replace the sales generated bytheir biggest hits.

Size Scrutiny The deal is evidence that even the world's biggestdrugmakers believe they can get even bigger. In January,Bristol-Myers Squibb Co. announced a $74 billion deal for CelgeneCorp., and Japan's Takeda Pharmaceutical Co. earlier this yearcompleted a $62 billion takeover of Shire Plc. A combined AbbVieand Allergan will have sales of about $48 billion, the companiessaid in a statement, making it one of the biggest in theindustry.

The combinations have begun to attract the notice of antitrustauthorities. On Monday, Bristol-Myers said it had agreed to divestone of Celgene's top products, the psoriasis pill Otezla, in orderto appease regulators at the U.S. Federal Trade Commission. Whilethere are few major areas of overlap between Allergan and AbbVie,the deal is almost certain to get a careful look fromregulators.

AbbVie is buying Allergan after a slump in shares in past yearThe deal will also return Allergan to the U.S., at least for taxpurposes. While the company is run from New Jersey, it moved itsdomicile to Dublin in 2015 via another merger, partly to takeadvantage of lower corporate rates abroad. The 2017 U.S. taxoverhaul cut corporate levies to 21% from 35%, which reducedincentives for companies to relocate overseas.

AbbVie currently pays far less in tax than that, however, andhas said it will have an effective rate of 9% this year. It hasprojected its effective rate will rise to 13%.

Allergan's Options Saunders had spent months turning over plansfor Allergan as the drugmaker's stock price dropped from a 2015peak of almost $340. Those options included selling off thecompany's gastrointestinal drugs or women's health unit, whichwould have left it more focused on its profitable medicalaesthetics line that includes the wrinkle treatment Botox.

AbbVie said it expects at least $2 billion in annual pretaxsynergies and other cost reductions in year three of the deal.About half of that will come from optimizing the research andearly-stage portfolio of products and cuts in overlapping R&Dresources, while the rest will come from sales, general andadministrative expenses and costs for manufacturing, supply chainand procurement.

Read more: AbbVie's $38 bill deal loan is 10th largest ever

Allergan holders will receive 0.8660 AbbVie shares and $120.30in cash for each share they hold. AbbVie will take on Allergan'sdebt, which totaled about $24 billion at the end of the firstquarter.

Two Allergan directors, including Chief Executive Officer BrentSaunders, will join AbbVie's board after the purchase is completed,according to the statement.

The deal is expected to close in early 2020, the companiessaid.

Morgan Stanley & Co. acted as AbbVie's financial adviser andKirkland & Ellis LLP and McCann FitzGerald were legal advisers.JPMorgan Chase & Co. was AbbVie's financial adviser, andWachtell, Lipton, Rosen & Katz and Arthur Cox gave legaladvice.

–With assistance from Marthe Fourcade, Liana Baker andCynthia Koons.

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