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Do you surprise why firms are keen to pay what seems to be a hefty premium for different firms? If that’s the case, check out the 4 factors beneath.
What occurred?
Within the greatest blockbuster acquisition since buying Allergen for over $60 billion in 2019, AbbVie (NYSE:ABBV) has agreed to accumulate ImmunoGen (IMGN) for $10 billion.
The transfer shocked many and, in fact, led to a couple hostile knee-jerk reactions. In any case, the value is sort of double what ImmunoGen traded for the day earlier than. AbbVie’s share worth dipped, then recovered greater because the consultants digested the transfer.
The transfer is brilliantly timed. AbbVie is changing its Humira gross sales (extra on that here and here) with Skyrizi and Rinvoq, persevering with to develop its aesthetics program with Juvederm and Botox, and seeing stable traction with Botox for migraines. However the oncology phase is scuffling, and everyone knows the risks of overreliance on a number of merchandise.
It’s also improbable timing as a result of the ImmunoGen signature drug is beginning a big ramp-up.
Let’s take a look at 4 the explanation why there may be extra to the acquisition than meets the attention.
The 4 Hidden Values of the Acquisition.
1. The advantages of shopping for a commercial-stage firm.
ImmunoGen’s flagship drug
The headline of the ImmunoGen portfolio is the drug ELAHERE. The drug is an antibody-drug conjugate (ADC) that treats ovarian and different cancers. It was granted accelerated approval in 2022.
This drug alone produced $105 million in gross sales for ImmunoGen in Q3 – a $420 million annual run price. Put the load of AbbVie’s infrastructure behind it, plus increasing approvals and designations, and the drug appears to be like like a severe winner.
ImmunoGen additionally has a pipeline with different medication in Stage 3, as proven beneath.
Supply: AbbVie
The hidden worth in buying a commercial-stage firm with a marketable product comes from financial savings on analysis and growth (R&D). Pharmaceutical firms spend billions creating merchandise that always by no means make a greenback. AbbVie spent $6.5 billion on R&D in 2022 and $5.7 billion by Q3 this yr.
Typically, buying a ready-made product, even for a premium, is a terrific monetary transfer.
2. Hidden tax belongings
That is an space the place I can present perception as a CPA. When an organization loses cash (referred to as internet working loss carryforwards or “NOLs”), it carries these losses ahead indefinitely to offset future revenue and lower your expenses on taxes. We name this a deferred tax asset. Usually, these belongings are transferred to the acquirer – AbbVie will use them to offset future revenue taxes. That is actual cash.
ImmunoGen has been shedding cash for years as a developmental stage firm and has huge NOL carryforwards.
However wait! There are no deferred tax belongings on ImmunoGen’s steadiness sheet. This is because of accounting guidelines that say you could low cost the belongings if they don’t seem to be prone to be realized.
Here is a simple method to perceive it. Say you’re a enterprise with a receivable from an organization for $1 million. However that firm is on the verge of chapter and unlikely to pay you. You have to write down that $1 million receivable in your steadiness sheet. It nonetheless exists, and chances are you’ll sometime accumulate, however it reveals as a internet zero on the public-facing steadiness sheet. ImmunoGen has written down its tax belongings in the identical manner.
Right here is the language from the notes to their monetary statements:
The belief of deferred revenue tax belongings depends on the era of ample taxable revenue throughout future intervals…The place the conclusion of such belongings doesn’t meet the extra doubtless than not criterion, the Firm applies a valuation allowance in opposition to the deferred revenue tax asset into consideration. As of September 30, 2023, the Firm has a full valuation allowance utilized in opposition to its deferred tax belongings.
In plain English: “We have these assets, but they are written down to zero.”
As of December 31, 2022, ImmunoGen reported on its 10-Ok $443 million in federal NOL carryforwards and internet deferred tax belongings of $334 million earlier than the valuation allowance.
It stays to be seen precisely how a lot of those belongings will switch. However AbbVie will doubtless profit to the tune of a whole lot of tens of millions in future tax financial savings from the acquisition.
3. Internet asset worth.
ImmunoGen has $767 million in present belongings, together with $736 million in money and receivables. It solely stories $135 million in present liabilities and $261 million in whole liabilities.
The acquisition comes with over $500 million in internet present belongings over whole liabilities, or 5% of the whole buy worth. And even that’s barely understated.
ImmunoGen has a measly $4.4 million in property and gear reported on the steadiness sheet. Huge deal, proper?
Property and gear are reported internet of depreciation. ImmunoGen depreciates its property in 3-7 years, as proven beneath.
Supply: ImmunoGen 10-Ok
So, most of its gear is written all the way down to nothing, however this gear is not nugatory.
Right here is one other instance: Say you personal a rental residence. You depreciate it yearly in your taxes till its foundation is written all the way down to zero. That rental property might be value rather more on the open market than you paid for it initially, plus it generates revenue. However your tax steadiness sheet lists it with zero internet worth. The identical is true for firms.
ImmunoGen has property, equipment, and gear with an authentic value of $36 million. It is not a large coup, however it nonetheless provides worth to the corporate that is not apparent at first look. AbbVie can use the property and gear or promote it and pocket the money.
4. Value synergies
Some have panned the acquisition since ImmunoGen is not worthwhile. Once more, this requires deeper thought. Let’s check out how the professionals have a look at it.
ImmunoGen misplaced $21 million from operation by Q3 2023, as depicted beneath.
ImmunoGen 10-Q
The corporate spent a whopping $114 million on promoting, normal, and administrative prices (SG&A). A lot of it will decline or be eradicated as AbbVie’s current buildings take up it.
ImmunoGen at present pays for its personal auditors, accounting division, gross sales drive, insurance coverage, human sources, and tons of different overhead prices. These might be built-in into AbbVie’s current techniques, resulting in great financial savings.
The acquisition will create operational efficiencies that shortly flip that working loss into revenue.
Talking of working losses, ImmunoGen spent almost $150 million this yr on R&D. This reveals that ImmunoGen’s current merchandise are extraordinarily worthwhile. The corporate is simply utilizing the cash it makes to put money into its pipeline and help its overhead.
Is AbbVie inventory a purchase now?
AbbVie inventory continues to chug alongside, offering us with a stable, rising dividend and a present yield of over 4.3%. The inventory is not going to make us wealthy in a single day like some dangerous, high-growth tech shares, however it is not going to make us poor, both.
These pointing to “more painful downside” clearly have a distinct timeline than I do. AbbVie has returned 14% yearly over the previous 5 years and 92% general.
The Humira cliff prompted some handwringing, however AbbVie’s administration is well-prepared, and this ImmunoGen acquisition is excellently timed with great potential to repay handsomely.
AbbVie is a recession-resistant revenue inventory that has anchored my portfolio for years and can proceed to take action till the story adjustments.
