Is AbbVie a Buy After Its Purchase of Apogee?

Pharmaceutical giant AbbVie (NYSE: ABBV) made a bold move this past Monday when it announced its planned $10.9 billion acquisition of Apogee Therapeutics (NASDAQ: APGE).

The deal would bring a promising immunology drug, zumilokibart, into AbbVie's pipeline. This is a drug that many see as competing with Dupixent from Regeneron Pharmaceuticals (NASDAQ: REGN) and Sanofi (NASDAQ: SNY) as a treatment for moderate to severe atopic dermatitis, the most common form of eczema.

AbbVie said it would pay $135.11 a share in cash, a 49% premium to Apogee's closing price last week of $90.38. Here are two reasons to buy AbbVie stock if the deal goes through, and one reason to stand on the sidelines.

Image source: Getty Images.

AbbVie bolsters its already solid immunology platform

Immunology is AbbVie's primary core competency. While the pharmaceutical company has successfully transitioned patients from Humira to its newer blockbusters, Skyrizi and Rinvoq, the Apogee acquisition provides immediate entry into next-generation targets. Apogee's lead asset, zumilokibart, directly targets interleukin-13 (IL-13). This allows AbbVie to build a powerful clinical footprint in massive, high-margin indications such as atopic dermatitis and asthma, directly positioning it to challenge dominant market players.

The main advantage of Apogee's pipeline lies in extended-half-life antibody engineering for treating certain inflammatory conditions. The market standard for these conditions is Dupixent, which requires an injection every two weeks and generated nearly $18 billion last year. Apogee's zumilokibart is being evaluated for dosing once every three to six months. If successful in Phase 3 trials, this superior dosing convenience could easily reshape patient preferences and unlock mega-blockbuster commercial potential.

Looking past zumilokibart, the biotech company has another promising pipeline candidate in the immunology space, asthma and COPD therapy APG273. This therapy combines zumilokibart with APG333, an antibody that blocks TSLP, a signaling protein that acts as an early trigger of inflammation in the lungs. It is also developing APG279 as a long-acting combination targeting IL-13 and thymic stromal lymphopoietin (TSLP) in atopic dermatitis therapy.

AbbVie can make the deal without adding debt

AbbVie is using its substantial operating cash flows to fund this $10.9 billion deal entirely in cash, without diluting existing shareholders. The company has a track record of executing major mergers and acquisitions, such as the Allergan and ImmunoGen deals, and successfully scaling external innovation through its powerhouse marketing and distribution network.

Unlike some large pharmaceutical companies, AbbVie enters the merger from a position of strength, as it isn't facing imminent patent expirations. It said the deal would bring it drugs with strong peak sales potential exceeding $10 billion annually.

In the first quarter, AbbVie reported $15 billion in revenue, up 12% year over year, with adjusted earnings per share (EPS) of $2.65, up 7% over the same period last year. The company recently raised full-year adjusted EPS guidance from $13.96 to $14.16 to $14.08 to $14.28, representing growth of 41.8% at the midpoint.

The risk and long timeline for the payoff

AbbVie is paying a premium for a clinical-stage biotech whose lead programs still face significant late-stage execution and regulatory hurdles. More importantly, AbbVie noted that the transaction is not expected to be accretive to adjusted EPS until 2032.

Investors are looking at a six-year runway in which billions in cash are tied up before seeing a meaningful effect on the bottom line. This long investment horizon heightens the risk of clinical failure, a vulnerability recently highlighted by stumbles in other acquired pipelines such as Cerevel.

Certainly worth the risk

AbbVie takes a risk every time it buys a promising biotech in the hopes of gaining a potential blockbuster or two. However, the company is experienced in developing immunology drugs and has the marketing and sales team to capitalize on a promising drug.

The company's financial health de-risks this acquisition, as it can easily absorb a $10.9 billion hit and continue to thrive. The markets see this, and on the day the deal was announced, AbbVie's and Apogee's stocks both rose.

AbbVie is a Dividend King that has increased its dividend for 54 consecutive years (counting its time as part of Abbott Laboratories before it was spun off) -- and that includes a 5.5% bump this year. The yield on that dividend is an above-average 2.91%. This means that investors can afford to be patient, as they are getting paid while they wait to see this prospective deal pay off.

James Halley has positions in AbbVie. The Motley Fool has positions in and recommends AbbVie, Abbott Laboratories, and Regeneron Pharmaceuticals. The Motley Fool has a disclosure policy.