That's an extraordinary amount of money even though that cancer drug, Imbruvica, is fantastic and may become one the best-selling of all time. Pharmacyclics (PCYC) developed Imbruvica, which is approved to treat two different types of blood cancer. Sales last year totaled $548 million and are projected to reach $1 billion this year.
AbbVie is spending $21 billion to acquire Pharmacyclics, which works out to $261.25 per share. But AbbVie is only buying half of Imbruvica because Johnson & Johnson (JNJ) already gets 50% of the drug's revenue. J&J acquired its interest in Imbruvica via a partnership signed with Pharmacyclics before the the drug was approved.
Paying $21 billion for Pharmacyclics -- or $20 billion if you back out $1 billion in cash on Pharmacyclics' books -- values Imbruvica at roughly $40 billion. That's assuming little else inside Pharmacylics has significant value.
RBC Capital biotech analyst Michael Yee figures AbbVie is paying seven times the projected Imbruvica peak sales of $6 billion. That's more expensive than any recent pharma-biotech M&A deal. By Yee's calculation, Amgen's (AMGN) $10 billion acquisition of Onyx Pharma translated into about five times Kyprolis' peak sales forecast. Sanofi (SNY) also paid about a fivefold premium for Genzyme -- a $20 billion deal.
AbbVie's decision to spend so much money for half of Imbruvica shows that "pharma wants big drugs and is willing to pay up, perhaps to accelerate growth and to 'get a better multiple' like biotechs," wrote Yee in a Thursday morning research note. He added, "There is scarcity value for drugs that 'move the needle' and those command a premium."
Desperation, even panic, may have played a role in AbbVie's decision, given the looming patent expiration for Humira, its top-selling auto-immune disease drug. Humira sales of $12.5 billion in 2014 represented more than 60% of AbbVie's total revenue. Biosimilar versions of Humira are coming to market soon, so AbbVie needs to replace the missing revenue.
The $21 billion AbbVie-Pharmacyclics deal is the ninth-largest M&A transaction in health care history. The largest was Pfizer's (PFE) $90 billion acquisition of Warner-Lambert in 2000. From a biotech perspective, only Roche's (RHHBY) $47 billion acquisition of Genentech was larger than Thursday's deal.
Last year, AbbVie was going to buy Shire (SHPG) for $54 billion before the deal was scuttled by the Obama administration's efforts to restrict buyouts done solely for tax-lowering purposes. From that perspective, perhaps AbbVie is getting a bargain by spending half as much to buy Pharmacyclics.
Adding half of Imbruvica sales to its top line will help AbbVie increase 2014 to 2020 revenue growth from 3% to 7% and earnings per share growth from 8% to 11%, calculates Deutsche Banc biotech analyst Robyn Karnauskas. She sees the Pharmacylics deal becoming accretive for AbbVie in 2017. But her calculations also depend on Imbruvica becoming one of the best-selling cancer drugs of all time. Her peak sales forecast for the drug is $7.5 billion by 2020, which is among the highest forecasts, if not the highest, on the Street.
Imbruvica is a pill and is protected by patents that will start to expire in 2027, so the value of the asset doesn't extend forever.