AbbVie is paying a 13.4% premium over Pharmacyclics' closing price on Wednesday and 39% above its closing price on Feb. 24 -- before it was reported that the Sunnyvale, Calif.-based company could be an acquisition target. Pharmacylics' shareholders will receive $261.25 per share through a choice of cash, stock or a combination of both. The transaction is expected to be completed in mid-2015.
Pharmacylics is the maker of Imbruvica, its flagship product which has been approved to treat two different types of blood cancer.
Jim Cramer, whose charitable trust is long AbbVie, thinks the company might be overpaying for Pharmacyclics. But it may have been an act of "desperation" on the big drug maker's part, given its looming patent expiration for Humira, he and Jack Mohr wrote on Action Alerts PLUS (paywall).
Pharmacyclics shares were up 10.6% to $254.96 on Thursday. AbbVie shares were down 2% to $59.05. Here's what Wall Street analysts said.
Jeffrey Holford, Jefferies (Buy on AbbVie; $80 PT)
We expect a mixed initial reaction to the PCYC deal. The $21bn being paid will be highly debated, but ultimately the earnings accretion, and more importantly, the dilution of Humira earnings should unlock multiple expansion and drive substantial upside for ABBV shareholders. There are few assets ABBV could have bought and PCYC looks one of the best options to meet its needs, particularly if the indication expansion of Imbruvica moves beyond just hematology.
Katherine Xu, William Blair (Outperform on Pharmacyclics; $261 PT)
Rumors had circulated in the press the last week that Pharmacyclics could be acquired, with Johnson & Johnson and Novartis (NVS $99.04) cited as the most likely acquirers. While AbbVie had not been mentioned as a possible acquirer in the press, we believe that the deal makes tremendous strategic sense. AbbVie had shown intent to build a strong hematologic oncology business with its extensive clinical program for venetoclax and its significant investment in duvelisib. However, both those products are still in clinical trials; the acquisition of blockbuster Imbruvica will jumpstart AbbVie's commercial presence in hematological oncology. In addition, after its attempted $52 billion merger with Shire SHPG ($239.64; Outperform) unraveled, AbbVie has dry powder to pursue new acquisitions.
Hartaj Singh, BTIG Research (downgraded Pharmacyclics to Neutral; $225 PT)
We are downgrading to Neutral as we believe that the price being paid by ABBV (Not Rated) is full and fair for Pharmacyclics. We believe that Imbruvica will be a $7-8B peak sales product in blood cancer alone, with solid tumors and a nascent immunology pipeline with intriguing early stage data filling out the rest.
This is a buyout makes strategic sense, the most relevant being that ABBV gets access to PCYC's Imbruvica, a potential backbone therapy of choice in blood cancers, per our thesis.
ABBV can now focus on developing this combination program in an efficient and timely manner, having greater control over Imbruvica.
Matthew J. Andrews, Wells Fargo Securities (Outperform on Pharmacyclics; NA PT)
A key question going forward and for today's conference call, in our view, is how will AbbVie position the hematologic cancer drugs in a portfolio which includes ABT199 (partnered with Roche; a BCL2 inhibitor), duvelisib (partnered with Infinity; a PI3Kdelta/gamma inhibitor), and Imbruvica. While this will ultimately be driven by Phase III clinical data in various indications, we believe all three novel oral drugs should be able to coexist and find respective important roles in various hematologic malignancies either as monotherapy, in combination with standard-of-care agents, or possibly in novel/novel oral combinations.
PCYC management clearly has maximized shareholder value with this potential transaction. For INFI, we do not see this news as a negative sign for its global AbbVie partnership considering duvelisib's strong profile in iNHL.
TheStreet Ratings team rates AbbVie as a hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate AbbVie a hold. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, weak operating cash flow and generally higher debt management risk."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth came in higher than the industry average of 13.1%. Since the same quarter one year prior, revenues slightly increased by 6.7%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. Compared to other companies in the pharmaceuticals industry and the overall market, Abbvie's return on equity significantly exceeds that of both the industry average and the S&P 500.
- The gross profit margin for AbbVie is currently very high, coming in at 83.16%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of -14.85% is in line with the industry average.
- The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared with that of the S&P 500 and the pharmaceuticals industry. The net income has significantly decreased by 171.8% when compared to the same quarter one year ago, falling from $1.128 billion to -$810 million.
- Net operating cash flow has significantly decreased to -$578 million or 146.42% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
- You can view the full analysis from the report here: ABBV Ratings Report