AbbVie’s acquisition of California-based Pharmacyclics has brought the flurry of big pharma deals this year to a peak. In the competitive bidding war between Johnson & Johnson, Novartis AG and AbbVie, J&J appeared to be the most natural acquirer due to its licensing deal with Pharmacyclics to sell Imbruvica. However, AbbVie swooped in at the last minute with a $21 billion offer to outbid the rest.
This has set off a debate about whether AbbVie overpaid in this transaction. Some analysts have described the price paid as ‘lofty’, ‘staggering’ and even ‘astronomical’. In their opinion, AbbVie had rushed into this deal and their reasons are two-fold. Firstly, Actavis’ acquisition of Forest Laboratories for $25 billion in early 2014 sparked off a chain reaction that led to the current frenzy of M&A activity in the pharmaceuticals sector. Just last month, Valeant Pharmaceuticals International Inc agreed to buy Salix Pharmaceuticals Ltd for approximately $10 billion and Pfizer Inc agreed to buy Hospira Inc for approximately $15 billion. Inevitably, this trend places pressure on companies if they do not engage in deals. In addition, AbbVie’s negotiations with Dublin-based Shire Plc last October that scuttled as a result of the crackdown by the US on tax inversion deals, might have been an additional pressure point.
Secondly, profits from Imbruvica are split between J&J and Pharmacyclics due to their licensing deal. Sanford Bernstein analyst Geoff Porges suggests that Imbruvica is effectively valued at $42 billion since its sales would need to generate twice the deal price for AbbVie to get its return. Alternatively, AbbVie may need to buy out J&J’s rights to Imbruvica and this would ostensibly be another multibillion dollar deal; hence AbbVie would be grossly overpaying for Pharmacyclics.
Abbvie’s Chief Executive Richard Gonzalez defended the hefty price tag, stating that “Imbruvica is not only complementary to AbbVie’s oncology pipeline, it has demonstrated strong clinical efficacy across a broad range of hematologic malignancies.” He is confident that Imbruvica has a bright market opportunity in the future. It generated $730 million of sales within its first year in the market in 2014, and Gonzalez believes it would be able to generate peak annual sales of $7 billion for AbbVie after splitting profits with J&J. Imbruvica’s high value stems from its ground-breaking efficacy against leukemia and various forms of lymphoma.
This deal may look worrying for AbbVie shareholders as it appears to be a huge gamble that is dependent on the potential of Imbruvica’s use to treat multiple diseases. On the other hand, it will reduce AbbVie’s reliance on its main drug Humira, which faces patent expiration in 2016. Deutsche Bank analyst Robyn Karnauskas considers it a positive deal for AbbVie as this transaction would diversify AbbVie’s business beyond Humira that accounted for 63 per cent of its sales in 2014, and at the same time accelerate AbbVie’s leading position in oncology. Only time will tell if Imbruvica is indeed a prized asset worth $21 billion or if AbbVie has overpaid out of desperation.