What Are AbbVie Shareholders Getting for Their $21 Billion? (ABBV, PCYC, JNJ)

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The fact that biopharma company Pharmacyclics, Inc. (NASDAQ:PCYC) was acquired by another biopharma name isn’t surprising. It’s long-been rumored that Johnson & Johnson (NYSE:JNJ) — already one of its partners on a key drug — was interested, and the buzz is that even Novartis AG (NYSE:NVS) was mulling a deal.

Pharmacyclics185What is a bit surprising is that AbbVie Inc. (NYSE:ABBV) was the first organization that came to the bargaining table with money in hand, offering $261.25 per share for PCYC, payable in a combination of cash and ABBV shares.

Regardless of how the deal came about, there’s only one key question owners of ABBV have at this point? What exactly are they getting with PCYC that’s worth a whopping $21 billion?

A Closer Look at PCYC

There’s no denying what AbbVie sees in Pharmacyclics is all about the future and has nothing to do with the present. Pharmacyclics only generated $729.7 million in revenue during 2014, and though it turned a profit of $86.1 million, income of only $1.10 per share of PCYC effectively means Abbvie made an investment in a company with a trailing price-to-earnings ratio of 237..5.

The premium was paid primarily for a blood cancer drug called Imbruvica. Imbruvica generated $492 million worth of revenue for PCYC last year… about two-thirds of the company’s total revenue. Total net Imbruvica revenue for Pharmacyclics (after Johnson & Johnson’s cut) this year is expected to reach $1 billion. By 2020, some industry experts collectively believe Imbruvica will be generating $5.8 billion worth of sales.

That’s still not all AbbVie is getting, however.

Although they won’t bear fruit for a while, if at all, Pharmacyclics also has three other drugs in its pipeline, all of which show promise. These trials include a histone deacetylase inhibitor currently in phase 2 tests as a treatment for hematologoc cancer, a phase 2 trial of a factor VIIa inhibitor, and a BTK inhibitor in phase 1 testing as a therapy for autoimmune disease.

Investors should also note that while Imbruvica has been approved as a treatment for three different cancers, it’s also in phase 2 or phase 3 trials as a therapy for seven other blood cancers.

Between these additional indications for Imbruvica and its three other R&D programs, PCYC arguably offers a very attractive risk/reward proposition.

AbbVie Needed Pharmacyclics

Though the 3% dip in the value of ABBV shares in the wake of the news suggest the market isn’t happy with the price AbbVie paid to nab Pharmacyclics, it may have been a premium well worth paying.

The bulk of AbbVie’s revenue is currently driven by arthritis and Crohn’s disease drug Humira. In fact, for perspective, Humira generated more than $3.3 billion worth of AbbVie’s $5.4 billion in total revenue last quarter, with Humira sales growing 11%.

That growth rate for an established drug is impressive, but the flip side to that coin is, ABBV has become dangerously dependent on Humira for sales and growth. That’s going to become a major liability beginning in 2017 after its patent expires in late 2016. Several biosimilar drugs have already been developed and are simply waiting for the green light to launch. If their launch is  like launches of other biosimilar drugs, the bulk of Humira’s revenue will have evaporated by 2018.

AbbVie attempted to abate this growing  liability last year, by beginning the process to acquire Shire PLC (ADR) (NASDAQ:SHPG).  A change in U.S. tax inversion rules, however, squelched that deal before it was ever finalized.

Point being, with the Shire deal falling through and with fewer and fewer viable choices on the table now that Hospira, Inc. (NYSE:HSP) and Salix Pharmaceuticals, Ltd. (NASDAQ:SLXP) have both been acquired by competitors, ABBV needs something new — now — to put on its menu.

The longer it waits and more desperate the company comes,  the more expensive a deal gets and the poorer the fit. Indeed, AbbVie was wise to act fast and pay a healthy price for PCYC this week, as it had been rumored Johnson & Johnson was on the verge of making an offer of its own for Pharmacyclics.

Bottom Line for ABBV

AbbVie clearly didn’t get Pharmacyclics cheap, but it was money well spent, and not an unusually large premium by biopharama standards. In fact, if Imbruvica end up becoming the $5 billion blockbuster drug many believe it will, $26.25 per share of PCYC will be seen as a bargain price. Successful development and approval of any of the other three drugs in the Pharmacyclics will just be a little gravy.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/03/abbv-shareholders-getting-21-billion-abbv-pcyc-jnj/.

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