"AbbVie’s deal for Phamacyclics ups ante as buyers bet on cancer drugs" by Tara Lachapelle, Bloomberg News March 06, 2015
NEW YORK — AbbVie Inc.’s $21 billion agreement to buy Pharmacyclics Inc. has taken the competition for cancer treatments to new heights.
“Staggering” is how one analyst described the price tag for Pharmacyclics, the latest and largest deal of its kind, as drug makers look for more lucrative ways to attack the disease beyond traditional chemotherapy and radiation. The $261.25-a-share offer ended a bidding war with Johnson & Johnson that went late into Wednesday.
AbbVie is gaining just half of the profits from Imbruvica, the medicine for which Pharmacyclics has a partnership with J&J. That makes this transaction look even more expensive: about 40 times revenue, according to Joshua Schimmer at Piper Jaffray Cos. Buyers paid an average of 31 times revenue for $1 billion-plus drug deals in the past three years, according to data compiled by Bloomberg.
“It appears to us that the company might be overpaying,” Alex Arfaei, a Bank of Montreal analyst, wrote in a report.
Investors flocked to other oncology drug stocks Thursday after the interest shown in Pharmacyclics. Puma Biotechnology Inc. surged 17.5 percent, while Juno Therapeutics Inc. rose more than 4 percent, and Vertex Pharmaceuticals Inc. climbed 5.8 percent. Both Kite Pharma Inc. and United Therapeutics Corp. climbed more than 2.5 percent. BioMarin Pharmaceutical Inc. rose 3.4 percent.
“It could be kind of an arms race going forward, where you see just outlandish bids for some of the companies that have new drugs out on the market,” said Chris Pultz, a money manager at Kellner Capital in New York. Given the high price AbbVie was willing to pay, “this is going to keep valuations up in the sector because everybody thinks everybody is for sale now.”
Shareholders of acquiring companies have been cheering mergers that will immediately boost profits. But this isn’t one of those cases. AbbVie shares fell by 5.7 percent Thursday.
The takeover may reduce the company’s earnings this year and next, with the extent of the dilution in 2015 dependent on when the deal closes, according to an analysis by Sam Fazeli and Asthika Goonewardene, analysts for Bloomberg Intelligence. Even assuming $150 million of cost savings, 2016 earnings per share will shrink 5 percent, the data show.
By 2017, the transaction will “add enormous value” to the company, according to AbbVie’s March 4 statement. Still, chief executive Rick Gonzalez said pharmaceutical and biotechnology valuations are at historically high levels.
“My intuition would tell me that valuations are probably as high as they’ve ever been,” Gonzalez said. “It’s as competitive a marketplace in pharmaceuticals and biopharmaceuticals as it’s ever been.”
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