Pop quiz: How much would a company whose best selling drug is about to lose patent protection pay for a portion of the rights to a successful blood cancer drug?
The answer came late last night: $21 billion.
That’s what AbbVie (NYSE: ABBV) has agreed to pay for the rights to Sunnyvale, CA-based Pharamcyclics (NASDAQ: PCYC) and its cancer drug ibrutinib (Imbruvica). AbbVie will shell out $261.25 a share —about 58 percent of it in cash, and 42 percent in stock—for rights to the company. Pharmacyclics shareholders have the right to choose cash, stock, or a combination of the two. North Chicago, IL-based AbbVie will set up a tender offer, and then buy any remaining Pharmacyclics shares that aren’t tendered via a second-step merger. It’ll fund the buyout with cash, new debt, and stock. Pharmacyclics’ shares closed at $230.48 apiece on Wednesday.
The two companies expect to close the deal in mid-2015. AbbVie shares sank more than 5 percent in pre-market trading on Thursday.
The price tag AbbVie is paying is already turning heads. It’s almost double, for instance, the $11 billion Gilead Sciences (NASDAQ: GILD) paid for Pharmasset to get ahold of its coveted hepatitis C drug, sofosbuvir (Sovaldi). Many industry watchers crowed about the high price Gilead paid, but it’s worked out—sofosbuvir went on to achieve the fastest drug launch ever.
Ibrutinib is already successful. After being approved in 2013, the drug, which binds to a molecular target called Bruton’s tyrosine kinase, or BTK, is expected to do about $1 billion in U.S. sales alone this year and over $6 billion in annual revenue at peak, according to RBC Capital Markets analyst Michael Yee.
But there are a few key differences with AbbVie’s deal. First, Pharmacyclics shares rights to the drug with Johnson & Johnson (Pharmasset held worldwide rights to sofosbuvir). The New Brunswick, NJ-based company holds international rights to ibrutinib, and shares profits with Pharmacyclics in the U.S. That’s why it wasn’t surprising that rumors surfaced late Wednesday that J&J (NYSE: JNJ), not AbbVie, was on the verge of acquiring the company. Bloomberg, citing an unnamed source, reported this morning that AbbVie swooped in last-minute and topped a $250 per share offer from J&J.
That isn’t the only revenue drain on the drug, however. In an unusual side deal, private equity investor Royalty Pharma and two venture firms will reap single-digit royalties from ibrutinib sales. They bought those royalty rights from Quest Diagnostics for nearly half a billion dollars in 2013. (Quest acquired them when it bought Celera for its diagnostics business in 2011.)
In 2014, Pharmacyclics said it paid out $27.4 million in royalties.
Royalty deals are not uncommon in biopharma, but it was startling to see the two venture firms—Aisling Capital and Clarus Ventures—each invest nearly $50 million, a huge allotment from such midsize venture funds, to gain those rights. How quickly and richly their investment pays off will be a side story to follow in coming years.
Then there’s the competitive landscape. While Gilead is facing competition for sofosbuvir (from AbbVie, incidentally), leukemias and lymphomas are a much more competitive space.
“Our conversations suggest folks are surprised by the valuation since the drug is in year 1-2 of launch, there is upcoming competition, and there is big opportunity cost (acquirers can buy lots of smaller biotechs and see it play out instead),” Yee wrote in a note this morning. “It very much convinces us [that] pharma wants big drugs and is willing to pay up, perhaps to accelerate growth and to ‘get a better multiple’ like biotechs, [and] there is a scarcity of value for drugs that ‘move the needle’ and these command a premium.”
AbbVie has more pressure than most, of course, to do a massive deal—the Pharmacyclics buyout, if completed, would be the ninth largest biopharma deal in history, according to Yee—for a big drug like ibrutinib. It derives more than 60 percent of its revenue from the wildly successful adalimumab (Humira), and that drug—approved for a slew of autoimmune disorders like rheumatoid arthritis—is about to lose patent protection at the end of 2016. Ibrutinib steps in and immediately generates revenue.
What’s more, the drug is ramping up. It was first approved to treat mantle cell lymphoma in late 2013, has since garnered approvals in chronic lymphocytic leukemia and a type of lymphoma called Waldenström’s macroglobulinemia, and was in a slate of 13 different Phase 3 trials at the end of 2014, according to Pharmacyclics’ regulatory documents. AbbVie, in a statement, specifically pointed to “significant opportunity” with other disease types, like solid tumors.
“The acquisition of Pharmacyclics is a strategically compelling opportunity. The addition of Pharmacyclics’ talented and innovative team will add enormous value to AbbVie,” said AbbVie chairman and CEO Richard A. Gonzalez, in the statement. “Its flagship product, [ibrutinib], is not only complementary to AbbVie’s oncology pipeline, it has demonstrated strong clinical efficacy across a broad range of hematologic malignancies and raised the standard of care for patients.”
AbbVie will host a conference call later this morning to discuss the transaction.
—Alex lash contributed to this report.