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Twenty-One Billion Dollars. Really.

Ibrutinib seems to be worth even more than everyone thought! As of this morning, AbbVie has won what was apparently a lively bidding war for Pharmacyclics, paying $21 billion for the company. Now that is a lot of money, and I’m not sure that I can made those numbers add up, but presumably there are people at AbbVie who are paid more than I am to figure such things out. (Adam Feuerstein sounds a bit stunned, too). Many news organizations had stories yesterday about how J&J was about to buy them, but if you’re willing to pay enough money, you can horn in on any deal you like.
I would assume that the company is going to aggressively move the compound into clinical trials for as many plausible indications/combinations as possible – that’s the main way I can see this working out. But as I said last week, this is what keeps people investing in biopharma: back in 2009, you could have had Pharmacyclics for $1 per share or less. Last night’s offer was $261.25. David Shayvitz has a good history of ibrutinib here, and it’s quite a story. Personally, I think that a lot of Pharmacyclics people are probably just relieved that they’re not going to have to attend any more sessions to learn how to become geniuses.

42 comments on “Twenty-One Billion Dollars. Really.”

  1. Anonymous says:

    Overpaying for deals like this is a symptom of Big Pharma’s short-sighted belief that their problem and goal is to fill their pipelines, rather than to create value.

  2. Anonymous says:

    what does not add up? $1B next year and projected to bring in $3-6B/yr in 3 years or so. could be best selling cancer drug. Abbvie will pay this back quickly and be reaping rewards for years to come.
    derek and others here are very shortsighted to be knocking this compound and the company that brought it to light. because of ibrutinib it ushered in era of covalent drugs, esp in cancer. just look at the science, not the side stories about ceo.
    people on this blog just dont get it, or have much foresight. probably same people dragging down the industry….

  3. annon too says:

    How about expanding the genius sessions to all of Abbvie…or better yet, all of pharma? I know at least one other big pharma that would take the bait if fed to them by one of the big consulting firms.

  4. watcher says:

    What I’d like to know is what makes this drug better than similar ones already on the market?

  5. Ed says:

    who owns the rights to the deutero-version??
    kerching!

  6. johnnyboy says:

    Gonna be some big shiny new Scientology buildings getting built soon…

  7. johnnyboy says:

    Gonna be some big shiny new Scientology buildings getting built soon…

  8. Anonymous says:

    #4. efficacy (70%+ response rate) and safety (greatly reduced TOX versus other therapies like PI3K etc). amazing drug.

  9. rd says:

    Anyone on the pharma side involved in the initial negotiations for ibrutinib, who didn’t advocate and propose at least a 3B offer to take out PCYC, should have lost their job. This is a monumental tactical screw-up for J&J and everyone else bidding. Abbvie doesn’t seem to understand the DoJ concern to J&J in the valuation.

  10. Anonymous says:

    Combining ibrutinib and checkpoint inhibitors.
    “Therapeutic antitumor immunity by checkpoint blockade is enhanced by ibrutinib, an inhibitor of both BTK and ITK.” PNAS 2015
    doi: 10.1073/pnas.1500712112

  11. John Wayne says:

    Nobody can deny that this looks like a great drug. Paying 21 billion dollars for half the profits really highlights the position of the industry; revenues need help and cash isn’t worth much.
    There are two risks to Abbvie’s position. First, this drug is the bees knees now but it could become outclassed by new options or other market realities before patent expiration. Second, Abbvie is giving up on everything else they could have done with that capital.

  12. Anonymous says:

    Even splitting the profits 50/50 with J&J, AbbVie will make their money back with just the current indications. Granted it may take a decade to do so, but with ~12 years of patent life left, AbbVie gets any potential new indications and PCYC’s early stage pipeline for free. Seems like an expensive, but safe bet here with the potential for a big upside.

  13. Anonymous says:

    Well said #11.
    And boilerplate valuations are not a guessing game. The underlying assumptions are a guessing game but NPV and related are simple calculations.
    So what will it be? Could make ‘$3-6B in 3 years’. Is it $3B or is it $6B? Will it be within 3 years or 5 years? How much will it cost in P3 trials to get the line extensions/revs?
    Or is it $1B for the next 10 years? The numbers matter!

  14. Steve says:

    @2, you clearly didn’t read the article, which said, “RBC Capital biotech analyst Michael Yee figures AbbVie is paying seven times the projected Imbruvica peak sales of $6 billion.”. Also, they only get 50% of the value since J&J already has 50%, purchased before the drug was approved. The only way I could see Abbvie coming out on top is if there’s something else that Pharmacyclics has in their pipeline that’s equally spectacular.

  15. Anonymous says:

    @14
    12 years with avg sales (for their half) of ~$1.8B gets them even. seems like safe bet they will make quite a bit, even without addnl. approvals.
    yeah, abbvie didn’t do a careful financial analysis–some blowhard on a financial newspaper did a better analysis..ok…
    At $100K/year, 20,000 patients gets you $2B–no problem.

  16. Anonymous says:

    about 15,000 cases of CLL/year in US. almost all will probably be prescribed ibrutinib.
    if treatment is $100K/year, there is $1.5B. incidence increasing and these patients will live longer on ibrutinib and increase sales!
    this does not even include MCL or new indications. abbvie made good purchase.

  17. johnnyboy says:

    Like #11 said, the rosy predictions about future revenues assumes that the best in class drug today will remain best in class until it goes off patent in 2027. Remaining the drug of choice for 12 years, in cancer ? Dream on Abbvie. This smells of desperation (from Humira going off patent) rather than shrewdness.

  18. Anon2 says:

    I wrote out a long rebuttal about regarding the price paid…then I thought about how Silicon Valley has the following valuations:
    SnapChat = 19 billion
    Instagram = 35 billion
    Facebook = 221 billion
    We should stop being such realists and start making more…bright eyed…assessments of each other’s work. Techies did it and that’s why they get paid 200k to chill in a Bay Area coffee shop to write code.

  19. steve says:

    I don’t know what you guys are smoking. Even at $1.5B/year (which is the best case scenario, assuming 100% market share) it would take Abbvie 28 years just to break even! That’s because 50% of the revenue goes to J&J. How on earth is that a good deal?

  20. ed says:

    i predict cost cutting and the closure/sale of AbbVie Luwigshafen

  21. Anon says:

    AbbVie just bought their biggest competitor to ABT-199.

  22. NH_Chem says:

    It can go lots of ways. Perhaps it will be like Gilead’s buyout of Pharmasset (which one can argue went very well and worht every penny) or like BMS’ buyout of Inhibitex (which went extremely poorly).
    Good luck to all of those whose options just hit “payday”

  23. sgcox says:

    #21. It is not a competitor, ABT-199 is synergistic with ibrutinib in CLL. Abbvie is aiming on a combo which might also reduce J&J share.

  24. steve says:

    @23 – You might be right but it’s still hard to justify an investment even if they reduce it from 28 years (see my earlier post) to 15 years to make their initial investment back. Everyone is trying to put a ton of lipstick onto what is clearly a pig.

  25. Warren638 says:

    Other people’s money is cheap these days. Doodling on my napkin: $21 billion at 4% interest; divided by 1.6 billion shares outstanding – then would be $0.53/share (of ABBV) to borrow the money. So share price declining to mid 50’s range seems about right, even if low return from the acquisition means it takes a long time to pay back the $21 billion.
    If this doesn’t sound right to you. Please respond with your preferred analysis. Use numbers.

  26. anonymous says:

    @20:
    I was thinking that too. But they were going to pay $50B for Shire last year, and it never went through, so it sounds like they should have plenty of money on hand.

  27. Hap says:

    Adjusted R+D for 3Q14 = $708M, so they’re spending roughly 5 months of research funding a year ($840M is the interest cost per year) to buy Pharmacyclics. That sounds like a lot of research they can’t do, though maybe one figures that their research isn’t going well and that spending a lot to get a (somewhat) guaranteed return makes sense. I don’t know.

  28. okemist says:

    Future value is equal to present value (21B) times one plus the interest rate raised to the nth power where n is the number of years. Based on 10% interest in five years they need to be getting 31.5 billion/5 just to keep pace with current value.

  29. steve says:

    It doesn’t matter how much money you have on hand; what’s the point of buying a drug if it’s clear that you’re going to lose money on it? If they’re desperate for a product like Fortune suggests (http://fortune.com/2015/03/05/abbvie-pharmacyclics-pharma-desperation/) how does it help to buy a product at a price point where you’ll never make back your investment? I predict a stockholder fight over this one.

  30. steve says:

    Good analysis from Motley Fool (http://www.fool.com/investing/general/2015/03/05/did-abbvie-just-grossly-overpay-for-pharmacyclics.aspx) –
    I think it’s a good analysis because it agrees with me ;-). Here are the salient paragraphs:
    The bad news, though, is that 50% of Imbruvica’s profits go to J&J through its licensing deal with Pharmacyclics. Boiling this down, AbbVie just paid $21 billion for a drug worth an estimated $3 billion, at peak, to its top line. Extending this reasoning a bit further, Imbruvica appears on track to generate about $25 billion to $28 billion total for AbbVie before it goes off-patent.
    However, AbbVie also has a similar experimental drug, ABT-199, that could cut into Imbruvica’s sales down the line, and oncology drug prices will probably come under significant pressure from payers in the not-so-distant future. Put simply, there is a good chance Imbruvica sales will take a decade or longer to cover the cost of this buyout.

  31. kyosce@hotmail.com says:

    Ibrutinib was initially developed as an inhibitor of BTK as a potential treatment for autoimmune diseases, e.g. rheumatoid arthritis. I wonder if this option is still open? Off-label use => anecdotal efficacy => clinical trial => new indication worth $$$

  32. steve says:

    Rituxan is approved for TNF-refractory RA so I guess it’s a possibility. It would have to have advantages over Rituxan for that indication. Probably depend on toxicity vs efficacy. Rituxan is very specific for B cells, not sure how much off-target effects ibrutinib has. What’s tolerable for a cancer patient might not be tolerable for an RA patient but maybe Abbvie thinks there are indications beyond CLL that justify the ridiculous price they paid. However, if that’s true, what does it say about all the other drugs they have in their pipeline for RA (http://www.abbvie.com/research-innovation/pipeline.html)?

  33. Warren638 says:

    WSJ Heard on the Street column:
    … The company estimates AbbVie’s share of peak annual sales from Imbruvica in excess of $7 billion. That is much higher than consensus forecasts before the deal, and the company referred to its new prize as “a pipeline in a drug.” …
    If management turns out to be wrong, and peak sales for Abbvie comes in at the $3 billion (consensus estimate) that others have referred to, then management should be subject to a clawback on the bonuses they will award to themselves … hahahahaha!
    Has anyone published an analysis on the impact of economic moral hazard on big pharma. In other words, there’s no downside to management for taking on the risk of the deal.

  34. Mr Anon says:

    The patents will be extended by a few years. In Europe may go to 2030.

  35. Mr Anon says:

    Ibrutinib also has orphan drug designation for key diseases, which may keep all new competition off the market for a decade.

  36. steve says:

    Orphan drug exclusivity is seven years after approval. It wouldn’t keep new competition off the market, just wouldn’t allow someone else to market a similar drug. Another company could always come up with a better drug and knock ibrutinib out of the market even with orphan drug status.

  37. Mr Anon says:

    I understand orphan status provides at least 10 years in Europe. The ability to keep similar drugs off the market is a powerful tool.
    I’ve not seen any examples of drugs being blocked or getting approval for being an improvement. Anyone know of any?

  38. steve says:

    You’re right, in Europe it’s 10 years; I was being US-centric. The exclusivity only covers the active moiety. If someone were to come up with a structurally different BTK inhibitor then they would not be blocked by ibrutinib’s orphan status. I’m not aware of any cases where this has happened but most of the orphan drugs I know are biologics where it’s difficult to come up with an alternative.

  39. Mr Anon says:

    I’ve just checked the US wording, and it relates to the ‘Same drug’ as you say. In Europe, exclusivity is provided against ‘similar drugs’. This is defined in EU Regulation 847/2000 (just 4 pages) and it covers structural analogues. Not completely clear so open to interpretation, but could cover compounds not covered by the patents.
    Not sure Abbvie’s due diligence would have investigated this.

  40. petros says:

    there are some examples in Europe of orphan exclusivity being used to preclude approval of similar drugs but the rulings to date show no pattern of consistency.

  41. Mr Anon says:

    Petros, do you have any links?
    I’d like to think it extended to analogues with a close similarity such as the omeprazole me-toos. Not sure about cimetidine/ranitidine but even if considered similar could still succeed in approval by proving a clinical improvement. Could speculate forever.
    Apologies for going off topic.

  42. Raymond says:

    FiercePharmaMarketing has the transcript of a conference call where AbbVie’s CEO justified the value of the deal — the interesting part comes where he says that 30% of expected growth will come from moving into earlier lines of therapy. So you’d get more patients taking the drug for longer periods of time. Hopeful, and risky.
    http://www.fiercepharmamarketing.com/story/just-where-does-abbvie-expect-find-7b-imbruvica-sales/2015-03-10

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