To the extent that biotech valuation fundamentals still count for anything – itself a questionable proposition – investors will be keen to learn how AbbVie’s knockout $21bn acquisition price for Pharmacyclics measures up against a realistic valuation of the target company’s key asset, Imbruvica.
An analysis of EvaluatePharma sales data, gathered from a consensus of leading banks, indicates by how much the US company might be overpaying (see tables below). And dialling up the metrics reveals just how bullish a bet AbbVie’s business development team must have made to justify the extraordinary price tag.
The model includes consensus US revenue and costs, booked by Pharmacyclics with the bottom line split 50/50 with Johnson & Johnson. Under the two companies’ 2011 alliance for Imbruvica the reverse is true in the rest of the world, and thus ex-US metrics are booked by J&J, with 50% of the profit accruing to Pharmacyclics.
A net present value calculation of Pharmacyclics’ combined after-tax profit taken all the way out to 2034 yields only $16.2bn – nearly $4bn short of the deal’s enterprise value (A few unsung heroes from AbbVie’s desperate $21bn move, March 5, 2015).
And $16.2bn is already a bullish number. The sellside nowadays is not known for restraint, so revenue assumptions will surely represent a bull case; it would be more typical to end all revenue after the patent expiry year of 2027; and a generous 8% cost of capital is applied when 12.5% would previously have been standard.
Of course this factors in the royalty payaway to Royalty Pharma that had been acquired from Imbruvica’s originator, Celera, and is assumed to be around 7%. A tax rate peaking at 30% is applied.
|A consensus model for Pharmacyclics' share of Imbruvica|
|US sales ($m)||1,481||3,264||4,614||5,327||2,669||143||59|
|EBIT net of J&J profit share ($m)||570||1,322||1,892||2,184||1,094||59||24|
|Pharmacyclics share of ex-US profit ($m)||552||930||1,465||1,742||1,627||1,069||724|
|Revenue accruing to Pharmacyclics ($m)||2,033||4,195||6,079||7,069||4,296||1,212||783|
|After-tax profit ($m)||1,122||1,802||2,350||2,748||1,905||789||524|
|Cost of capital (WACC)||8%|
|NPV of Pharmacyclics interest ($m)||16,189|
|Source: EvaluatePharma consensus data; EP Vantage NPV calculation.|
AbbVie acknowledges that it used EvaluatePharma data to compute the size of the global malignant haematology market, so it is possible that the group had also used related consensus data in arriving at its assumptions in the bidding for Pharmacyclics. So it is worth taking a stab at what the group might have additionally factored in to justify paying $21bn.
For instance it might assume that Imbruvica could be domiciled in a more tax-friendly regime, thus cutting the tax rate to the 22% blended rate that consensus assumes for its current business. Or it could have cut the cost of capital to 6%, though this would have been remarkable even in today’s low interest rate climate.
Applying both assumptions to the model does raise the NPV to $20.6bn – just about in line to justify the price but showing no further upside for investors.
|NPV upside analysis ($m)*|
|*All other assumptions unchanged|
So what else might AbbVie be thinking of? It is surely impossible to squeeze cost of goods and SG&A any further; Imbruvica being a premium-priced $130,000-per-year small molecule that is cheap to make and market; the base case already assumes generous margins.
That leaves the possibility of internal forecasts of even higher revenue – for instance from solid-tumour Imbruvica indications currently not factored into analysts’ models. Still, AbbVie yesterday said it saw peak Imbruvica sales accruing to Pharmacyclics of around $7bn – in line with the $7.2bn the above model already assumes in 2026.
Moreover, new indications necessitate significant R&D spending; none is assumed in the base model. Yesterday AbbVie stock closed down 6% – equal to $5.4bn, and remarkably close to the amount by which this analysis calculates the group to be overpaying.
The best the sellside could do was damn the deal with faint praise, with the most generous quote sent out by AbbVie’s public relations advisors in the aftermath coming from Jefferies’ Jeff Holford, who stated: “We expect a mixed initial reaction to the deal.”
Things must be getting desperate when even the sellside struggles to justify a biotech valuation in today’s market.