The clear winners from yesterday’s shock takeout of Pharmacyclics are the group’s management, which played a blinder in more ways than one, and investors who had – seemingly against reason – pumped up the company’s stock 88% this year.
Less obvious but no less significant will be the smugness felt by Johnson & Johnson and the private groups Royalty Pharma and Acerta Pharma – now sitting on assets that will be perceived as far more valuable than before. Whether it makes AbbVie anything more than a desperate buyer wanting a deal at any cost will only emerge in time.
It was already abundantly clear from AbbVie’s ultimately unsuccessful pursuit of Shire that the group had to do something fast. With genericisation of Humira, the world’s biggest-selling drug, starting as early as 2017, AbbVie basically needed a defensive move.
Its decision to make a knockout $21bn offer, roughly 42% of which is in stock, was apparently taken at the very last moment. Until late last night it was Pharmacyclics’ partner on Imbruvica, Johnson & Johnson, that was rumoured to have been close to sealing a takeover.
But it made little sense for J&J to pay top dollar, since the group already effectively controls half of Imbruvica. Under its tie-up with Pharmacyclics the two companies co-promote Imbruvica in the US, with J&J selling it elsewhere and paying a royalty.
Not only has J&J thus avoided overpaying, it is now sitting on an even more valuable asset. And its deal with Pharmacyclics, struck in 2011 and worth just $150m up front and $975m in milestones, now looks like a bargain.
Even more remarkable is how little the asset had cost Pharmacyclics in 2006, when covalent inhibitors like Imbruvica were out of favour: it had paid $2m up front plus about $5m in stock and a mid-to-high single-digit royalty to Celera, Imbruvica’s originator. Turning this into an asset, half of which is worth $21bn, must be one of the greatest biotech returns of all time.
The Celera royalty stream was later sold to Quest Diagnostics, which divested it to Royalty Pharma two years ago for a generous-looking $485m (Royalty bet endorses ibrutinib’s whisper numbers, July 19, 2013). That bet by Royalty Pharma, too, now looks smart.
Of course by now Imbruvica, a BTK inhibitor, is on track to become a hugely successful single-agent, oral treatment for leukaemia. Sellside consensus is for in-market sales to hit $1.3bn this year and $6.5bn in 2020, according to EvaluatePharma, and the drug being a high-priced small molecule makes it highly profitable.
But this does little to suggest that AbbVie is not overpaying, even if you accept that Pharmacyclics comes with $857m of cash, an early pipeline and unapproved Imbruvica indications. A simple calculation using a 9% cost of capital over Imbruvica’s patent life, which ends in 2027, values the NPV of Pharmacyclics’ interest at only $16.2bn.
Imbruvica had already survived one threat: the disappointing launch of Gilead’s PI3K inhibitor Zydelig. And AbbVie is empire building, already having interests in the Roche-partnered Bcl-2 inhibitor venetoclax – seen as Imbruvica’s biggest challenger – as well as the PI3K inhibitor duvelisib, licensed from Infinity last year.
On a call this morning AbbVie highlighted the potential to combine its haematological oncology assets – though it does not own any one of these fully – as well as combining Imbruvica with checkpoint inhibitors.
And what about competing similarly acting agents? There are not many, though Celgene and Gilead have clinical-stage BTK inhibitors, while anti-PI3K assets can be found at Gilead, Amgen, TG Therapeutics and others. TG stock rose 5% yesterday and was up 8% this morning.
One of the most intriguing competitors must be the private Dutch group Acerta, which has both a BTK and PI3K inhibitor (ACP-196 and ACP-319 respectively) in phase II. Acerta was founded in 2013 by Ahmed Hamdy, the ex-chief medical officer of Pharmacyclics.
AbbVie’s chief executive, Rick Gonzalez, denied that buying Pharmacyclics was driven by a lack of confidence in Humira, and said he was “thrilled to have won this highly competitive process”. He revealed that AbbVie had been one of three companies in the final bidding, and insisted that the deal was favourably priced.
Investors were less convinced, sending AbbVie stock down 4% in early trade. This might be due to the structure of the deal, which has a fixed price, meaning that if AbbVie stock falls the group will issue more equity to bring the value up to $21bn, threatening a stock price spiral.
Still, in a market where asset price inflation is a daily fact of life it will only take one even more overpriced biotech takeout to make AbbVie look smart.