AbbVie Doubles Down on M&A
AbbVie will not let its sales growth go quietly into the good night.
The company's success is largely down to one threatened drug: Arthritis treatment Humira makes up a whopping 60 percent of its sales and will likely face competition from generic biosimilars some time in the next few years. Surviving even the partial loss of a blockbuster is extremely tough, and AbbVie is spending aggressively to cushion the blow ahead of time. That started in a big way last year with its $21 billion purchase of Pharmacyclics, and that company's blood cancer drug Imbruvica, last spring.
On Thursday, it doubled down on a high-risk, high-reward M&A strategy by paying $5.8 billion for the closely held drug developer Stemcentrx and its late-stage lead drug for small-cell lung cancer, Rova-T. If the deal works out, then AbbVie will be a cancer powerhouse with sales to soften any Humira blow. But there's a worrying alternative -- that the company may have overpaid for assets twice inside of a year.
AbbVie will have to wait for a payoff; it doesn't expect Stemcentrx to contribute to EPS until 2020. The long-term outcome of these two acquisitions will go a long way in determining whether or not AbbVie is something of a one-hit wonder.
AbbVie clearly sees upside in both deals. It thinks Imbruvica could net it $5 billion in revenue by 2020 as it expands to treat other types of blood cancer. That would be particularly impressive, given that half of the drug's total sales go to Johnson & Johnson. Analysts are a bit more reserved, estimating the drug will net AbbVie $4.5 billion in revenue that year.
The company believes Stemcentrx's Rova-T has peak revenue potential approaching $5 billion, according to the company's earnings call on Thursday. That probably won't be until some time in the 2020s; the drug isn't expected to be approved until 2018. Abbvie hopes it may have applications in other tumor types beyond its initial target of lung cancer. Expanding from one approved treatment area for a drug to many is a trademark of AbbVie and the reason Humira's been such a success.
But these deals have risks. Imbruvica, for example, has a potentially scary competitor in AstraZeneca's acalabrutinib. That drug has the same target as Imbruvica, may be more effective, and may have fewer side effects. If that drug is approved as expected in the next few years, then it could throw a major wrench in AbbVie's buoyant Imbruvica forecasts.
As for Stemcentrx, its Rova-T is late-stage and relatively low risk, with promising trial results so far. But predicting $5 billion in sales from a drug that hasn't yet been approved is always fraught. AbbVie is also taking on Stemcentrx's likely substantial drug-development costs. And Rova-T is furthest along in testing for patients who haven't responded to other therapies. AbbVie hopes it can get the drug approved to treat patients at earlier stages of illness; if that doesn't work out, then sales could be limited.
These were not cheap bets. AbbVie paid a 40 percent premium for Pharmacyclics -- already hefty even if Johnson & Johnson didn't own half of the company's lead drug. The Stemcentrx deal could get more expensive; AbbVie owes its investors an extra $2 billion should Rova-T get approved, and $500 million for every one of its later-stage pipeline drugs that enters pivotal trials.
Some sense of urgency is warranted. AbbVie won an initial patent battle with Amgen that should help stave off biosimilar competiton for Humira for some time. The company insists it has protection into the 2020s, though analysts predict a sales decline sooner. But the sooner AbbVie has enough solid sources of revenue growth to account for any Humira contingency, the better investors will feel.
These may be AbbVie's last big Humira-cushioning bets for some time. The company said on a conference call it doesn't expect any more deals approaching this size for 18 months, due in part to the dilution from the Stemcentrx deal. It's also probably financially prudent to wait. Standard & Poor's cut the company's rating -- albeit just to A- from A -- due to the latest deal's expected impact on leverage.
This is AbbVie's second multi-billion-dollar shot on goal inside a year, essentially. It has other recently approved drugs and other options in its pipeline, but it needs to make these big deals count. Investors will become increasingly less tolerant of failure as Humira's decline transitions from distant bogeyman to reality.
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