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Pharmacyclics Deal Stokes Cancer Drug Stocks

10 March 2015 in Trading Ideas

As if the cancer drug market wasn’t already heating up.

Last week, pharmaceutical firm AbbVie said it would spend $21 billion to buy Pharmacyclics, an amount that one analyst told Bloomberg News was “staggering.”1 This was no cut-and-dried deal, either, as an apparent back-and-forth with another potential suitor, Johnson & Johnson, went into the wee hours before a deal with AbbVie was solidified.

Perhaps most notably, AbbVie paid the high price tag despite the fact that it will bring them only 50% of the revenue of Pharmacyclics’ main product, the blood cancer drug Imbruvica, according to Bloomberg.

J&J gets the other half – the result of a previously in-place partnership to market the drug.

While several analysts on Wall Street termed the deal an overpayment, the transaction highlighted the actions of drugmakers to look for new, more lucrative ways to fight cancer beyond traditional chemotherapy and radiation.

Following the deal’s announcement last week, investors flocked to other oncology and specialty-drug stocks. Last Thursday alone, Puma Biotechnology surged 18%, while Juno Therapeutics rose 4.1% and Vertex Pharmaceuticals climbed 5.8%.

“It could be kind of an arms race going forward where you see just outlandish bids for some of the companies that have new drugs out on the market,” Chris Pultz, a money manager at Kellner Capital, told Bloomberg. Given the high price AbbVie was willing to pay, “this is going to keep valuations up in the sector because everybody thinks everybody is for sale now.”

However, many drugmakers were already seeing their stocks perform well before the Pharmacyclics acquisition. The Battling Cancer motif, for example, has risen 17.2% so far this year. In that same time period, the S&P 500 has increased 1.4%.

Over the past year, the motif has grown 24.5%; the S&P 500 is up 13%.

As Bloomberg noted, big pharmaceutical companies are rushing to snap up assets in cancer drugs as a new type of treatment called immunotherapy begins to hit the market. The market for immunotherapies, which help the body’s immune system fight cancerous cells, is expected to be worth $30 billion or more in the next decade. The medicines have shown remarkable responses in patients who have failed multiple prior treatments, Bloomberg said.

Bristol-Myers shares reached a 14-year high last week when it won expanded US approval for its immunotherapy drug Opdivo to treat lung cancer, Bloomberg said. Drugmakers are able to charge high prices for the novel treatments — Opdivo costs $150,000 a year.

The prospect of lucrative cancer treatments has helped to propel takeover prices in the industry. Last year, buyers paid an average 57% premium — the highest in at least a decade — for pharmaceutical and biotechnology acquisitions larger than $1 billion, data compiled by Bloomberg show. AbbVie’s offer is 55% higher than Pharmacyclics’ average price in the 20 trading sessions before Bloomberg reported last month that the company was on the block.

The Pharmacyclics deal suggests that investors in cancer drug stocks may continue to see a bevy of high-priced mergers in a fast-growing market with no shortage of willing participants.

1Tara LaChapelle and Caroline Chen, “AbbVie’s Bid Ups Ante as Buyers Bet On Cancer Stocks,” Bloomberg.com, March 5, 2015, http://www.bloomberg.com/news/articles/2015-03-05/abbvie-s-bid-ups-ante-as-buyers-bet-on-cancer-drugs-real-m-a, (accessed March 9, 2015).