'Arms race'; AbbVie deal ups ante for cancer drugs.

AuthorLachapelle, Tara

Byline: Tara Lachapelle and Caroline Chen

AbbVie Inc.'s $21 billion agreement to buy Pharmacyclics Inc. just took the contest for cancer treatments to new heights.

"Staggering'' is how one analyst described the price tag for Pharmacyclics, the latest and largest deal of its kind as drugmakers look for new, more lucrative ways to attack the disease beyond the traditional chemotherapy and radiation. The $261.25-a-share offer ended a bidding war with Johnson & Johnson that went late into Wednesday.

AbbVie is gaining just half of the profits from Imbruvica, the medicine for which Pharmacyclics has a partnership with J&J. That makes this transaction look even more expensive -- about 40 times revenue, according to Joshua Schimmer at Piper Jaffray Cos. Buyers paid an average of 31 times revenue for $1 billion-plus drug deals in the past three years, according to data compiled by Bloomberg.

"It appears to us that the company might be overpaying,'' another analyst, Bank of Montreal's Alex Arfaei, wrote in a report.

'Outlandish bids'

Investors flocked to other oncology and specialty-drug stocks Thursday in the wake of the interest shown in Pharmacyclics. Puma Biotechnology Inc. surged 18 percent, while Juno Therapeutics Inc. rose 4.1 percent and Vertex Pharmaceuticals Inc. climbed 5.8 percent. Both Kite Pharma Inc. and United Therapeutics Corp. climbed more than 2 percent. Even giants BioMarin Pharmaceutical Inc. and Bristol-Myers Squibb Co. rose.

"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,'' said Chris Pultz, a money manager at Kellner Capital, an event-driven investment firm in New York.

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.''

Shareholders of acquiring companies have been cheering mergers that will immediately boost profit.

This isn't one of those cases.

AbbVie shares dropped almost 6 percent Thursday. The takeover may lower the company's earnings this year and next, with the extent of the dilution in 2015 dependent on when the deal closes, according to an analysis by Sam Fazeli and Asthika Goonewardene, pharmaceutical analysts for Bloomberg Intelligence.

Even assuming $150 million of cost savings, 2016 earnings per share will shrink 5 percent, the data show.

$30 billion market

The transaction will be accretive by 2017 and "add...

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