With AbbVie (ABBV -4.58%) reporting on Nov. 30 that it plans to acquire ImmunoGen, (IMGN) a biotech developing antibody-drug conjugate (ADC) therapies for various cancers, it's clear that the pharma is intent on avoiding being left behind by the competition. Specifically, it's following in the footsteps of companies like Pfizer, which in March acquired the ADC-focused biotech Seagen for $43 billion in cash.
Now, with the conditions in the ADC market set to heat up over the coming years, investors are faced with a quandary. Which drug developers are serious about winning the segment, and which are simply trying to reduce the chances of missing out on potential revenue amid the approaching gold rush?
Is this a play driven by FOMO, or sound strategy?
In terms of its financial outlay, AbbVie is buying ImmunoGen for just over $10 billion in cash, so right off the bat it's clear that the scale of its commitment isn't as large as Pfizer's. The biotech has one ADC on the market, called Elahere, and it's indicated for chemotherapy-resistant ovarian cancer. As Elahere was only approved by the U.S. Food and Drug Administration (FDA) in November 2022, there isn't a baseline for how much revenue it'll bring in annually. Nonetheless, given that Vertex Pharmaceuticals sought to license its ADC technology for up to $337 million in milestone payments, there isn't any doubt that there's a lot of interest in what the company can do.
Its pipeline contains four mid- to late-stage programs dedicated to expanding Elahere's approved indications, and two mid-stage programs for other cancers, all of which are ADCs. So it's obvious that AbbVie's goal with the purchase is to bolster its own oncology pipeline, which had eight ADC programs as of its last major pipeline update in February. But what's so special about ADCs that major biopharmas are eager to buy them up?
The point of using an ADC for treating cancer instead of a traditional approach like systemically administered chemotherapy is twofold. First, the antibody portion of the molecule ensures that its payload, typically a potent chemotherapeutic molecule, is delivered directly to tumor cells. That spares healthy cells from experiencing many of the noxious effects associated with chemotherapy.
Second, because the healthy cells won't be as affected by the therapy, drugmakers have some leeway to use more powerful -- and more toxic -- chemotherapeutic molecules than they'd ever be able to safely use with a traditional regimen. And while ADCs aren't exactly new, with at least 11 on the market already, they're a very popular platform for drug development right now because of how versatile and effective they can be.
In other words, ADCs are here to stay, and AbbVie's ongoing scale-up of its ADC pipeline is unlikely to stop with the ImmunoGen purchase.
This is a long-term play, and it may not work out
The acquisition is expected to close in mid-2024, and management thinks that the purchase will start to boost the company's earnings per share (EPS) sometime in 2027. If all goes according to plan, between the sales of Elahere, the expansion of its approved indications to include additional cancers, and the development of Immunogen's pipeline programs, AbbVie figures that its revenue could see boosted growth through roughly 2035. That makes the deal quite the long-term investment by the standards of the biopharma industry, which typically only publicizes strategic plans for seven or eight years out.
Right now, AbbVie has about $13 billion in cash, equivalents, and short-term investments. After paying up for ImmunoGen, it won't be under any financial pressure, as its trailing 12-month free cash flow (FCF) is approaching $25 billion. It could even make another similarly sized acquisition, if it finds a suitable target. Therefore the near-term risk to shareholders stemming from the deal is quite low, and the additional growth it could spur is a decidedly bullish factor for those willing to hold their shares for the long haul.
But investors should take note that Elahere's future growth is not guaranteed. It might not get the approvals to commercialize any of its expanded indications until 2030. Most oncology programs, even sophisticated ones, fail before they are commercialized. And management is clear that Elahere will need considerable additional work in clinical trials before its revenue-driving potential will be as advertised today.
Furthermore, AbbVie still won't be a leader in the ADC space after the purchase, though that might not matter to investors as long as it can build on its earnings and sales consistently.
Still, between the potential upsides and the limited opportunity costs of the acquisition, this issue will likely eventually break in favor of AbbVie and its shareholders. If you're thinking of adding to your position, you have plenty of time to do so, and it's likely a good idea.
