The pharmaceutical industry is undergoing an unprecedented level of consolidation right now, triggered by the loss of patent protection for numerous top-selling drugs in recent years, a desire to lower effective tax rates, and the approval of a host of new game-changing drugs. As these conditions still exist for the most part, this trend looks set to continue into 2015 and perhaps beyond.
One of the most interesting aspects about this flurry of M&A activity is that companies of all shapes and sizes are getting in on the act. Pfizer tried to pair up with AstraZeneca in a mind-boggling deal that would have exceeded $100 billion, for instance. And Actavis plc snapped up a host of branded drugmakers than spanned several orders of magnitude in terms of size (from small-cap Durata Therapeutics all the way to large-cap biopharma Allergen).
AbbVie (NYSE:ABBV) was also looking to play the M&A game last year with its courtship of Irish specialty biopharma Shire plc. But the Illinois-based drugmaker got cold feet after the U.S. Treasury modified the rules governing so-called tax inversions.
Following this ill-fated merger, the rumor mill began to swirl that AbbVie might now be the hunted, instead of the hunter. With this in mind, let's consider if AbbVie is an attractive takeover target in 2015.
What would a buyer gain?
AbbVie is the maker of the world's best-selling drug, Humira. At present, this injected antiinflammatory drug is approved for a total of eight indications by the Food and Drug Administration, and is close to completing clinical testing for another two (Hidradenitis Suppurativa and Uveitis).
AbbVie's other major drug is its hepatitis C therapy Viekira Pak, recently approved for use in genotype 1 patients in the U.S. Because of the pricing war with Gilead Sciences (NASDAQ:GILD) over its rival HCV drugs, Sovaldi and Harvoni, Viekira Pak's commercial potential isn't entirely clear-cut. At this point, we don't even know how much AbbVie is discounting the drug in its deal with pharmacy benefits manager Express Scripts (NASDAQ:ESRX). That said, Viekira Pak is expected to generate megablockbuster type numbers in 2014, making it a potentially key asset for any buyer.
Aside from these two flagship drugs, AbbVie also sports three products generating double-digit sales growth in the third-quarter, namely Creon (for pancreatic enzyme therapy), Duodopa (for advanced Parkinson's disease), and Synagis (a seasonal respiratory vaccine developed by AstraZeneca).
On the clinical-side, AbbVie does have a notably deep pipeline. Per its third-quarter report, management reminded investors that the company is presently developing 12 late-stage clinical candidates, with a handful now under regulatory approval.
Perhaps the biggest value driver going forward, though, is AbbVie's experimental PARP-inhibitor veliparib, which is now in four late-stage trials for both breast and lung cancer.
What are the downsides of buying AbbVie?
Although AbbVie has been generating decent revenue growth lately (up 8% in the third quarter, year over year), the vast majority of this increase stems from a single drug, Humira. Specifically, Humira now accounts for 63% of the company's total net sales, up from 56% a year ago.
While some of this rise is due to Humira's strong organic growth, it also reflects the loss of AbbVie's lipid franchise to the patent cliff and falling sales for its drug Androgel amid safety concerns over testosterone replacement therapy.
And then there is the ticking time bomb that is Humria's patent expiration. AbbVie has been working diligently to explore ways to extend the drug's patent beyond 2016, but these attempts have largely failed for complex legal reasons.
So is AbbVie a compelling buyout target?
AbbVie's reported suitor is none other than the world's biggest drugmaker, Pfizer. This is the pivotal issue at hand because it's important to understand what Pfizer wants and needs in a buyout scenario.
Looking back at its overtures to AstraZeneca, Pfizer was said to be pursuing the deal to lower its effective tax rate of 26.8% and gain a pipeline of promising new oncology drugs.
Given that AbbVie is also based in the U.S., it's effective tax rate isn't much better at a reported 26.3% in the third-quarter. And while it does hold a couple of intriguing oncology candidates, they are no match for AstraZeneca's assets in the immuno-oncology arena.
In sum, AbbVie's downside risks (Humira's looming patent expiration, Androgel's plummeting sales, etc.) appear to outweigh the upside in a buyout scenario in general, and a Pfizer deal in particular looks unlikely given that it simply wouldn't be good fit.