Why AbbVie Inc.'s $21 Billion Deal Had To Happen

By Markets Fool.com

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Source: AbbVie

With patent expiration for its top-selling autoimmune drug Humira looming, AbbVie has to move quickly if it hopes to offset the risk of lost sales. Last week, it took a major step forward to filling that potential future sales gap when it agreed to pay $21 billion to acquire the oncology drugmaker Pharmacyclics.

What's at stake
Since being spun-off by Abbott Labs in 2013, AbbVie's success has been uniquely tied to the success of Humira.

Humira is approved to treat a host of diseases including rheumatoid arthritis and psoriasis, and thanks to multiple indications, an annual price tag of $21,000, and the fact that patients need to take Humira perpetually, Humira has become the planet's best selling therapy.

In 2014, Humira's sales totaled $12.5 billion, up 17.7% from 2013. Given the sheer size of its sales, it's probably not too surprising to learn that Humira accounts for a whopping 63% of AbbVie's total annual sales. That means that Humira has a massive impact on AbbVie's profitability.

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In the past, that impact has been a good thing, but with the patents protecting it from generic biosimilars expiring at the end of 2016, Humira's tailwind could soon shift to a debilitating headwind that could rival that of when Pfizer's$12 billion anti-cholesterol drug Lipitor lost patent protection in 2012. Since that happened, Pfizer's sales have continuously slid, dropping from a peak of $65 billion prior to Lipitor's patent expiration to less than $50 billion last year.

Although the FDA has been slow to approve biosimilars (so far), there are signs that the agency is finally moving forward. In January, a key advisory committee recommended that the FDA approve a biosimilar to Neupogen, a blockbuster white blood cell booster. If the FDA follows that guidance (it usually does), then the path to approval for future biosimilars could become more easily traveled. That would be good news for companies like Amgenthat are developing biosimilars to Humira, but it would be overwhelmingly bad news for AbbVie.

Making a move
With so much revenue in jeopardy, AbbVie needed more than a few blockbuster wins if it hoped to blunt the risk of lost sales.

Although Viekira Pak's approval as a treatment for hepatitis C in December is likely to boost AbbVie's sales this year by a couple of billion dollars, the fact that the hepatitis C treatment market changes quickly could mean that Viekira Pak is an all-but forgotten drug by the time biosimilars begin challenging Humira.

Instead, AbbVie would likely have to rely on other drugs in its pipeline, such as the oncology drugs elotuzumab, veliparib, and ABT-199. However, counting on drugs that are in development like these -- even when they're in late stage trials -- can be folly. Far too many so-called promising compounds fail in phase 3, and even when they don't, many still fail to become commercial successes.

Given that backdrop, it's not too shocking to see AbbVie make this big splash with Pharmacyclics to get its hands on the cancer drug Imbruvica, which is co-marketed with Johnson & Johnson .

Since launching at the end of 2013, Imbruvica has been a massively successful drug. In fact, Imbruvica has been so successful that industry analysts think that its peak sales could one day be as high as $3.6 billion.

Currently, Imbruvica is approved as a therapy for mantle cell lymphoma, chronic lymphocytic leukemia, or CLL, and Waldenstrom's macroglobulinemia. Following the drug's approval in CLL -- the largest patient population of these indications -- sales have marched steadily higher. As a result, Imbruvica's sales totaled $492 million in 2014.

That's a great start that suggests that Imbruvica could indeed become a multibillion dollar a year treatment. When we compare the post-launch sales for Imbruvica to the post-launch trajectory of some of the globe's top-selling cancer drugs at the same point following their launch, we see that Imbruvica outpaces all but the $6.6 billion per year drug Avastin.

Looking ahead
Whether or not Imbruvica can deliver on the industry's lofty expectations remains to be seen, but it's certainly positioned for success. A fast launch and the fact that there are more than 50 ongoing trials that could expand its market significantly could mean that this is just the kind of product that AbbVie needs to offset its risk to Humira. Pharmacyclics thinks that Imbruvica's addressable patient population in blood cancer alone could expand from 40,000 today to 374,000 over time. If so, then it seems that Pharmacylics guidance for more than $1 billion in Imbruvica sales this year isn't misplaced. Where the peak for Imbruvica could be remains to be seen, but with a motivated AbbVie at the helm and J&J as a partner, it's probably not wise to bet against its success.

The article Why AbbVie Inc.'s $21 Billion Deal Had To Happen originally appeared on Fool.com.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.