AbbVie joins the pharma chain reaction

As executives from Johnson & Johnson huddled with their advisers, including Goldman Sachs, late on Wednesday, there was cautious optimism that they had done enough to secure one of the most attractive assets in the US biotech sector.

Yet J&J's offer for Pharmacyclics had been trumped by a higher $21bn offer from AbbVie as the year-long wave of dealmaking in the pharmaceuticals sector reached a new peak.

It was, said Rick Gonzalez, AbbVie chief executive, one of the most competitive bidding wars he had ever seen, with a third unknown company also vying for the California-based maker of the Imbruvica leukaemia drug.

"There were multiple companies competing [and] multiple rounds for this asset," said Mr Gonzalez. "Three companies stayed in till the end and bid against each other . . . We won."

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The deal adds to the more than $300bn of M&A activity among drugmakers in the past year. This represents a record level for the industry - higher even than the megamergers of the late 1990s and early 2000s that created many of today's pharma giants.

The frenzy began when Actavis bought Forest Laboratories for $25bn early last year and has continued ever since, involving almost every big drugmaker and many supporting actors from the biotech and medical devices sectors.

"Companies are under pressure if they're not doing deals," says one senior healthcare banker. "Once somebody does a transaction it sets off a chain reaction where that company's competitors suddenly feel under pressure to respond."

This marks a dramatic reversal in investor attitudes from the scepticism that had set in towards large-scale pharmaceuticals M&A over previous years. Megamergers such as Pfizer's $90bn takeover of Warner-Lambert in 1999 and SmithKline's $72bn merger with Glaxo had struggled to produce growth. Some critics argued that such deals destroyed value and disrupted research and development.

What has changed? The main difference is that the deals of the past year have in the most part been smaller and more targeted. Many have involved big drugmakers buying smaller biotech companies to replenish their R&D pipelines. AbbVie's acquisition of Pharmacyclics is the latest example of this.

There have been exceptions, such as the $66bn takeover of Allergan by Actavis last November. Pfizer's failed $110bn offer for AstraZeneca also showed that mergers among the biggest groups cannot be ruled out altogether. But more typical of prevailing thinking was the $20bn asset swap completed this week between GlaxoSmithKline and Novartis.

Perhaps in the past, Sir Andrew Witty, GSK chief executive, and his Novartis counterpart, Joe Jimenez, would have looked to combine the two groups when they entered talks on a range of assets last year. Instead, GSK traded its cancer drugs business for the Swiss group's vaccines business and the pair set up a joint-venture in consumer healthcare.

Glen Giovannetti, head of global life sciences for EY, the consultancy, says this deal reflected a shift towards greater specialisation by big pharma groups. "Companies are asking: what businesses do we want to be in? Where do we have a competitive advantage? They are picking a few therapeutic areas and focusing on them."

This greater willingness to make clear choices about strategic priorities has been evident in deals such as Bayer's $14.2bn acquisition of Merck's consumer healthcare division last year - a transaction that greatly increased the German company's scale in over-the-counter medicines while leaving the US company to focus on innovative pharmaceuticals.

Structural changes in the industry have also spurred more M&A as big pharma groups battle to increase productivity. Cuts in R&D spending have left the industry more dependent on young and nimble biotech companies to come up with new drugs. Of the 41 new medicines approved by the US Food and Drug Administration last year, about half came from outside the top 20 drug companies.

For AbbVie, buying Pharmacyclics will provide some of the fresh growth it urgently needs to reduce dependence on its Humira rheumatoid arthritis treatment which loses patent protection at the end of next year. Similar factors were behind deals such as Roche's $8.3bn takeover of InterMune and Merck's acquisition of Cubist and Idenix in two further multibillion-dollar transactions last year.

Analysts and bankers predict more to come, with US companies such as Puma, Juno and Kite at the forefront of a wave of medical innovation. This combination of scientific advances and M&A is fuelling a boom in US biotech stocks. The Nasdaq biotechnology index has more than doubled since the start of 2013.

AbbVie paid a 50 per cent premium over Pharmacyclics's share price just weeks earlier. The 4 per cent decline in AbbVie's stock after the deal was announced suggests investors may be starting to ask tougher questions about valuations as the M&A boom rolls on.

Additional reporting by David Crow and James Fontanella-Khan

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