AbbVie (ABBV) /Pharmacyclics (PCYC) Deal Bullish for SMID Biotech and Big Drugs, Says RBC

RBC Capital analyst Michael J. Yee commented on AbbVie's (NYSE: ABBV) $21 billion deal to acquire Pharmacyclics (NASDAQ: PCYC), calling it "very surprising." In his view, the size of deal shows pharma's desire for big drugs, and its willingness to pay. Overall the news supports a bullish biotech sector view, he said.

"The buyer is very surprising to us but supports a bullish biotech sector view for other smid caps: big assets and big drugs command premium valuation for their scarcity and the value they bring: revenues, growth, high margins, earnings growth," said Yee.

"Our conversations suggest folks are surprised by the valuation since the drug is in year 1-2 of launch, there is upcoming competition, and there is big opportunity cost (acquirers can buy lots of other smaller biotechs and see it play out instead)," continued the analyst.

"It very much convinces us (1) pharma wants big drugs and is willing to pay up, perhaps to accelerate growth and to "get a better multiple" like biotechs, (2) there is a scarcity value for drugs that "move the needle" and these command a premium, (3) this is positive for the biotech sector because it suggests other companies are undervalued with so much innovation going on and investors can have greater confidence that "if it fits" with pharma, (liver, oncology, hospital drugs, orphan disease, etc) then M&A will remain an option. Other companies we see that might fit into synergies: ICPT, VRTX, BMRN, RCPT, ESPR, UTHR, PTCT, JUNO/KITE, DYAX," he added.

For an analyst ratings summary and ratings history on Pharmacyclics click here. For more ratings news on Pharmacyclics click here.

Shares of Pharmacyclics closed at $230.48 yesterday.

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