Imbruvica, the only drug Pharmcyclics sells. What makes Imbruvica so valuable is its future cash flow generation potential. In 2014, the drug brought in \($492.4\) million in sales, which AbbVie expects to double to about \($1\) billion in 2015 and to top \($3.5\) billion by 2018. J&J already owns 50% of Imbruvica via a manufacturing partnership through its Janssen Biotech subsidiary. J&J was edged out of the bidding after it offered \($261\) per share, slightly below AbbVie’s winning bid of \($261.25\) per share consisting of \($58%\) in cash and the rest in stock. The AbbVie bid valued Pharmacyclics at more than \($21\) billion and represented a 39% premium over Pharmacyclics’s closing price on February 29, 2015, when the bidding war began. AbbVie’s board and management in justifying the price paid argued that the companies’ shared expertise, combined with AbbVie’s five late-stage oncology drugs in its development pipeline set to launch during the next several years, has the potential to transform cancer treatment protocols and improve patient outcomes and quality of life. Pharmacyclics’ Imbruvica has been approved in 50 countries for mid- to late-stage cancers and offers broad international expansion. The risk to AbbVie is clear. Can it earn enough from Imbruvica to enable it to earn back the hefty premium paid for Pharmacyclics and still earn its cost of capital? Some analysts question whether Imbruvica can reach the lofty sales goals, unless the drug can prove effective against other kinds of tumor types and different diseases. Failure to reach these ambitious sales goals could result in substantial future write-offs. But the real risk may have been one of entering into a deal when you are feeling desperate. An important objective for AbbVie was to gain complete control of Pharmacyclics through a tender offer to gain initially majority control followed by a back-end merger to “squeeze out” any remaining target firm shareholders. A tender offer consisting of both cash and stock was used to broaden the appeal of the proposed bid to Pharmacyclics shareholders. Deal terms also included a termination fee and a fixed-value collar.....

Discussion Questions:

1. What is the form of payment used in this deal? Why might this form have been selected? What are the advantages and disadvantages of the form of payment used in this deal?
2. What is the form of acquisition used in this deal? Why might this form have been chosen? What are the advantages and disadvantages of the form of acquisition?
3. Would you characterize this as a reverse or forward merger? Based on your answer why might this type of reorganization have been selected by AbbVie?
4. How would the fixed-value collar arrangement work to fix the value of the offer price? How would this affect AbbVie and Pharmacyclics shareholders?
5. How would this deal be treated for financial-reporting purposes? Briefly describe how the methodology you have identified might be applied to how Pharmacyclics’ financial data would be presented on AbbVie’s consolidated financial statements.
6. Assume it is determined by auditors during the next several years that AbbVie overpaid significantly for Pharmacyclics. What is the most likely reason this determination could happen? How might this impact the firm’s reported EPS and in turn its share price? Be specific.
7. What is the purpose of a termination fee in these types of deals?
8. Did the sale of Pharmacyclics require a vote by the firm’s shareholders? Explain.