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. 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. AbbVie's tender offer consisted of three options for Pharmacyclics shareholders. They could choose to receive all-cash, all-stock, or a combination for their shares. AbbVie sought to acquire all of the outstanding shares of Pharmacyclics through the tender offer that ended on May 22, 2015. By the end of the period, 87% of Pharmacyclics' outstanding shares had been tendered. Of those tendered, 24.1 million made an election to receive mixed consideration (both cash and stock), 14 million made an election to receive the all-cash option, and 29.3 million chose to receive all-stock. The transfer of ownership was accomplished through successive mergers involving two AbbVie wholly owned subsidiaries: Merger Sub 1 and Merger Sub 2. The tender offer was the first step in AbbVie's plan to acquire a controlling interest and ultimately all outstanding shares of Pharmacyclics. Once the exchange offer was completed, Merger Sub 1 was merged into Pharmacyclics with Pharmacyclics surviving. As permissible under Delaware Corporation Law (AbbVie was incorporated in Delaware), all Pharmacyclics common shares not tendered in the share exchange were cancelled and converted into the right to exercise the same options offered in the tender offer. Immediately following the first merger, the surviving corporation (Pharmacyclics) was merged into Merger Sub 2, with Merger Sub 2 surviving the merger as a wholly owned subsidiary of AbbVie. The tender offer qualified as a tax-free reorganization. Shareholders receiving stock will incur a taxable gain or loss only when they sell their shares, while those receiving cash will incur an immediate taxable event. Pharmacyclics would have had to pay a termination fee of 3% of the transaction value if the merger agreement were terminated because Pharmacyclics board accepted a better offer. The equity portion of the purchase price involved an exchange ratio subject to a "collar" in which the value of AbbVie's share price could fluctuate up or down by 10% without changing the value of the offer price. To secure financing for the cash portion of the deal and for anticipated working capital requirements, AbbVie obtained an \$18-billion 364-day senior unsecured bridge loan commitment from a consortium of major banks. The firm had the option to obtain permanent (long-term) financing during this period but chose not to do so. END OF CHAPTER CASE STUDY: ABBVIE PLACES A BIG BET ON CANCER DRUG MAKER PHARMACYCLICS Case Study Objectives: To Illustrate - Form of payment and of acquisition - The application of common takeover tactics - Tax and accounting considerations - The importance of discipline during negotiations Successful takeovers require a sound business strategy, an inteligent takeover plan, unwaver- ing discipline during the negotiations, and excellent postmerger execution. The AbbVie business strategy seems to have consisted of placing a high-risk bet on a single drug intended to restore and sustain the firm's growth in revenue and profits. Prior failed takeover attempts may have made AbbVie an undisciplined bidder contributing potentially to overpaying for the target. In this case study, we discuss the circumstances leading up to the deal, how they may have affected the deal, and tactics common to transactions of this type. Pharmaceutical company AbbVie, a leading supplier of cancer-fighting drugs, had been on the hunt for growth as its top-selling drug Humira, a treatment for rheumatoid arthritis, faced patent expiration in 2016, a dilemma faced by most major pharmaceutical firms. Humira accounted for about 56% of AbbVie's total $22.33 billion in 2014 sales. Illustrating its dependence on Humira, Abbvie's next biggest drug, Androgel, generated only 4% of its annual revenue. The firm's earnings had been deteriorating for several years as generic drug makers cut into the firm's market share. The day of reckoning was fast approaching. AbbVie had been frustrated in its attempt to acquire United Kingdom-based Shire for $54 billion in 2014. The takeover would have enabled AbbVie to diversify its pharmaceutical offering and to reincorporate overseas to lower its tax bill in a "tax inversion." When US regulatory authorities changed tax rules to make such strategies less attractive, AbbVie withdrew its bid.Against this backdrop, AbbVie moved aggressively in a bidding war to acquire Pharmacyclics, challenging Johnson \& Johnson (J\&J) and Novartis for the right to acquire the target, eventually winning out in mid-2015. What made Pharmacyclics attractive was its blood cancer drug called 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 eam back the hefty premium paid for Pharmacyclics and still earn its cost of capital? Some analysts 1