Recently, AbbVie said it will be acquiring neuroscience drugmaker Cereval Therapeutics for $8.7 billion. AbbVie is making this bold acquisition as its flagship drug, Humira, starts facing generic competition. In terms of timing, I'd say timing is unique when considering that last week, AbbVie agreed to acquire cancer drug developer $IMGN for nearly $10 billion.

The unique thing about Cereval Therapeutics is that Cereval creates drugs for both neurological and psychological disorders where “where significant unmet needs remain." So far, Cereval has developed drugs like Emraclidine, an experimental treatment for both schizophrenia and Alzheimer’s disease psychosis. For background, Cereval Therapeutics is a clinical-stage biotech company and it does not have any approved drugs yet. While paying $8.7 billion for a company with no functioning product may sound absurd, know that it's common to see biotech firms with no sellable products getting acquired. Once these companies see their drugs get approved, the biotech firm that acquired the startup reaps huge fortunes.

Let's assume, conservatively, that Emraclidine takes 15% of the $1.2 billion Alzheimer's psychosis market (source). That would mean Emraclidine would have revenues of $180 million. If gross margins are 85%, then gross profits would be $153 million. Account for the 21% corporate tax rate and net profits are $120.9 million. When we account for time value of money, with a discount rate of 12%, those net profits would be worth $690 million. That would provide a conservative ROI of nearly 8%.

Here are some things to keep in mind when looking at the low ROI: