Friday, May 24, 2013

Deals Of The Week Ponders When $2.1 Billion Is A Steal

With the oncology high season upon us and just about everyone in the industry scrambling to decode the secrets hidden in ASCO’s abstracts, we couldn’t help but stop and reflect on how at least one company got where it is in oncology today through stellar deal-making. Bristol-Myers Squibb Co.’s $2.1 billion acquisition of Medarex in 2009, which seemed to some like a fortune at the time, catapulted Bristol into the leading position in the field of immune-oncology, an area of cancer drug development that some analysts are now calling a potential $10 billion to $20 billion market.

When the two companies, already partners, announced the acquisition in July 2009, “The Pink Sheet” called the offer “a coup for the biotech,” which got nearly double its stock price from Bristol. Fast forward four years later and it is Bristol that made out like a bandit.

There is still a lot to learn about how the immune system can be used to fight cancer, but it is increasingly evident that the immune system can indeed be directed to turn against tumors, potentially resulting in long, durable responses. Thanks to Medarex, Bristol has become one of the experts at the forefront of the research. Yervoy (ipilimumab), the immunotherapeutic targeting CTLA4 Bristol developed with Medarex, is already on the market for metastatic melanoma and could achieve blockbuster level sales this year. A second drug, nivolumab, which targets a different immune checkpoint, PD-1, has already moved into pivotal trials.

In about one week at ASCO, Bristol will release data on Yervoy and nivolumab used in combination, where the potential of immunotherapeutics is believed to be greatest. And those are just two of the immunotherapeutics Bristol has in development. The company is studying multiple immune system targets in earlier trials, some gained through Medarex and some gained through other deals. For example, the company gained a KIR receptor blocker through a licensing deal with Innate Pharma SA in 2011, and a monoclonal antibody against another target, CD-137, was developed internally. Bristol believes these drugs will ultimately be used together in different combinations to turn cancer into a potentially chronic disease.

It’s never easy to quantify the value of an acquisition years after a portfolio is integrated into big pharma, but it is safe to say Medarex turned out to be a smart buy. Investors and analysts have certainly taken note. Citi Research managing director for global pharmaceuticals Andrew Baum upgraded the company May 22 and raised the stock’s price target to $55 from $33 on the strength of the immunotherapeutics portfolio, which he said “will likely exceed $10 billion [in sales] by 2022.”

The company’s stock is up more than 11% since May 15, when the ASCO abstracts were released and Bristol’s data was highlighted in a press preview; it closed May 23 at $47. How is Wall Street valuing Medarex in the share price? “It’s at least $10. Perhaps as much as $15,” speculated ISI Group analyst Mark Schoenebaum.

All that’s not to say Bristol didn’t pay handsomely to be in the position it’s in. The company’s then-CEO James Cornelius took a big gamble on immuno-oncology when he put $2.1 billion down on Medarex as part of his “string of pearls” acquisition strategy before the Phase III data on ipilimumab read out.

The deal was one of the most expensive in oncology in the last five years, trumped only by mega acquisitions like Roche’s $43.7 billion buyout out of Genentech Inc. and Takeda Pharmaceutical Co. Ltd.’s $8.2 billion buyout of Millennium Pharmaceuticals, both in 2008, and by a couple of mid-sized acquisitions including Astellas Pharma Inc.’s acquisition of OSI Pharmaceuticals Ltd. for $3 billion and Celgene Corp.’s purchase of Abraxis BioScience Inc. for $2.9 billion.

Also, weighing in as more expensive is Eli Lilly & Co.’s $6.5 billion acquisition of ImClone Systems Inc. in 2008; ironically, Bristol was outbid by Lilly that time. Months later, Bristol turned around and acquired Medarex instead, a decision it probably doesn’t regret. Even though Medarex was expensive, the value it has brought to Bristol appears to be clear cut. Even a great deal can cost a fortune after all. -- Jessica Merrill

Which one of the deals below will pay dividends?  Check back in a few years, but for now content yourself with the latest edition of ...

Pfizer/Zoetis: Pfizer said May 22 that it will shed its remaining 80% ownership of the Zoetis animal health business that it began spinning out via IPO in February. The timing was earlier than expected. Analysts had anticipated that Pfizer would wait at least 180 days before divesting the remaining portion of the company, partly to help Zoetis establish its footing and also due to a lock-out period by underwriters. Yet, that waiting period could be waived if Zoetis established itself as standalone company, and apparently it has. Pfizer’s former animal health business seems to be adjusting to independence well; Zoetis reported first quarter earnings per share on April 30 of $0.36 per share, up 20% from what the unit reported a year earlier and three cents ahead of analysts’ expectations. The Madison, NJ-based company brought in sales of $1.09 billion, up 4% from the year-prior period. News of the swap didn’t impair Zoetis’ market performance; shares added about 1.5% to $33.55 on the day of the announcement. The Zoetis IPO, which brought in $2.2 billion for Pfizer, was a success. The offer price was above the anticipated range of $22 to $25 per share; the company sold 86.1 million shares at $26 each on Jan. 31. The stock opened at $30.74 on Feb. 1 and was up 20% on the first day. Now, Pfizer shareholders will be given the option to exchange all, some or none of their shares of Pfizer stock for Class A shares of Zoetis stock, which will be issued at a 7% discount to market price, meaning $100 of Pfizer stock would be worth $107.52 of Zoetis shares, according to the company. Though this time Pfizer won’t see any cash, the tax free swap will reduce the Big Pharma’s share count and thus be accretive to earnings per share. – Lisa LaMotta

Elan/AOP Ophan/NewBridge/Speranza: In its continuing effort to spend its way to diversification, Elan Corp. PLC announced a trio of deals this week. It acquired profitable, Central and Eastern Europe-focused orphan disease company AOP Orphan Pharmaceuticals; it invested in Middle Eastern specialty pharma NewBridge Pharmaceuticals; and it spun out its only clinical candidate into Speranza Therapeutics.
These deals come on the heels of its royalty deal with respiratory company Theravance and Elan’s struggle to remain independent. Also this week, Royalty Pharma increased its hostile bid to acquire Elan to $12.50 per share for the company, which it said is the equivalent of $4.6 billion for Elan’s remaining half of its royalties for multiple sclerosis drug Tysabri (natalizumab). That’s a 42% premium to the $3.25 billion for which Elan sold the other half of its Tysabri royalty to partner Biogen Idec Inc. in March. Elan shareholders previously rejected an $11.25 per share offer from Royalty Pharma earlier this year. Elan is acquiring AOP for €263.5 million ($339.8 million) in cash and stock, plus a potential €270 million in regulatory milestones. The Austrian company markets orphan disease products in Central and Eastern Europe and the Middle East. Elan also made a $40 million investment in specialty pharma NewBridge. Elan received a 48% equity stake and has the option to buy the remainder by 2015 for $244 million. Finally, Elan is divesting ELND005 (scyllo-inositol), which did not meet the primary endpoints in a Phase II trial to treat Alzheimer’s disease, into newco Speranza. Elan will invest $70 million for an 18% position in the company, plus royalties or commercial rights in undisclosed markets. A second undisclosed investor will invest $20 million for a 62% equity position, with the remaining 20% distributed among the management. Elan has committed to an additional potential $8 million, while the other investor may invest another $2 million. Elan CMO Menghis Bairu takes the reins at the new biotech as CEO. – Stacy Lawrence

Actavis/Warner Chilcott: Following more than a week of speculation, generics giant Actavis Group agreed to purchase specialty pharma Warner Chilcott PLC on May 20 in an all-stock transaction under which Warner shareholders will end up with a 23% interest in the combined company, to be called Actavis PLC. The deal gains Actavis a favorable tax environment in Ireland and puts to rest for now further talk of a potential Actavis/Valeant Pharmaceuticals International Inc. merger. Valued at about $8.5 billion including the assumption of $3.4 billion in debt, the merger will require approval from 75% of Warner shareholders under Irish law and is likely to close in the fourth quarter, the two companies said. Warner shareholders will receive 0.16 shares in the new company for each full share they hold in Warner, equating to a valuation of $20.08 for each existing share. That’s a 34% premium over the stock’s closing price on May 9. Aside from its core generics business, Actavis PLC will have eight women’s health products including contraceptives, infertility treatments and hormone therapies; six urology drugs across indications such as overactive bladder, testosterone replacement, prostate cancer and benign prostatic hyperplasia; two gastrointestinal drugs, both for ulcerative colitis; and one marketed dermatology product with a second slated for launch this July. It also would boast a pipeline of 25 compounds, 15 of which in the women’s health area. Actavis CEO Paul Bisaro said the merger would result in Actavis deriving about 25% of revenues from specialty branded product sales, compared with about 7% currently.– Joseph Haas

Novo/Xellia: Novo AS added the business-to-business generic anti-infectives manufacturer Xellia Pharmaceuticals AS to its portfolio of health care companies on May 21, building up a life sciences cluster in Denmark that may well be the envy of larger countries. Novo, a life sciences investor and the holding company for the Novo Group, is already the majority shareholder of three Denmark-based companies, Novo Nordisk AS, Novozymes AS and Chr. Hansen Holding AS, and said it was pleased to bring Xellia ownership back to Scandinavia. Xellia specializes in difficult-to-manufacture generic antibiotics and anti-infectives like vancomycin and colistimethate sodium, with fermentation technology not routinely available to bulk manufacturers of other antibiotics like penicillins and cephalosporins. Novo is owned by the Novo Nordisk Foundation, and like the Wellcome Trust in the U.K., the foundation is a major supporter of academic research through grants and other funding. Novo paid the U.K. private equity company 3i and minority shareholders $700 million for Xellia, a company 3i and its management bought from U.S.-based Alpharma Inc. back in 2008. Alpharma was itself created through the merger of companies based in Norway, Denmark and the U.S. 3i made a 2.3 times return on its investment in Xellia, not bad during the past five years of slow economic growth. – John Davis

BTG/Ekos/Nordion: Britain's BTG PLC announced two planned acquisitions this week, one extending its abilities in liver cancer and the other an ultrasound treatment for dissolving severe blood clots, to create an interventional medicine business with potential sales of $1 billion. BTG agreed to pay $180 million in cash and up to $40 million in milestones for Seattle-based Ekos Corp., which will provide control of EkoSonic, a new technology approved in the U.S. and Europe for treating blood clots which is enjoying 29% annual compound growth rate over the past three years. The specialty pharmaceutical group also agreed to buy the targeted therapies division of Nordion Inc., for about $200 million in a deal that adds that company’s Therasphere radioactive glass beads treatment for liver cancer. BTG believes Therasphere will complement its existing chemotherapy beads unit and wants to expand the indications of use for that product and its geographic footprint beyond Europe and the U.S. to Asia, where the prevalence of Hepatitis B – a precursor for liver cancer – is very widespread compared with the West. For example, 5% of primary liver cancers occur in China. BTG thus sees a huge market opportunity there and aims to build on the chemo bead partnerships and regulatory track record it already has in China, Japan and South Korea for promoting Therasphere. Some of the cost of buying the Nordion unit will be met from a May 23 private placement that raised $160.7 million. BTG sold 32.2 million new shares, representing just below 10% of its share capital. -- Sten Stovall

GSK/BARDA: Biopharmaceutical business development executives are oft heard claiming that every deal is different – and so breathless PR claims of “first of its kind” and uniqueness usually tend to be simultaneously overheated and paradoxically unnecessary. But this week’s deal between GlaxoSmithKline PLC and the U.S. Biomedical Advanced Research and Development Authority might fit the bill. The collaboration is essentially a grant over which BARDA exercises an unusual amount of control and will focus on developing antibiotics against resistant bugs and potential bioterror agents. BARDA retains flexibility in which GSK projects it chooses to fund over the life of the deal; it will contribute $40 million over an initial 18 month period and up to $200 million if the deal gets renewed over five years. The only specific GSK asset cited in the award contract is GSK 2140944, an antibiotic against respiratory and skin and soft tissue infections currently in Phase I studies for conventional and biothreat applications. A joint BARDA-GSK committee will determine funding allocations and select or eliminate projects for the team’s portfolio. BARDA doesn’t receive any traditional ownership or return rights (no milestones or royalties to reward its risk taking). Nor will it acquire any rights to GSK’s pre-existing IP, according to a GSK spokesperson. For IP that comes out of the relationship, the spokesperson notes that “GSK may obtain title to any patents for inventions GSK makes as part of the contract, with BARDA reserving certain government rights to such inventions.” The deal underscores the need for new models to fund R&D in a space largely underfunded by traditional means thanks to scientific difficulties and poor return on investment. GSK isn’t alone in its pursuit of new antibiotics, but it’s an increasingly small club.--CM

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