Patience is a virtue for big pharma buyers

For biotechs nearing regulatory approval the key is to sell before launch. For buyers, playing the waiting game is a better strategy.

Tesaro’s share price surge on rumours that it is in the sights of acquisitive big pharma companies points up an uncomfortable fact for single-product biotechs that achieve regulatory approval: launching a new drug alone usually leads to an erosion of value.

Bid speculation has boosted Tesaro before and has come to nothing; this time around the increase puts the company's much-depleted valuation at a quarter of where it stood when it launched the cancer drug Zejula 14 months ago. The same is true of a group of biotechs that have recently realised the dream of getting to market, with one exception that will come as no surprise to seasoned pharma watchers.

Slip sliding away

A total of nearly $9bn in valuation for this cohort of companies has drained away since they got US FDA approval, with most sinking below the net present value of their marketed products, as calculated from sellside consensus sales forecasts. Theoretically, these groups could now represent more attractive targets for big pharma looking to add sales.

What am I bidding for these companies?
Company Product Approval date Market cap at approval Market cap today* NPV of marketed products
Tesaro Zejula Apr 2017 $7.5bn $1.9bn $4.4bn
Acadia Nuplazid Apr 2016 $3.8bn $2.4bn $5.2bn
Puma Biotechnology Nerlynx Jul 2017 $3.6bn $899.0m $1.6bn
Radius Health Tymlos Apr 2017 $1.5bn $761.0m $662.0m
Portola Andexxa May 2018 $2.8bn $1.3bn $3.8bn
Intercept Ocaliva May 2016 $3.7bn $3.0bn $5.1bn
Achaogen Zemdri Jun 2018 $441.0m $76.0m $519.0m
Agios Tibsovo Jul 2018 $5.3bn $4.1bn $4.1bn
Clovis Oncology Rubraca Dec 2016 $1.9bn $883.0m $2.2bn
Sarepta Therapeutics Exondys 51 Sep 2016 $1.5bn $8.4bn $903.0m
Total $32.0bn $23.3bn $28.6bn
*Friday close. Source: EvaluatePharma.

The picture would look even better for big pharma buyers if not for the obvious exception to this rule – Sarepta Therapeutics, which has continued its charmed life after the launch of Exondys 51, thanks largely to its microdystrophin gene therapy.

Declining valuations have not escaped the notice of the investment community, which is seeing the potential for renewed M&A activity thanks to an autumn selloff that has put biotech broadly in the red for 2018.

“Because the valuations have crashed and large cap companies are topline challenged, [big biopharma will] start to buy”, David Lohman, portfolio manager at Diag Capital Management, told the Jefferies healthcare conference last week. “I think we’re still a few months away from that, but I think it resumes early next year, maybe in the spring”.

Tesaro, Clovis, Puma and Agios represent particularly inviting cases, as approved oncology assets owned by small companies are pretty rare. Still, it should be remembered that there are frequently good reasons why buyers have passed them by in the past, not always related to valuation. For example both Tesaro’s Zejula and Clovis’s Rubraca are competing with big pharma in the form of Astrazeneca’s Lynparza, though a bigger company might be a better match against the UK group’s commercial muscle.

The intrigue surrounding Tesaro has only grown since it cancelled an appearance at an investor conference scheduled for next week, and Clovis has been pulled along by the Tesaro rumours.

Maybe wait some more

Other cases in this cohort are more problematic. Sarepta and Intercept, for example, still behave like pre-commercial companies given that much of the betting has been on follow-on indications or pipeline projects.

Buying Intercept at this price only makes sense if you believe that Ocaliva’s approved indication of primary biliary cirrhosis will be supplemented by approval in Nash. Whether that will come to pass depends on the results of the Regenerate trial, which is expected to report data in the first half of 2019.

Sarepta skyrocketed when it revealed data from three patients in a gene therapy trial in Duchenne muscular dystrophy (Sarepta investors party like it’s 2015, June 19, 2018). This is a small cohort on which to make a takeout bet, which would be expensive based on the company's $8bn valuation.

Then there are assets that might not fit well into every big company’s portfolio – namely Acadia, Radius Health and Achaogen. Parkinson’s disease, in Acadia’s case, osteoporosis in Radius's and hospital infections in Achogen’s are conditions with numerous generic competitors, presenting a commercial problem that not even bigger firms might be able to crack.

Achaogen recently undertook a strategic review in the hope of flushing out a buyer, although Zemdri’s approval only in urinary tract infections is likely an impediment to achieving a sale.

Small biotechs provide much of the innovation in the pharmaceutical ecosystem, but it must be recognised that a chunk of pre-commercial valuation is based on unrealistic expectations. It can be difficult to wait out the bidding frenzy when product lines need to be refreshed, but perhaps picking up good values post-approval can make up for the expensive opportunities missed at the development stage.

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