Looking for value in the deal sweet spot
With plenty of assets out there but a dearth of deals, biopharma’s problem right now seems to be valuation. Or, more accurately, the gap between what a seller believes itself to be worth and what a potential buyer is willing to pay.
Novartis’s chief executive, Joe Jimenez, summed up the issue on the group’s earnings call this week, saying the Swiss company was having trouble finding attractive assets in its $2-5bn sweet spot. An analysis by EP Vantage reveals various targets at this price, but his comments suggest that investors have priced many out of the market (see table below).
A clearly overvalued example is Axovant, which has a market cap of nearly $2.5bn despite not yet having phase III data for its highly risky Alzheimer’s project intepirdine. It is hard to see who would want to buy the company before this readout – due in September – and equally hard to foresee this trial succeeding.
The analysis looks at companies currently capitalised at $1.5-4bn, on the grounds that a likely takout price would have to include a premium above the valuation ascribed to it by the markets.
|Selected companies in the $1.5-4bn range|
|Company||Market cap ($bn)||2017e sales ($m)|
Another high-risk/high-reward bet would be Juno Therapeutics, a specialist in CAR-T therapy, which has generated much excitement but still has safety questions hanging over it. Of course, Novartis already has a presence here so is unlikely to be interested, but Juno could entice a rival big drugmaker.
Meanwhile, a takeover premium already seems baked into GW Pharmaceuticals’ valuation. The UK-based company has been talked about as an acquisition target since it first tasted success with its anti-epilepsy project Epidiolex but, with its price tag looking rich, bigger players seem unlikely to bite.
Portola and Puma look more likely targets, having recently bagged unexpected approvals for their lead projects.
Puma in particular looks more fairly valued than it did a couple of years ago, when takeout speculation drove the stock to unrealistic levels. The opportunity for its breast cancer pill is now clearer, and a bigger cancer specialist might think it can do a better job of selling Nerlynx, in spite of its link with severe diarrhoea.
Sarepta also suddenly looks more attractive after pleasantly surprising investors with its second quarter and raising full-year sales guidance for its Duchenne muscular dystrophy drug Exondys 51.
This week’s Biomarin settlement, which will see Sarepta pay its rival royalties of 5% and 8% in the US and Europe respectively, will put a dent in future profits. However, during yesterday’s earnings call Sarepta's new chief executive, Douglas Ingram, maintained that the agreement would remove distractions and allow the group to focus on selling Exondys 51 and developing new therapies.
He described Sarepta as “among the most undervalued and underappreciated companies” in biotech and, with a market cap of $1.8bn, the group is more reasonably priced than the others in this analysis.
But the company is still targeting a tiny portion of an already small market, and is having problems getting payers on board to boot. Investors piling into the stock today – Sarepta opened up 20% – may have unrealistic expectations of the price tag the company might command.
Mr Jimenez’s protestations aside, takeouts within Novartis’s sweet spot are getting done. Most recently Fresenius bought Akorn for $4.3bn, though as this was driven by the latter’s pharmacy and clinic network it does not fit well with the typical biopharma business model.
Other deals have been focused on expansion within a specific speciality area, with Allergan buying Tobira, Vifor taking out Relypsa and Astrazeneca swooping on ZS Pharma. Celgene in particular has seen the need to grow its haematology pipeline, and the cost of Acetylon and Engmab did not stop it buying these private companies.
Indeed, it is in the interest of acquirers like Novartis to talk down the value of targets. But as long as biotech investors banking on takeouts unwittingly price their assets out of acquirers' reach the slowdown in deals seen this year will likely continue.