Biotech smells the coffee

A couple of small M&A deals this week shows more developers capitulating to the new reality.

Back in 2016 Radius Health was a hotly tipped takeover target boasting a $2.5bn market cap and an osteoporosis candidate primed for the big time. But that drug, Tymlos, failed to live up to hopes and the company is now being taken private by two healthcare investment firms, for $890m.

And after only 19 months after reversing into a Nasdaq listing, F-Star Therapeutics has agreed to be bought by Chinese developer Sino Bio for $161m. The UK bispecifics developer was facing the prospect of a dilutive raise, with only enough cash left to last until early next year.

Both deals are the result of the dire market conditions and with few expectations of a recovery any time soon more moves like these will inevitably follow.

The aggregate enterprise value of the world’s biotech sector is down 74% since it peaked in February last year, investment bank Torreya calculates. Meanwhile the number of life science companies trading below their enterprise value has ballooned this year, with 215 in that state last week.

It is worth noting, however, that both Radius and F-Star had revenue streams and promising projects to monetise. Finding these sorts of lifelines will be even tougher for earlier-stage developers with less to offer.

In Radius’s case, its financial profile probably attracted Gurnet Point and Patient Square. Although fairly heavily indebted the company has accumulated $1.7bn in net operating losses, or NOLs, which can be used to maximise cash returns in various circumstances, like asset sales. Radius is owner of a promising breast cancer drug, the Serd elacestrant, which could be sold off, maybe to partner Menarini, along with other pipeline projects, analysts believe.

Tymlos never made the splash in osteoporosis that was initially promised, but it is bringing in around $250m a year. That cash flow and the other attributes makes Radius more of a viable proposition for financial buyers.

The $890m transaction will see investors get $10 per share immediately and a $1 CVR, which becomes payable if Tymlos sales hit a certain threshold. The upfront payment represents a 45% premium over Radius’s 30-day average share price; summing up the situation analysts at Stifel said investors would be getting “a relatively 'safe and secure' gain in a bear market characterized by extreme risk and volatility”.

Bargain bispecifics

F-star too has struggled for years to make headway, and while it does not have any projects close to the market it does have a couple of big pharma collaborations under its belt that could bring future revenues. The most successful deal it struck was with Denali, which bought some neurodegeneration assets in 2018.

The company’s lead asset is FS118, a Lag-3/PD-L1 bispecific that Merck KGaA previously had an option over. Important data are due mid-year from a head and neck trial − perhaps Sino Biopharm got an early glimpse of the data. F-Star will become part of the Chinese group’s ex-China R&D subsidiary, Invox Pharma, which is based in the UK.

SVB analysts noted that while the $7.12 per share take out price is attractive compared to F-Star’s share price over the past year, it is below the $7.20 per share average cost basis of the group’s top 15 shareholders. However the alternative for these investors would be to support an equity raise at even steeper discount, so aside from insisting that a better offer is found they probably have little option but to support the deal.

With tumbling valuations across the sector, these are the sorts of quandaries that many developers and investors will be facing in the coming months. And while they are not the sorts of big ticket transactions that will tempt investors back to biotech, they at least show an adjustment to the new realities.

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