J&J option backs Clozel’s biotech dream scenario

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With Johnson & Johnson yesterday handing across $230m to exercise an option over Idorsia’s aprocitentan the markets have another reminder of the genius way in which Jean-Paul Clozel negotiated J&J’s $30bn takeout of Actelion, the group of which he was chief executive.

Mr Clozel of course now runs Idorsia, a company spun out of Actelion under the takeover, financed largely with J&J cash, and to which J&J will now owe royalties. Investors might well wonder whether there is any way in which J&J can now avoid having to buy Idorsia too – a dream scenario for Mr Clozel that the latest deal does nothing to dispel.

The aprocitentan metrics to which Mr Clozel got J&J to agree when negotiating the Actelion takeout are awe-inspiring. In addition to the $230m opt-in fee the big pharma group is required to pay Idorsia a 20% royalty on aprocitentan annual sales of up to $500m, rising to a huge 35% on revenue exceeding $2bn.

Idorsia was spun out of Actelion and listed in June, so sellside forecasts for aprocitentan are hard to come by. And as the asset is still in phase II the likelihood of it hitting such impressive sales targets is still unclear. The only spending Idorsia looks to be on the hook for now is 50% of phase III cost.

But biotech deals typically call for a much lower royalty rate, and even the mid teens is seen as generous. Of course profit margins on aprocitentan can only be guessed at at present, but it is relevant to ask what economic benefit J&J would derive from marketing this drug after paying out 35% of sales.

It is considerations such as this that underpin the bull case for Idorsia; after all, why should J&J be lumbered with crippling royalties when it could simply own the assets outright? Price would be a separate issue: Idorsia currently has a market cap of around $2.5bn, but would likely hold out for more in a takeover.

Idorsia's mid to late-stage pipeline
Project Potential use J&J involvement
Phase III
Ponesimod S1P agonist for MS 8% royalty
Cadazolid Antibacterial 8% royalty
Pivlaz Endothelin A receptor antagonist for vasospasm None
Phase II
Aprocitentan Endothelin A & B receptor antagonist for hypertension $230m opt-in fee, 20-35% royalty
ACT-541468 Orexin 1 & 2 receptor antagonist for insomnia None
Cenerimod S1P agonist for lupus None

To see why J&J would even have agreed to such deal terms it is necessary to understand how desperately the group wanted to own Actelion. Mr Clozel being given Idorsia to run was apparently one of the turning points in the Actelion negotiations (Clozel’s takeover masterclass, February 16, 2017).

Not only that, but J&J even provided $830m of debt financing to get Idorsia off the ground – the convertible part of this could give J&J a 32% stake, further backing the takeover thesis. And in aprocitentan J&J likely sees the mother of all lifecycle management strategies: the project is a metabolite of the blockbuster Opsumit, which itself was a follow-up to the now off-patent Tracleer.

While Tracleer and Opsumit are indicated for pulmonary arterial hypertension, aprocitentan is being pitched as a treatment for patients whose hypertension is uncontrolled despite the use of at least three antihypertensive drugs. In a phase II trial aprocitentan beat placebo but not lisinopril control.

If Mr Clozel does secure a second buyout from what started out as the same business he would be living the biotech dream twice over. The last time a similar feat was achieved was when the sellers of Aragon to J&J rolled an apparently non-core asset into a new venture, Seragon, which they subsequently sold to Roche.

Knowing Mr Clozel’s track record with Actelion, J&J had better brace itself for some hardnosed negotiating.

To contact the writer of this story email Jacob Plieth in London at jacobp@epvantage.com or follow @JacobPlieth on Twitter

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