In signing in-licensing deals for its drugs business, Bayer has made some pretty good bets in recent years with products like Eylea and Nexavar. Its $2.4bn offer for Norwegian group Algeta will be a test of how savvy it is in M&A.
For the conservative German conglomerate to come out of its shell and make the offer there must have been a good deal of confidence that it was not paying over the odds to secure all of the cash flow for prostate cancer drug Xofigo. Still, given the run-up in Algeta’s share price since positive pivotal data emerged more than two years ago, one might wonder why Bayer waited so long.
Avoiding future costs
Algeta today disclosed an offer from Bayer of NKr336 a share, a 27% premium to yesterday’s closing price of NKr264.60. Shares in the Oslo-based group rose 33% to NKr351 in mid-afternoon trading as investors anticipated that negotiations would result in a further uplift in Bayer’s offer price.
Buying Algeta would bring Bayer all of the rights to Xofigo, a targeted radiopharmaceutical approved earlier this year to treat bone metastases related to prostate cancer. Just launched in the US, the drug generated $600,000 in sales in the second quarter and $17m in the third quarter, according to Algeta. EvaluatePharma’s consensus puts 2018 sales at $1.06bn; alliance revenue due to Algeta is forecast at $471m in 2018, yielding a net present value of $516m for the Norwegian group.
The partners have a 50/50 co-promote deal in US, and Bayer pays royalties on sales in ex-US regions. While the senior partner has already paid out substantial lump sums – including a $59.5m upfront fee and around $136m on US regulatory successes – the 2009 pact that locked up Xofigo also included some $520m in sales-related milestones, out of a total $785m total deal value, so Bayer still stands to avert significant payouts yet if it succeeds in buying Algeta. It also will obtain a fair cash pile, as Algeta reported it held NKr1.5bn ($239m) at the end of the third quarter.
Whether these considerations justify Bayer’s offer is a fair question. Among the more bullish analysts like JP Morgan and Bank of America-Merrill Lynch price targets in the NKr300 range were suggested before the Bayer bid, so NKr336 would not seem overenthusiastic – those banks believe peak sales for Xofigo in excess of $2bn can be achieved.
Less enthusiastic are Deutsche Bank and UBS, the latter of which, earlier this month, saw $1.5bn in peak sales as a best-case scenario and established a price target of NKr165. A UBS note today diplomatically states that the Bayer offer is not excessive if consensus figures are followed – in essence, it is proposing to buy an estimated $385m in 2018 profits at 8.3 times earnings – and that a 27% premium is conservative in the biotech sphere.
UBS also states that Xofigo may be able to withstand generic erosion better than many drugs because of its radioactive properties, making it a more desirable asset.
If Algeta is a coveted property, the next question is why Bayer did not offer to buy it sooner – Algeta certainly wanted Bayer to tie the knot. And it was apparent that Xofigo was very likely to be approved when the Alysmpca trial ended early because of clear evidence of superiority to placebo (Algeta receives major and unexpected Alpharadin boost, June 6, 2011).
Since then, its shares have risen 32% – and indeed, would have seemed even more a bargain if Bayer had waited and then made an offer in April 2012, when shares had slumped to NKr124.40.
But Bayer does not open its chequebook often – the last time it paid more than $1bn for a pharma company was the $21.3bn buyout of Schering AG in 2006. Should it succeed in reaching a deal with Algeta by year’s end, it would be its second pharma M&A deal this year; prior to the buyout of Steigerwald Arzneimittelwerk earlier this year it had been dormant since 2008 in buying drugmakers.
Whether an Algeta takeout at the current price range turns out to be a good move will depend on whether Xofigo achieves some rather bullish forecasts. If it does not, Bayer could come to regret taking the risk.