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Deal Watch August 2016

Pfizer's hat trick as well as Sanofi, GlaxoSmithKline, Boehringer Ingelheim and more are featured in this month's round-up

Medius Deal Watch August 2016Pfizer's hat trick
The rules of cricket are a mystery to most people, even the English. An interesting language learning exercise is to ask non-English speaking students to translate the rules of cricket and then based on their understanding to play the game. Needless to say confusion reigns. But, there is one thing to thank cricket for and that is the origin of the phrase 'hat trick'.

Apparently at a cricket match in 1858 in Sheffield, England, the bowler took three wickets with three consecutive deliveries and, in recognition of this, a collection was held and he was bought a hat. (For those of you who don't understand the first part of the last sentence, it is recommended you read the rules of cricket.)

In April this year the major news was the collapse of Pfizer's $160bn acquisition of Allergan as a result of change in US tax regulations to prevent tax inversions. At the time Deal Watch commented: “Hopefully Pfizer has finally got the message from the US Government and will now focus on developing its long term business as a leading pharmaceutical company rather than seeking a short term financial 'fix' to improve its financial results.”

It seems Pfizer has got the message judging from the Anacor acquisition for $5.2bn in May and a hat trick of deals this month, including the acquisitions of Medivation for $14bn, antibiotic business interests from AstraZeneca for $1.4bn and Bamboo Therapeutics for $645m. It may have been a quiet summer month for other companies but not for Pfizer.

The Medivation acquisition provides an interesting case study. At the same time as "Pfizergan" was collapsing, Sanofi was making a hostile bid for Medivation after the CEO refused to meet or discuss a transaction. Sanofi offered $52.50 per share, which it claimed was a 50% premium over the previous 2 months, but omitted to mention the share price had been unusually low in that period. Sanofi subsequently increased its offer to $58 plus a contingent value right valued at a maximum of $3.

Pfizer massively “trumped” (this word has a whole new meaning now that The Donald has become a global celebrity) Sanofi and was slightly above the other bidders rumoured to include AstraZeneca and Gilead, by offering $81.50 representing an 81% premium over the $45 mid-April price before the Sanofi bid. This high premium and the one for Cynapsys (see below) has led to speculation that other potential target mid cap biotech companies such as Vertex, BioMarin and Alexion could command higher premiums. One commentator suggested BioMarin could be a Plan B for Sanofi.

Did Pfizer overpay?
The Pfizer $14bn price tag looks high given that Medivation's sales were $0.9bn in 2015 and operating income was $0.4bn giving a price multiple of 35! Although Pfizer pointed to the $2.2bn of Xtandi sales for advanced metastatic prostate cancer, this product has been under licence to Astellas since 2009, including a US profit share and “tiered royalties (three tiers) ranging from the low teens to low twenties” outside the US.

So the conclusion is that Pfizer is mainly expecting to generate value from Medivation's late stage oncology programme. The lead product is talazoparib, a PARP inhibitor, bought from BioMarin in phase III for treatment of BRCA mutated advanced breast cancer. This would complement Pfizer's palbococlib, launched in the US in February 2015, to treat HR+/HER2 metastatic breast cancer.

Nevertheless $14bn still seems to be a high price because Pfizer will have to generate an average £3bn in cash from the acquisition every year for the next 10 years just to achieve an internal rate of return (IRR) of 16%, which is the top end of the discount rate it uses (11% to 16% according to the 2015 annual report). Based on a Deal Watch best case forecast including synergy savings on S&M and G&A, peak sales of Xtandia at $7bn and profits from palbococlib, Deal Watch calculates the maximum IRR is around 18% assuming everything goes according to plan. The Deal Watch conclusion is Pfizer overpaid but, in fairness, this is not unusual in a competitive bidding process.

Hostile takeovers
When the management board of a target company refuses to accept a takeover, the bidder can make a hostile bid either by making a tender offer or a proxy fight where the shareholders are encouraged to replace the board with directors willing to accept the takeover. Sanofi sought to take control of Medivation's board using a paper vote. In contrast, in 2015 Mylan made a tender offer for Perrigo.

An unsolicited bid for a company is where a bidder submits a bid to acquire the target company, which has not been requested by the target. This can turn into a hostile bid. For example, Pfizer made an unsolicited bid for AstraZeneca but did not increase the offer when the US treasury changed the tax inversion rules.

Did Sanofi make a mistake launching a hostile bid?
Apart from the question whether Pfizer overpaid for Medivation, the other interesting aspect is whether Sanofi did the right thing making a hostile bid. A couple of studies in the US and Canada showed that hostile bids succeed in only 50% of cases. Recent experience of large hostile bids in the pharmaceutical industry is not encouraging.

Date / Type of BidBidderTargetValueOutcome
Mar 06 / HostileMerck KGaASchering AG$17bnSchering AG sold to Bayer for $20bn
Jan 14 / UnsolicitedPfizerAstraZeneca$118bn'Final' offer rejected by AZ and Pfizer decided not to increase offer
Sep 15 / HostileMylanPerrigo$26bnTender offer failed as Mylan shares dropped in value (Teva withdrew bid)
Apr 14 / HostileValeantAllergan$54bnAllergan sold to Actavis for $66bn

Experienced business development executives are aware that securing a deal is not just driven by price. The personal relationship between executives in the bidder and target companies is also important. The very nature of a hostile bid is one of conflict not co-operation so it is not surprising if the target company finds another more co-operative company to sell to e.g. Allergan sells to Actavis not Valeant.

As far as we know, Sanofi did not have any business relationships with Medivation unlike Pfizer who had a deal running from 2008 to 2012. In addition, according to Reuters, the Pfizer senior vice president Douglas Giordano was in touch with the Medivation chief executive officer early on in the transaction selling the benefits of joining Pfizer.

It is unclear whether Pfizer had identified Medivation as a potential target earlier than Sanofi did or only entered the race once Sanofi were making the running. When the auction was started Pfizer was quick to sign a CDA and get onto the short list. If Medivation had then decided that Pfizer was its partner of choice, it was only a matter of ensuring the Pfizer offer was higher than the others.

So did Sanofi make a mistake launching a hostile bid? If Sanofi was making an opportunistic bid to capitalise on the low Medivation share price at the time and did not expect any other (higher) bidders, then it could be argued Sanofi's hostile bid had a chance of success. If Sanofi was keen to acquire Medivation, it should have spent more time building a relationship with the company rather than launching a hostile bid so early after initial discussions.

Completing the hat trick
Pfizer's bid to acquire AstraZeneca two years ago may not have been successful but it does not seem to have damaged the relationship between the companies judging by Pfizer's acquisition of AstraZeneca's antibiotic franchise outside the US for up to $1.575bn. The price, as is often the case in product acquisitions including products in development, is structured like a licence with an upfront ($550m), deferred payment ($175m), development ($250m) and sales related ($600m) milestones and tiered royalties.

This is the latest divestment by AstraZeneca as it streamlines its product portfolio (and cuts costs) to focus on oncology, cardiovascular/metabolic and respiratory/inflammation/autoimmune medicines. In contrast Pfizer has decided to retain a much wider portfolio. It has the same therapy areas as AstraZeneca apart from respiratory but also has neuroscience/pain, rare disease, vaccines and biosimilars.

In the same way that the asset acquisition deal between AstraZeneca and Pfizer had the financial structure of a licence, so too does the Pfizer acquisition of Bamboo Therapeutics. Pfizer's third deal of the month was the acquisition of the remaining 78% of the Bamboo shares for up to $645m. In the first quarter of this year, Pfizer acquired a 22% stake for $43m. The payment this month is $150m upfront plus up to $495m in milestones dependent on progress in development, regulatory and commercialisation. It is hardly surprising that over 70% of the value of the company is milestones as preclinical gene therapy has a very high risk of failure in development.

Perhaps the most valuable asset of Bamboo is the expertise of the staff and the operational manufacturing facility “which has served as a qualified supplier of rAAV vectors for several healthcare companies and academic institutions”. This will help with the collaboration with Spark Therapeutics that is developing a treatment for haemophilia B that incorporates a bio-engineered rAAV vector and the academic collaborations e.g. with Kings College, London.

You can't teach an old dog new tricks
Older people learn from their children how to use digital technology. The same is happening in the pharmaceutical industry where traditional pharmaceutical companies are joining forces with digital companies to improve patient treatment and care. At the UK Pharmaceutical Licensing Group conference on Digital Health in May, it was reported that 27% of senior citizens are tracking some aspect of their health using digital technology.

Marco Mohwinckel, Global Head of Integrated Care Business at Janssen explained that digital technology provides the opportunity to modernise the pharma business model given that the blockbuster model is under severe pressure because of longer and more regulated development, market access hurdles and shorter commercial life cycles.

GSK had got the message back in 2012 when it set up a bioelectronics medicines group. It has now made a major leap forward with the setting up of a $0.7bn joint venture with Verily Life Sciences, formerly Google Life Sciences. GSK will hold 55% of the shares in Galvani Bioelectronics, which will seek to develop miniaturised devices, attached to individual nerves to correct irregular electrical signals that are characteristic of certain chronic diseases. The likelihood of a bionic person is getting closer but will cost a lot more than the Six Million Dollar Man played by Lee Majors in the 1970s TV series.

Another digital deal in August was Boehringer Ingelheim's collaboration with Qualcomm to develop a small wireless disposable module for the Respimat inhaler that will track puffs from the inhaler to help health care providers to better manage patients with COPD. Deal Watch predicts there will be a lot more digital health deals in the next two years.

One trick pony
Cynapsys, the Canadian CNS company, appears to be a one trick pony. The lead and, apparently, only product in development according to the website is a sublingual film containing apomorphine in phase III for treatment of OFF episodes of Parkinson's disease. If apomorphine is the only product, the acquisition of the company by Sunovion (the US subsidiary of Dainippon Sumitomo) for $645m, paying a hefty 123% share price premium, looks very expensive even assuming the clinical studies in the US and Europe meet all the target endpoints.

Trick or treat
As usual this month the licence deals are mainly early stage collaborations between biotech and big pharma companies Amgen, Gilead and Boehringer. The headline numbers are high but the upfront payments are modest, two at $5m (discovery) and one at $40m (preclinical). Late stage licences can also command relatively low upfront fees. For example, Helsinn has licensed pracinostat, which is phase III-ready, for $15m upfront plus $5m equity payment.

Pharmaceutical companies are expanding into other non-medicine technologies in addition to digital technology. For example, Allergan has acquired ForSight Visions, a company that has developed a peri-ocular device that allows extended release of a drug to reduce intra-ocular pressure in glaucoma patients.

Finally it was interesting to see that Pharming has recovered from Valeant the North American rights to its product Ruconest. It is an example of how licensing a product to a small company in the first instance can end up at a large company who may have no interest in the product. Pharming originally licensed the product to Santarus in 2010. Santarus was acquired by Salix in 2014 which in turn was acquired by Valeant in 2015. So the product, which is an orphan drug, ended up in the portfolio of a $10bn company focussed on GI, dermatology and neurology and which was under investigation by the SEC in the US. Pharming did well to get the rights back especially as it resulted in Valeant having to make a $199m write down of its intangible assets.

Licensor / Acquisition targetLicensee / AcquirerDeal type*Product / TechnologyHeadline £m
Medivation (US)Pfizer (US)Company acquisitionOncology company with marketed Xtandi for prostate cancer and talazoparib in phase III
14,000
AstraZeneca (UK) antibiotic businessPfizer (US)Asset acquisitionEU approved ceftazidime-avibactam), marketed meropenem and ceftaroline fosamil and clinical development assets aztreonam-avibactam (ATM-AVI) and CXL
1,575
Verily (US), formerly Google Life SciencesGlaxoSmithKline (UK)Joint ventureGalvani Bioelectronics set up to develop and commercialise bioelectronics medicines
714
Mallinckrodt (US) Nuclear Imaging businessIBA Molecular (BE)Asset acquisitionDiagnostic imaging products for use in nuclear medicine including molybdenum-99
690
Bamboo Therapeutics (US)Pfizer (US)Company acquisitionPreclinical gene therapies and manufacturing plant
645
Cynapsys (CA)Sunovion (US) (Dainippon Sumitomo)Company acquisitionSublingual apomorphine for Parkinson's disease in phase III in US
624
Advaxis (US)Amgen (US)LicenceADXS-NEO, preclinical investigational cancer immunotherapy treatment
540
MEI Pharma (US)Helsinn (CH)LicencePracinostat, phase III-ready HDAC inhibitor for treatment of acute myeloid leukaemia
469
Genmab (DK)Gilead (US)LicenceDuoBody® technology platform to develop bispecific antibody candidates for targeting HIV plus option to second licence
252
VersartisTeijin (JP)Licence JapanSomavaratan, long-acting form of rhGH, for paediatric and adult growth hormone deficiency in phase II/III in Japan
165
Shionogi (JP)Kyowa (JP) (Lupin)Asset acquisition Japan21 branded products in Japan with $90m sales
151
Valeant (US)Pharming (NL)Asset acquisition North AmericaRuconest (recombinant human C1 esterase inhibitor) for treatment of acute Hereditary Angioedema with sales of $25m
125
SanionaBoehringer IngelheimLicenceIon channel drug discovery collaboration
112
Catalyst BiosciencesAttenuaAsset acquisitionThree oral Neuronal Nicotinic Receptors (NNR) in phase I and II
105
ForSight VisionsAllerganCompany acquisitionPhase II peri-ocular ring for extended drug delivery to reduce intraocular pressure (IOP) in glaucoma patients
95
 Ionis (US)Biogen (US)Exercise option  Nusinersen, in phase III for treatment for spinal muscular atrophy 75

*Global rights unless stated

15th September 2016

15th September 2016

From: Sales

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