Pharma deals during October 2013

This month's Deal Watch reviews the top value deals reported during October. As usual this month's report focuses predominantly on those deals where financial terms are disclosed.

The month opened with the news that Merck & Co is eliminating a further 8,500 jobs, in addition to the previously announced 7,500 job cuts, in its plan to reduce the global workforce by about 20 per cent. Merck is also closing facilities in New Jersey and will discontinue some late stage drug development programmes to meet its objective of saving about $2.5bn annually by 2015. 

So the fact that the IPO window seems to be open, at least in the US (and for now) is heartening news. Various commentators have cited President Obama's Jumpstart Our Business Startups (JOBS) Act as being a catalyst for the resurgence of IPOs in the US. This Act eases various securities regulations and enables companies contemplating going public to meet investors in confidence to "test the waters” and gauge interest before making their offering.

Examples of recent IPOS

*Source www.nasdaq.com

Following on from our September analysis, acquisitions continue to feature in the deals reported. Of the 17 transactions in the October Deal Watch, four were acquisitions of companies or assets and four contained options to acquire the company or assets within the deal structure. In terms of therapeutic areas, oncology featured in four of the deals and there were also transactions in bone metabolism, diabetes and the cardiovascular area. Overall there was a somewhat eclectic mix of companies featuring in the deals reported and interestingly private equity (PE) companies were involved in several of the transactions.

Acquisitions  
The highest value headline deal this month was the $8.3bn purchase of 50.01 per cent of Celesio's stock by the San Francisco-based wholesale drugs group McKesson, with an offer to buy the remaining shares. Celesio is owned by the holding company Franz Haniel & Cie. Although not necessarily a household name, Celesio includes the Lloyds pharmacy chain which represents a good geographic fit for McKesson. As part of the deal, McKesson will gain over $30bn in annual revenues and the resulting pharmacies/wholesale group will have revenues in excess of $150bn. The bid for the remaining stock at €23 represents a 43 per cent premium over the price in June when speculation started about the change of ownership. This offer values Celesio (including debt) at approximately 11 times expected EBITDA for this year, this is higher than the 9.8 multiple of McKesson.

Following the acquisition trail, and with a deal carrying a headline value of $440m ($200m in cash and $240m in deferred consideration), AstraZeneca's (AZ) MedImmune bought Spirogen. Part of the Auven Therapeutics portfolio of companies, Spirogen has antibody-drug conjugate (ADC) technologies which will fit well with MedImmune's oncology biologics capabilities. Spirogen's pyrrolobenzodiazepine technology enables the attachment of cytotoxic agents to specific antibodies which specifically target cancer cells, thus minimising the toxicity to the patient. Pre-existing out-licensing agreements, which include milestones and royalties, remain in effect and these have been transferred into a holding company 75 per cent owned by Auven.

In addition, MedImmune is making a $20m investment in ADC Therapeutics, another Auven portfolio company, and entering a collaboration to jointly develop two ADC programmes with the company. This investment is being matched by Auven on the same terms; the collaboration agreement includes an upfront payment with development milestones with a cost and profit sharing arrangement (MedImmune has the majority share). ADC Therapeutics retains the option to co-promote one of the two products in the US.

Role of private equity
Taking an active role behind both Spirogen and ADC Therapeutics, Auven Therapeutics, as a PE company follows a strategy of acquiring controlling interests in early stage therapeutic products or platforms. When the value of the assets has been enhanced through appropriate development programmes, the assets are then sold on to pharmaceutical companies. Auven's portfolio of companies includes Resolvyx, Kiacta, Kolitan and Sprout Pharmaceuticals, as well as Spirogen and ADC Therapeutics. 

The other major deal featuring PE is the acquisition of Acino by Avista Capital Partners and Nordic Capital for $439m. Acino share holders were offered 115 Swiss francs per share in a cash tender offer which represented a 33 per cent premium over the price of 86.50 Swiss francs per share. The sale has been strongly supported by the Acino Board, notably the stock had fallen by 62 per cent over the last five years. Shares responded with an increase of 32 per cent, which is the biggest increase recorded for the company. Two thirds of shareholders must accept the terms for the deal to go through to completion.

Options to acquire
In a double announcement Sideris Pharmaceuticals reported the successful completion of its series A financing of $32m as well as the closure of an option agreement with Novartis. Under the terms of the agreement Novartis has the exclusive right to acquire Sideris with its lead asset, the iron-chelating candidate SP-420 for transfusional iron overload diseases. The headline value of this agreement, taking into account upfront, acquisition and milestone payments, could reach $300m. The closing of the series A financing allows Sideris to take the SP-420 programme through into phase II clinical studies. No information was available as to the duration of the option term.

In a similar deal, PharmAkea Therapeutics (which was seed-funded by Celgene) and Bay City Capital have entered a strategic collaboration with Celgene based on PharmAkea's technology platform to discover novel small molecule therapeutics for cancer and fibrotic diseases. This deal includes an initial three-year term for which Celgene will provide $35m funding; Celgene also has an option to extend the collaboration with additional funding. As part of the transaction, Bay City Capital has invested $10m in a series A equity financing; Celgene will also take an equity stake in PharmAkea and will retain an exclusive option to acquire the company.

Oncology continues to lead
In terms of therapeutic areas, oncology continues to be the most popular topic for deals. The Spirogen/Auven Therapeutics deal with MedImmune discussed above re-confirms that ADC technology is certainly in vogue amongst the large pharma. This month ImmunoGen and Novartis announced a second licence under their 2010 agreement giving Novartis rights to the biotech's ADC technology to develop anticancer therapeutics to an undisclosed target. ImmunoGen could receive around $200m in upfront and milestone payments plus royalties on sales of any products resulting from the licence.

Focusing on China, Lilly has entered into a licence and co-development agreement with Hutchison MediPharma for fruquintinib (HMPL-013), a phase II inhibitor of all three forms of Vascular Endothelial Growth Factor (VEGF) receptor tyrosine kinase for the treatment of solid tumours. Hutchison MediPharma will continue the development of Fruquintinib in China with Lilly sharing the costs.  In return for the rights to Fruquintinib, Lilly is paying up to $86.5m in upfronts, development and regulatory milestones and will also pay tiered mid-teen royalties on net sales made in China.      

AstraZeneca is focusing on developing its regional oncology portfolio as evidenced by the closure of a co-promotion deal with Janssen in Japan for Zytiga (abiraterone acetate), an innovative oral therapy for the treatment of metastatic castration-resistant prostate cancer in combination with prednisone. A CYP17-inhibitor, Zytiga inhibits the enzyme which modulates the production of androgens which stimulate the growth of prostate cancer cells. 

Settlements and terminations
Valeant has often appeared in Deal Watch through its extensive acquisition activities, but sometimes acquisitions bring liabilities as well as assets. This proved to be the case with Dow Pharmaceutical Sciences, which had undertaken development work for Anacor on the topical antifungal tavaborole for the treatment of onychomycosis under a 2004 master services agreement, prior to its acquisition by Valeant. This became the source of a dispute when Valeant intended launching its own product Jublia (efinaconazole) for the same indication; Anacor then initiated arbitration proceedings last year. The outcome of the arbitration was that Valeant was ordered to pay damages to resolve the dispute.  Valeant has agreed to pay Anacor $142.5m to settle all existing and future claims related to Anacor's contractual dispute with Dow. However, Anacor had sought an award of at least $215m plus injunctive relief, but the arbitrator did not grant an injunction nor an ongoing royalty. Therefore the launch of Jublia can proceed, subject of course to receiving regulatory approval.

Some five years after the $620m headline deal for worldwide rights to veltuzumab (humanised anti-CD20 antibody) for all non-cancer indications, Takeda has formally given notice of termination of the licensing agreement it inherited through its acquisition of Nycomed. The dispute between the parties concerns development delays that Immunomedics argued were material breach of the agreement. On termination, all rights revert back to Immunomedics and it is expected that arbitration will continue in parallel with discussions for the technology transfer reversion.  

Whilst the termination of the licence with Takeda may have nothing to do with the efficacy or safety of veltuzumab, the Immunomedics share price took a tumble and has yet to recover; it is currently approximately 40 per cent down on the price the day before the announcement was made.  However such "life cycle events" are not atypical in our industry and there may be potentially good prospects for Immunomedics to find another partner once the dust has settled. 

Looking forward
So to conclude this month's commentary, we have seen some interesting deal structures and large companies wanting to take an early position to secure rights to assets of potential interest at a later stage, ie the Sideris and PharmAkea transactions. Whilst large pharma continue to restructure and shed jobs, there does seem to be a lifeline of new companies growing and securing finance, especially in the US. It will be interesting to see how long the IPO window lasts in the US and we very much hope the renewed interest in IPOs can cross the Atlantic.

See a table listing all the major pharma mergers, acquisitions and collaborations agreed during October 2013