M&A in­fla­tion just pushed the av­er­age bio­phar­ma val­u­a­tion to a scary new peak

John Roun­tree

The con­sul­tants at No­va­sec­ta have been crunch­ing the num­bers on bio­phar­ma M&A for the past few years and con­clud­ed that a lot more of these deals are weigh­ing in so heav­i­ly in­flat­ed now that many buy­ers would be bet­ter off look­ing for oth­er ways to grow their busi­ness­es and their pipelines.

Look­ing at each deal as a mul­ti­ple of rev­enue for the ac­quired com­pa­ny, the Lon­don-based con­sul­tan­cy says that the me­di­an val­ue of a buy­out last year was 39 times rev­enue. Com­pare that to a me­di­an 19 times rev­enue in 2015 and 8 times rev­enue in 2014, and you get a point­ed pic­ture of the fresh peak that’s been cre­at­ed in val­u­a­tions.

Ze­ro­ing in on the amount paid rel­a­tive to sales rev­enue was a good proxy for rep­re­sent­ing the in­creas­ing amount that com­pa­nies are pay­ing for all their new as­sets, both on the mar­ket or still in the clin­ic. In an email ex­change, No­va­sec­ta Man­ag­ing Part­ner John Roun­tree tells me:

•The mul­ti­ple com­bine the two things go­ing on in M&A, one is the amount you have to pay to ac­quire a cer­tain amount of rev­enue, which is clear­ly up, and the sec­ond is that when rev­enue is low­er (i.e. most­ly pipeline val­ue) you are tak­ing more risk and bet­ting on the hope that your ac­qui­si­tion will pay off.

•To get a good-sized sam­ple and long-term trend we al­so looked at two co­horts of deal-mak­ing – 2009–2011 and 2014-2016 (five years lat­er).  This part of our analy­sis clear­ly shows that the mul­ti­ples are up across the board, so even when the com­pa­ny is not tak­ing on the risk of ear­ly-stage hope, they are al­so pay­ing much more for on-mar­ket rev­enue.

•So we don’t ex­plic­it­ly val­ue the ear­ly-stage pro­grams, this is in the eye of the be­hold­er, the is­sue is that ac­quir­ers are pay­ing more than they used to for ear­ly-stage gen­er­al­ly across the board.

That as­sess­ment may al­so help ex­plain why 2016 fell far short of over­all M&A ex­pec­ta­tions, as some com­pa­nies you’d ex­pect to be in the buy­er col­umn — hel­lo, Gilead — have steered clear of ac­qui­si­tions.

Any­one look­ing for spe­cif­ic ex­am­ples of how this trend is play­ing out in par­tic­u­lar deals need on­ly look at Al­ler­gan’s buy­out of To­bi­ra or Pfiz­er’s $14 bil­lion Medi­va­tion ac­qui­si­tion, which in­clud­ed a big share of a mar­ket­ed drug as well as a promi­nent ex­per­i­men­tal med. J&J’s prospec­tive ac­qui­si­tion of Acte­lion will do noth­ing to pop this par­tic­u­lar bub­ble.

“The bot­tom line is that the era of cheap cap­i­tal since 2008 has led to a sig­nif­i­cant in­fla­tion in deal val­ues across the board,” Roun­tree adds, “which can be great for the ac­quired com­pa­ny share­hold­ers but ques­tion­able for the ac­quir­er’s share­hold­ers.

“Our con­clu­sion is that though some deals will end up be­ing great for both par­ties, many are at over-in­flat­ed prices, and the ac­quir­ing com­pa­nies would do bet­ter to fo­cus on fix­ing their own shops and en­ter­ing in­to part­ner­ships where they need ex­tra ca­pa­bil­i­ty rather than ex­pen­sive M&A.”

Don’t look for the end of this trend in 2017 as Big Phar­ma waits for Pres­i­dent-elect Don­ald Trump to fol­low through with a high­ly an­tic­i­pat­ed move to al­low the multi­na­tion­als to repa­tri­ate bil­lions in over­seas cash.

“Our sense is that 2017 is un­like­ly to see a de­crease in the prices paid, per­haps they will go high­er yet: there is a lot of mon­ey in the ecosys­tem seek­ing the high re­turns that suc­cess­ful in­no­va­tion can cre­ate,” notes Roun­tree. “The price of rev­enue-gen­er­at­ing deals will be­come pro­hib­i­tive due to lack of sup­ply, ex­cept for those with ex­treme­ly strong bal­ance sheets or very pa­tient share­hold­ers or both.”

Health­care Dis­par­i­ties and Sick­le Cell Dis­ease

In the complicated U.S. healthcare system, navigating a serious illness such as cancer or heart disease can be remarkably challenging for patients and caregivers. When that illness is classified as a rare disease, those challenges can become even more acute. And when that rare disease occurs in a population that experiences health disparities, such as people with sickle cell disease (SCD) who are primarily Black and Latino, challenges can become almost insurmountable.

Jacob Van Naarden (Eli Lilly)

Ex­clu­sives: Eli Lil­ly out to crash the megablock­buster PD-(L)1 par­ty with 'dis­rup­tive' pric­ing; re­veals can­cer biotech buy­out

It’s taken 7 years, but Eli Lilly is promising to finally start hammering the small and affluent PD-(L)1 club with a “disruptive” pricing strategy for their checkpoint therapy allied with China’s Innovent.

Lilly in-licensed global rights to sintilimab a year ago, building on the China alliance they have with Innovent. That cost the pharma giant $200 million in cash upfront, which they plan to capitalize on now with a long-awaited plan to bust up the high-price market in lung cancer and other cancers that have created a market worth tens of billions of dollars.

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So what hap­pened with No­var­tis' gene ther­a­py group? Here's your an­swer

Over the last couple of days it’s become clear that the gene therapy division at Novartis has quietly undergone a major reorganization. We learned on Monday that Dave Lennon, who had pursued a high-profile role as president of the unit with 1,500 people, had left the pharma giant to take over as CEO of a startup.

Like a lot of the majors, Novartis is an open highway for head hunters, or anyone looking to staff a startup. So that was news but not completely unexpected.

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Who are the women su­per­charg­ing bio­phar­ma R&D? Nom­i­nate them for this year's spe­cial re­port

The biotech industry has faced repeated calls to diversify its workforce — and in the last year, those calls got a lot louder. Though women account for just under half of all biotech employees around the world, they occupy very few places in C-suites, and even fewer make it to the helm.

Some companies are listening, according to a recent BIO survey which showed that this year’s companies were 2.5 times more likely to have a diversity and inclusion program compared to last year’s sample. But we still have a long way to go. Women represent just 31% of biotech executives, BIO reported. And those numbers are even more stark for women of color.

David Meek, new Mirati CEO (Marlene Awaad/Bloomberg via Getty Images)

Fresh off Fer­Gene's melt­down, David Meek takes over at Mi­rati with lead KRAS drug rac­ing to an ap­proval

In the insular world of biotech, a spectacular failure can sometimes stay on any executive’s record for a long time. But for David Meek, the man at the helm of FerGene’s recent implosion, two questionable exits made way for what could be an excellent rebound.

Meek, most recently FerGene’s CEO and a past head at Ipsen, has become CEO at Mirati Therapeutics, taking the reins from founding CEO Charles Baum, who will step over into the role of president and head of R&D, according to a release.

Jay Bradner (Jeff Rumans for Endpoints News)

Div­ing deep­er in­to in­her­it­ed reti­nal dis­or­ders, No­var­tis gob­bles up an­oth­er bite-sized op­to­ge­net­ics biotech

Right about a year ago, a Novartis team led by Jay Bradner and Cynthia Grosskreutz at NIBR swooped in to scoop up a Cambridge, MA-based opthalmology gene therapy company called Vedere. Their focus was on a specific market niche: inherited retinal dystrophies that include a wide range of genetic retinal disorders marked by the loss of photoreceptor cells and progressive vision loss.

But that was just the first deal that whet their appetite.

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Vicente Anido (University of West Virginia via YouTube)

Aerie fires CEO af­ter lead pro­gram flop, com­ments about pri­ma­ry end­points be­ing 'not re­quired'

Aerie Pharmaceuticals CEO Vicente Anido has left the company less than a week after trying to chart a Phase III study in the wake of a serious Phase IIb flop.

Anido’s last day at Aerie was Friday, the biotech announced in a news release Tuesday morning, and Benjamin McGraw is taking his place in an interim role. The now former CEO was terminated without cause, according to an SEC filing.

The board has started looking for a full-time chief to take his place.

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When ef­fi­ca­cy is bor­der­line: FDA needs to get more con­sis­tent on close-call drug ap­provals, agency-fund­ed re­search finds

In the exceedingly rare instances in which clinical efficacy is the only barrier to a new drug’s approval, new FDA-funded research from FDA and Stanford found that the agency does not have a consistent standard for defining “substantial evidence” when flexible criteria are used for an approval.

The research comes as the FDA is at a crossroads with its expedited-review pathways. The accelerated approval pathway is under fire as the agency recently signed off on a controversial new Alzheimer’s drug, with little precedent to explain its decision. Meanwhile, top officials like Rick Pazdur have called for a major push to simplify and clarify all of the various expedited pathways, which have grown to be must-haves for sponsors of nearly every newly approved drug.

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Lat­est news: It’s a no on uni­ver­sal boost­ers; Pa­tient death stuns gene ther­a­py field; In­side Tril­li­um’s $2.3B turn­around; and more

Welcome back to Endpoints Weekly, your review of the week’s top biopharma headlines. Want this in your inbox every Saturday morning? Current Endpoints readers can visit their reader profile to add Endpoints Weekly. New to Endpoints? Sign up here.

Next week is shaping up to be a busy one, as our editor-in-chief John Carroll and managing editor Kyle Blankenship lead back-to-back discussions with a great group of experts to discuss the weekend news and trends. John will be spending 30 minutes with Jake Van Naarden, the CEO of Lilly Oncology, and Kyle has a brilliant panel lined up: Harvard’s Cigall Kadoch, Susan Galbraith, the new head of cancer R&D at AstraZeneca, Roy Baynes at Merck, and James Christensen at Mirati. Don’t miss out on the action — sign up here.

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