Andrew Pannu

The best biopharma M&A deals

Introduction

M&A has long been considered the lifeblood of the biopharma industry – and for good reason. Developing and commercializing novel medicines requires a diverse set of competencies that typically span multiple organizations. Nimble, fast-moving biotech companies are adept at early-stage R&D: raising money to progress cutting-edge breakthroughs from the academic setting into preclinical and early clinical testing. Large pharmaceutical companies have the know-how, infrastructure and cash to push the most promising molecules through costly late-stage trials, regulatory approvals and global commercialization. These lines can and do blur, but biotech has long operated as a reliable testing ground for novel molecules & modalities, the best of which pharma is happy to swoop up for a premium. These are the terms of the ecosystem we all operate within.

While choppy markets undercut some of the usual M&A enthusiasm the past few years, it’s inevitable that momentum will pick up again as pharma looks to backfill upcoming LOEs of their biggest blockbusters.

In the spirit of hoping for more transformative M&A in 2023 to lift up a sluggish biotech sector, I took a look through history and compiled the top M&A deals (in my opinion).

Methodology

There’s a lot of different ways to quantify “best” M&A deals – and I fully recognize that financial ROI is not the sole determinant of a good acquisition. An acquisition can also change the company culture, spur long-term R&D changes or bring in key people that lead the next phase of growth. I’m reminded of Sanofi’s acquisition of Genzyme, which helped revitalize the company’s R&D culture and transform the company into a biologics powerhouse.

With that said, financial return does present a consistent metric by which to compare deals, and so this analysis will predominantly rely on that. A summary of the selection criteria and analytical methodology:

Formula summarizing the way I calculated the ROI multiple for each group of deals

Results (& interesting background stories)

First, the top deals that emerged from group 1:

Bar charts showing ROI multiple of group 1 deals, with associated value / cost data

In terms of companies and therapeutic areas, it feels like a lot of the usual suspects here. Oncology, rare disease and hematology are well-represented, which makes sense given the favorable reimbursement & commercialization dynamics allow for greater value extraction in these disease areas. We also see a mix of conviction around these deals – in some cases, the acquirer recognized the promise of a de-risked asset and secured a great deal, while in others they had no idea they had just uncovered a hidden gem.

Some of my favorite deal backgrounds – collectively highlighting the serendipity of biopharma M&A:

BioMarin / IBEX (Oct 2001) – Palynziq

By far the smallest financial outlay on the list, BioMarin dolled out just $20M ($34M inflation adjusted) to acquire two programs from IBEX. The star was Neutralase, an injectable heparinase which had just demonstrated promising safety & efficacy data in Phase 2. Included as more of a footnote was a preclinical program for Phenylase, an orally active enzyme with the potential to treat PKU. While Neutralase would be abandoned just two years later, it would be Phenylase (now known as Palynziq) that saved the deal, generating $244M in sales in 2022, with peak sales estimated at >$600M. Interestingly, this deal was entirely driven by BioMarin’s confidence in Neutralase, with Phenylase as more of an interesting research project to sweeten the deal. If you were to allocate how much of the $20M purchase price was for Phenylase, my guess is it would be a rounding error – biopharma deals tend to be lead asset driven. Sometimes you get what you pay for, and sometimes you get a whole lot more!

Vertex / Aurora Biosciences (Apr 2001) – Cystic Fibrosis franchise

In contrast to the lesser known BioMarin deal, the story of how Vertex pivoted to and largely conquered cystic fibrosis is famous in biotech lore and venture philanthropy. The story begins with Aurora Biosciences, a San Diego-based biotech founded in 1995 and focused on providing assay development services to other companies. While the company was doing well, platform-oriented companies were losing popularity in the wake of the genomic revolution bubble popping around 2000, and so Aurora pivoted to developing their own drugs, rather than solely providing services to help others do so (sounds familiar).

It was that year that the Cystic Fibrosis Foundation offered a $47M investment over 5 years to fund drug discovery work in cystic fibrosis, an indication that no other biopharma companies wanted to touch as it was considered too small, with only 30K patients in the US (the industry had not yet realized how profitable rare disease could be).

This is where Vertex enters the picture – they acquired Aurora for $592M ($995M inflation adjusted) in a stock-for-stock transaction. The rationale for the deal had nothing to do with CF. Rather, combining Aurora’s assay development, screening and cell biology capabilities with Vertex’s drug discovery expertise would create an integrated platform for end-to-end drug discovery & development. When the CF Foundation approached Vertex about continuing the program, they decided to do so largely for the scientific challenge and because it was a “less expensive form of financing”, per the company’s CBO at the time.

That decision proved fruitful. Research continued at Aurora in earnest, and in 2005 the promising molecule ivacaftor was discovered. The drug was eventually approved in 2012 (Kalydeco) to treat 4-5% of patients. With the underlying biology cracked and predictive biomarkers in place, Vertex moved quickly, securing the approvals of Orkambi (2015), Symdeko (2018) and Trikafta (2019). All of these drugs contain ivacaftor, illustrating that the Aurora acquisition paved the way for the reinvention of Vertex as a company, and, more importantly, a suite of effective medicines treating ~90% of CF patients that previously had limited options.

Jazz Pharmaceuticals / Orphan Medical (Apr 2005) – Xyrem

Unlike the other two deals, this acquisition had far less serendipity and is more so a case study in effectively building brand equity and growing market awareness. While gamma hydroxybutyric acid (GHB) is a fairly old drug, having first been synthesized in 1874 by a Russian chemist, our story begins in 1994, when the FDA approached Minnesota-based Orphan Medical to investigate GHB as a treatment for narcolepsy. The disease impacting tens of thousands in the United States had no approved medicines. Six years later, while Orphan Medical was preparing to file it’s NDA, Congress made the drug illegal, while leaving room for use in future medical treatments. In 2002, the FDA approved Orphan’s drug, Xyrem, for narcolepsy patients with cataplexy, which was the sudden onset of paralysis during the daytime that many patients also reported.

Orphan Medical began commercializing Xyrem, eventually selling off nearly all of their other drugs to focus their CNS salesforce. For FY2004, sales reached $10.6M. The company was acquired in April 2005 by then privately-held Jazz Pharmaceuticals, with Xyrem (& the accompanying salesforce) the core value drivers. At the time, the $123M ($187M inflation adjusted) purchase represented ~11x Xyrem sales – a fair multiple to pay for a drug treating a rare disease with strict distribution laws and the looming threat of lawsuits due to adverse events.

As you can see from the chart below, Jazz didn’t do anything fancy or grow the product overnight. Instead, they significantly increased the salesforce (from 36 at FYE2004 to 200 by FYE2007), racked up expansion indication wins, expanded physician and patient awareness with TV spots and other outreach campaigns, and, oh *checks notes* increased the price 841% between 2007 and 2014.

Tactics aside, the Xyrem acquisition has been a tremendous boon for Jazz, and they don’t plan to pivot anytime soon – a next-gen version Xywav launched in November 2020 and should finish 2022 with $900M in sales, incredible growth driven by Jazz encouraging physicians to switch patients from Xyrem.

Xyrem net sales over time from launch to 2022, with annotations of key events

Now, the top deals that emerged from group 2:

Top 6 deals from group 2 ranked by ROI, with accompanying cost data & ultimate acquirer

In all of these examples, the acquirer picked up a molecule that turned out to be the core value driver for their own acquisition down the road. Some of my favorite deal backgrounds from this group:

Horizon Therapeutics / River Vision (May 2017) – Tepezza – Acquired by Amgen

Note: Deal multiple assumes 60% of value in Amgen acquisition derived from lead asset (Tepezza) – Horizon Tx has a few other key products (Krystexxa – $1.65B in peak sales, and Uplizna – $1B in peak sales) that also contributed to the acquisition. Value allocation was determined by peak sales contribution, but it could be argued this deal was entirely driven by Tepezza.

High on this list is the recently acquired Horizon Therapeutics, which built tremendous value through the acquisition of multiple niche biologics (see Torreya’s excellent overview). Horizon has two entries here, as they also prudently acquired Krystexxa from Crealta. However, I’ll focus on Tepezza as it was acquired for 3.5x less, while estimated to deliver almost 2.5x in peak sales.

When Horizon paid $145M ($176M inflation adjusted) to get Tepezza (teprotumumab), it was a Phase 2 asset that had demonstrated promising results treating thyroid eye disease (TED), a rare disease with no approved medicines and ~10K moderate-to-severe patients in the US. Horizon estimated peak sales of $250M at the time of acquisition (representing 30% penetration of 10K patients), indicating they expected this to remain a relatively niche product.

Over the next few years, positive data and market feedback led Horizon to 12x that initial peak sales estimate, eventually arriving at $4B by the time they were acquired by Amgen. An overview of key events:

Per Horizon management, a few things drove this outperformance – some were unexpected, but others were the result of diligent execution:

Overall, prudent BD coupled with outstanding commercial execution drove Horizon’s headline acquisition, the largest in 2022.

Sierra Oncology / Gilead (August 2018) – Momelotinib – Acquired by GSK

Note: Deal multiple assumes 100% of value in GSK acquisition derived from momelotinib

While this deal rounds off the list, it very easily could top it depending on how the ROI calculation was done. As mentioned before, for consistency I used the headline deal number inclusive of milestones to calculate all deal multiples, but it’s worth noting that Sierra paid just $3M upfront and was acquired by GSK before the mostly commercial milestones were triggered. Inflation adjusting that $3M to $3.5M and using that as the total deal cost results in an astounding 534x multiple for former Sierra shareholders!

Momelotinib had passed hands several times before Sierra acquired it – Gilead acquired the rights in 2013 through the acquisition of YM BioSciences, which had obtained the rights in 2011 from their acquisition of Cytopia. YM BioSciences was run by several members of Sierra’s management team, including CEO Nick Glover, so there was already familiarity with the molecule.

So how did Sierra get it on the cheap? Gilead progressed the asset to two separate Phase 3 studies in patients with myelofibrosis. The first was a comparator against Incyte’s Jakafi in untreated myelofibrosis patients – momelotinib met its primary endpoint of noninferiority to Jakafi but failed a key secondary endpoint of response rate in total symptom score. The second trial gave momelotinib or best alternative treatment to myelofibrosis patients that had previously received Jakafi – again, the drug failed to deliver the results Gilead wanted. Across both trials there were lingering safety concerns as multiple patients dropped out due to side effects. While a deeper look at the data showed there was still some promise, Gilead ultimately felt the drug would not compete effectively against Jakafi even it were to be approved and shelved the drug, offloading it to Sierra a little less than 2 years later.

As they say, one man’s trash…

Appendix

List of top 26 biopharma I analyzed for group 1:

  1. AbbVie
  2. Alnylam
  3. Amgen
  4. Apellis
  5. ArgenX
  6. AstraZeneca
  7. Biogen
  8. BioMarin
  9. BMS
  10. Eli Lilly
  11. Gilead
  12. GSK
  13. Jazz Pharma
  14. J&J
  15. Merck
  16. Moderna
  17. Neurocrine Biosciences
  18. Novartis
  19. Novo Nordisk
  20. Pfizer
  21. Regeneron
  22. Roche
  23. Sanofi
  24. Sarepta Tx
  25. Seagen
  26. Takeda
  27. Vertex

Complete list of deals I looked at for group 2:

  1. Ablynx / Sanofi
  2. Acceleron / Merck
  3. Alexion / AstraZeneca
  4. Allergan / AbbVie
  5. Arena / Pfizer
  6. Array / Pfizer
  7. Audentes / Astellas
  8. AveXis / Novartis
  9. Celgene / BMS
  10. Dicerna / Novo Nordisk
  11. Forty Seven / Gilead
  12. Genzyme / Sanofi
  13. GBT / Pfizer
  14. GW Pharma / Jazz Pharma
  15. Horizon Tx / Amgen
  16. Hospira / Pfizer
  17. Immunomedics / Gilead
  18. Juno / Celgene
  19. Kite / Gilead
  20. Medivation / Pfizer
  21. MyoKardia / BMS
  22. Sierra / GSK
  23. Spark Tx / Roche
  24. TESARO / GSK
  25. The Medicines Co. / Novartis
  26. Turning Point Tx / BMS
  27. Vifor / CSL

The detailed data tables for selected deals upon which the above charts are based:

Full data tables for selected deals across both group 1 & 2

Note: price paid for group 1 does not reflect downstream milestone / royalty payments not reflected in the headline deal figure. For example, Biogen has paid out >$1B in commercial milestones to Fumapharm as Tecfidera hit aggregate sales thresholds. For consistency, these retroactive adjustments were excluded.



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