Will 2018 be the year of biotech M&A? - An analysis by KBC Securities

 

In the Belgian biotech space, 2018 has started with a bang. With not even two full weeks into the new year, two Belgian biotechs have already received takeover bids from major pharma players. As U.S. tax reforms are expected to allow big pharma to spend big money, the M&A rumor mill has started spinning, spurring non-U.S. players to action in fear of missing out of the acquisition action. Japanese pharma behemoth Takeda is targeting its development partner Tigenix, as the company’s core product Alofisel (Cx601) prepares to conquer the European market. While Takeda and Tigenix seem to be aligned when it comes to the takeover story, Danish diabetes specialist Novo Nordisk appears to be having a more difficult time convincing its target of choice, Ablynx.

In the last two years, M&A in the biotech sphere has been rather low. Although some had expected M&A to pick up in 2017, the year was rather uneventful apart from the $30bn takeover of Actelion by J&J and Gilead’s $12bn acquisition of Kite. However, with the form and impact of the U.S. tax reform becoming more clear, the biotech community is gearing up for a new M&A season.

 

Pharma companies are known to hold large amounts of cash outside the U.S., mostly in tax-friendly countries such as Ireland. Frontrunners in this area are Amgen, Gilead and Merck, holding respectively $34bn, $25bn and $21bn offshore. In Amgen’s case, this accounts for a whopping 91% of the company’s total war chest. As repatriating this cash comes at a tax rate of 35%, pharma isn’t inclined to bring the cash they earned outside of the U.S. back home. This could drastically change with the upcoming U.S. tax reform, which not only cuts corporate tax rates from 35% to 21%, but also lowers repatriation tax rates from 35% to 14.5%. The freeing up of cash, taken together with the fact that big pharma’s pipelines are running dry and are actively looking to supplement their own with external innovations should fuel the M&A engine in 2018.

 

Considering that the tax reform is only expected to be implemented somewhere mid-2018, it can hardly be called a coincidence that big non-U.S. players are kicking off the next M&A wave. Japanese and Danish powerhouses Takeda and Novo Nordisk have shown that non-U.S. companies aren’t going to stand by and wait for U.S. competition on the bidding field and have launched their respective offers on Tigenix and Ablynx.

 

The close partners

Takeda has been a crucial and enthusiastic partner to Tigenix since their collaboration deal, closed in the summer of 2016. Takeda would gain all non-U.S. rights to the commercialization of Tigenix’ lead product Cx601 (later renamed Alofisel) and aid in the further clinical development of the product. In return, Tigenix would receive an upfront payment of €25m, total potential milestone payments of €355m and an 18% royalty rate on potential future sales.

 

Since the partnership was closed, Alofisel has concluded a successful phase III trial and received a positive opinion from the CHMP, almost certainly triggering market approval by the EMA in the coming weeks. Thanks to the deal closed with the Australian Mesoblast, Tigenix can also start exploring the use of Alofisel in markets beyond its initial target indication: complex perianal fistulas in Crohn’s disease patients. And of course, with a broader market (e.g. addition of recto-vaginal fistulas, enterocutaneous fistulas, etc.) comes a higher value.

 

With the now close to market Alofisel fitting perfectly into Takeda’s pipeline focus of gastrointestinal drugs and a rather expensive deal from their side, the Japanese haven’t wasted any time and launched a takeover bid of €1.78 per share, an impressive 81% premium on the €0.98 closing price predating the offer. As both Tigenix management and major shareholders seem to be on board with Takeda’s offer, little seems to be in the way of a successful takeover.

 

The “will they/won’t they”

Ablynx and Novo Nordisk have been collaborating since the end of 2015 on a single Nanobody program in an undisclosed disease area. However, Ablynx’ highly interesting Nanobody platform has attracted partners from far and wide. Compared to Ablynx’ other collaborations, the partnership with Novo Nordisk isn’t as broad or on late stage assets as it is with other development partners such as AbbVie, Merck and Sanofi.

 

Only a few days ago, Novo Nordisk issued a press release stating that it had offered Ablynx a second takeover bid after the first one had been rejected by the company’s board. The €30.5/share offer (44% premium on previous closing price),  of which €28 in cash immediately and €2.5 contingent upon two material events, was again turned down by Ablynx, as the company stated it ‘fundamentally undervalues’ Ablynx’ assets and future prospects. Also analyst consensus points to Novo Nordisk’s hostile takeover bid being the low side, with price targets ranging from €32.5 to €40. It seems Novo Nordisk is rather pulling the discussion into the public space to put some pressure on Ablynx while the market clearly believes a higher bid is in order as Ablynx’ shares continue to rise to up to €37. Additionally, counterbids of other parties, such as Merck, cannot be excluded. While no agreement has been reached at time of writing, chances are high that Ablynx will be acquired at a significantly higher price, be it by Novo Nordisk or another contender.

 

Caplacizumab, Ablynx’ lead Nanobody intended to treat aTTP, fits right into Novo Nordisk’s hemophilia franchise. However, as Novo Nordisk is mainly focused on diabetes and blood diseases, the many other disease areas where Ablynx is active in by itself or with partners seem to make for a more awkward match with the Danes.

 

The next in line?

When discussing takeover possibilities and Belgian biotech, Galapagos’ relation with Gilead can’t be ignored. Galapagos’ potential blockbuster Filgotinib was partnered for further co-development and co-commercialisation with Gilead in early 2016. Filgotinib shows potential in a broad range of inflammatory indications, and could function as a doorway into this huge market. The commercial performance of Gilead’s HIV and HCV is starting to slow down and shareholders are putting pressure on the company to consider M&A in function of keeping the pipeline filled. Gilead has shown to be willing to do so with its $12bn takeover of Kite, one of the two key players in CAR-T cancer therapy together with Novartis.

 

Additionally, Gilead and Galapagos had agreed on a standstill period after Gilead acquired a large amount of Galapagos shares as part of their partnering deal. The end of the standstill period was undisclosed at the time of the deal but in late 2017 was revealed to be December 31st 2017. With Gilead being free to make Galapagos an offer from 2018 on and Filgotinib’s first phase III data coming out mid-18, chances are growing that Gilead will swoop in after the summer.

 

Whether or not takeovers in the coming year will be successful will have to be seen as prices are set, synergies identified and ongoing R&D is disrupted as little as possible during integration. In any case, thanks to rising M&A buzz, 2018 promises to be an eventful year for biotech.

Note

This article is written by KBC Securities.

 

 

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