ONCOLOGY M&A: GREENLIGHT FOR PROFIT?

By Owen Marino, Biotech Analyst

Mergers and acquisitions continue to be huge factors in the world of biotech. These days, the industry is trending towards being separated into two different groups – small, clinical-stage companies that do the research and develop novel products, and the rich, established companies that simply buy the rights to these promising products and don’t actually do any of the R&D on their own. Prospective mergers and acquisitions are always a tough thing for a company to evaluate given all the uncertainties of projecting future cash flows after joining with a new company and the exact value of the unique synergies that will be created, requiring analysts to make a number of quantitative assumptions. Companies usually pay a premium for acquisitions, which means a marked up price some percentage above the valuation of what the company is actually worth on the open market. In response to big biotech and pharma shifting attention away from COVID-19 efforts, many have looked to address their oncology efforts as totally effective cancer treatments continue to be lacking in the medical world. A recent article on xtalks.com highlights four of the biggest mergers in the field of cancer research that have taken place this year. By looking at the potential of these new products being developed, the prior success of the companies that purchased their assets, as well as potential synergies we can find, we can grade the mergers as green, yellow, or red, based on the returns they should bring for each of the respective parties.

🟢 Agilent technologies buys Resolution biosciences liquid biopsy platform for $695 million

Agilent is a California based pharma giant that has mainly focused on the manufacture and distribution of pharma paraphernalia such as analytical equipment and lab supplies. Now, the company is looking to grow cancer diagnosis capabilities and step into the sphere of oncology. Specifically, the company’s recent acquisition of clinical-stage firm Resolution Biosciences will focus heavily on the pipeline for the latter’s ctDx liquid biopsy assay, a test for lung cancer.

Entering the precision medicines field will let Agilent experience greater market consolidation helped by technological developments from Resolution, as well as doing this through brand-new advancements, specifically using Next Generation Sequencing (NGS). Agilent will pay $550 million in cash upfront, with the possibility of an additional $145 million for meeting “future performance milestones”, such as drug approval; heavily incentivizing the deal helps protect investors should some portion of the merged company’s developments fail.

The combination of resources offers a lot of potential synergies, and this acquisition is coming at just the right time. The move is estimated to grow the company’s total addressable market by $3 billion in 2025, and by $6 billion by 2030, for a 10.3% gain. 

Just as important to curing diseases is the ability to easily and reliably detect when a person has one. In vitro diagnostics, or IVDs, do this through hi-tech scans of blood tissue in the body. With the other products Agilent already has in development for curing diseases, entering precision oncology, specifically NGS, complements exactly what they are trying to do.

So far, Agilent’s price has risen by 12.4% in the months since the acquisition. Additionally, it had a $315 million, or 19.4%, revenue increase from its Genomics operations alone. Revenue forecasts for the Resolution division are expected to be $50 million and $55 million in the next 2 years, up from $30 million this past year, with all signs pointing toward healthy, continued growth for the merged companies. 

🟢 Hologic Inc. buys Biotheranostics inc. for $230 million

The acute focus of this deal is on treatments for women’s cancer – the key products Hologic will continue to develop from Biotheranostics being the San Diego-based company’s CancerTypeID and Breast Cancer Index (BCI) tools. This deal looked good on paper due to the lack of PCR-based gene-expression tests in the field and corresponding high growth potential, and early returns are backing this idea up. For the fiscal quarter Q3 ending in June, Hologic saw revenues increase by 42%, even as demand for the company’s SARS-Cov-2 testing assays, one of the company’s central products, declined as a result of the receding pandemic at the time. Molecular diagnostics, which this particular acquisition played a major role in, accounted for the biggest increase of 25%, to a total of $665.5 million in that category. The catalyst largely responsible for this revenue push came this past May, when expanded Medical Local Coverage Determinations under the US Social Security Act gave its Breast Cancer Index test much more Medicare funding eligibility than it had previously had. Not only was this a huge boost to the company’s Q3 numbers, but this news makes it expectable that the trend will continue. Hologic saw the second largest gains in the 360Dx index during the month of July, to the tune of a 12 point increase. This merger is a major green light for investors who want to put their money in a safe company on the rise right now.

🔴 Amgen buys Five Prime therapeutics for $1.9 billion

This acquisition specifically targets Amgen CEO Robert Bradaway’s expansion initiatives into China and East Asia, where Amgen will receive royalty sales on products distributed in this region. While the deal has potential, investors should stay away for a few reasons. The acquisition was made with Amgen paying a 78% premium, the percentage of the price paid over the established enterprise value of a company. While paying an excess of goodwill is often necessary for a large-scale deal with so much revenue potential in order to account for high future cash flows, it is fairly high even by industry standards. In the massive December 2020 deal where AstraZenaca bought 85% of Alexion in a cash-stock deal, the former paid a premium of only 45%. In addition, Five Prime Therapeutics has had a number of major failures, including a failed phase II pancreatic cancer drug in collaboration with Bristol Myers-Squibb and the resignation of its CEO in 2019, making this even more risky for investors. This deal is a big boom-or-bust, and bemarituzumab has shown some promising results early on, delivering “meaningful clinical improvements” in daily life during phase II. However, there is still much to lose from an investor’s standpoint and buyers would be better off watching this one from the sidelines.

🟡 Takeda Pharmaceuticals buys T-cell assets from Maverick Therapeutics for $525 million

This deal is highlighted by 3 of Maverick’s chief developmental products, including the COBRA platform that uses T-cell activation immunology methods to treat cancer, and comes as part of an agreement made in 2017 where Takeda could purchase Maverick after five years, an option they chose to exercise after four. Takeda announced upon initiation of the deal that all Maverick scientists will join the Takeda team, continuing to work in their previous roles in the former company.

While the deal looks promising, it is a bit risky for a number of reasons. First, all of the involved products are so early into trials if they are even in trials at all, which obviously leaves a lot to chance. Cobra is a completely novel type of therapy, leading the charge in T cell innovation, and being the innovator of an alternate treatment method carries the risk of being the first to make a number of mistakes. While results announced last year show regression in EGFR and B7H3 tumors in mice, TAK-186 (formerly known as MVC-186 under Maverick) is only in phase I/II of clinical testing, and TAK-280 has not even begun trials. 

There are a number of research and development synergies available, with the entire team coming to the acquirer from Maverick, but investors have to wonder – just how much more marginal revenue can this partnership generate? The teams have already been working in collaboration for about 5 years – has enough progress been made to justify an investment over 5 times bigger than the one in 2017?

In addition, investors may want to keep in mind that Takeda has been shown to be somewhat volatile, with an average -1.2-10.5% growth CAGR, with some of this due to past mergers. Investors should hold out for the release of some new information before deciding to take Takeda on.