Scrambling to bulk up their drug pipelines, big biopharma companies are increasingly turning to gene therapy. Gene therapies' potential to overcome genetic mutations in over 6,000 genetic disorders prompted Roche Holdings (RHHBY +1.30%) to acquire gene therapy pioneer Spark Therapeutics (ONCE +0.00%) for $4.8 billion last month. This month, Biogen (BIIB +1.96%) followed that news up with its $877 million acquisition of gene therapy upstart Nightstar Therapeutics (NITE +0.00%). Are more gene therapy deals in the works?
In this episode of The Motley Fool's Industry Focus: Healthcare, host Shannon Jones and Motley Fool contributor Todd Campbell explain why Roche and Biogen are buying these companies and if these acquisitions make Regenxbio (RGNX +2.73%) an M&A target, too. Tune in to learn:
- The real reason behind Roche's interest in Spark;
- How Nightstar could kick-start Biogen's future;
- The common thread these companies share with Regenxbio.
A full transcript follows the video.
This video was recorded on March 6, 2019.
Shannon Jones: Welcome to Industry Focus, the show that dives into a different sector of the stock market every single day. Today is Wednesday, March 6th. I'm your host, Shannon Jones, and I'm joined via Skype by healthcare guru Todd Campbell. Todd, how are you?
Todd Campbell: Good! Hello, Wednesday! [laughs]
Jones: Hello, Wednesday!
Campbell: Glad to be back on the show again today and to chat about a lot of really interesting stuff.
Jones: Yeah, it's been a little while. I'm glad that for today's topic, we're actually diving straight into the major headlines because Todd, there have been a plethora of mergers and acquisitions over the past couple of weeks. We're going to be diving into that and also, at the end, we're going to make a very bold prediction about the company we think could be the next big buyout target.
Todd, let's just set the stage for the mergers that have been happening. They've really been focused in one field in particular, and that's gene therapy. For our listeners who are maybe new to biotech, new to the space, what exactly is gene therapy?
Campbell: Before we talk about gene therapy, let's talk about what our genes do, because then you'll be able to better understand what gene therapy is. Our genes are pretty special. They produce proteins that allow our bodies to work right. Unfortunately, sometimes mutations in our genes tend to mess up the works. They can cause a gene to overproduce or underproduce a protein or stop producing a protein altogether. And when that happens, it results in any one of over 6,000 genetically caused disorders. Here's where the gene therapies come in. Gene therapies attempt to restore the normal protein expression by either inactivating, otherwise known as knocking out, or inserting genetic material, such as a functional copy of the DNA that has the mutation.
Typically, the way that's done is, that material is delivered via an inactivated viral vector, a virus that's been deactivated so that it can't cause the person to be sick. That's how these gene therapy companies deliver these targeted fixes to try to correct for these mutant DNA situations.
Jones: Let's talk about why gene therapy is really hot right now. One reason in particular is the fact that technology in terms of gene sequencing has advanced so rapidly. Consider, it was just a few short years ago, the ability and the cost to sequence the human genome was astronomical. You're talking about 13 years, literally $1 billion to do this. Nowadays, researchers can literally sequence the human genome within a workday, and you're talking about maybe a few thousand dollars. The goal is to get that down to $100. You can see, with advances in technology, it's unlocking these targets that researchers and drug developers haven't had previously. And now you see this big boom into gene therapy. A really exciting space.
We've seen this, of course with CAR-T therapies, which we've talked about a lot on the show, Todd, and also, a company we're going to get more into, Spark Therapeutics with Luxturna.
Campbell: When I was explaining how gene therapies work, it may have sounded to somebody who hasn't paid much attention to the space as, "Oh, that sounds pretty simple. Just fix this part of the DNA, right?" But like you alluded to, it's so complex. This is not easy science. It's been a long time coming.
That being said, there are a few gene therapies that are on the market, and that has validated the approach. And as this approach has become validated, more and more big drug developers are starting to get excited and go out and cut deals like the ones we're going to talk about.
Jones: I should also note, gene therapy thankfully has had a huge push forward, thanks to Scott Gottlieb, the FDA commissioner who just announced that he is stepping away from that post just yesterday. Heartbreaking, for sure. I posted on Twitter, literally, my reaction was an ugly cry, Todd. There's no other way to put it. He's been so innovative in making sure that these therapies can come to market. It'll be interesting to see what happens and who takes the helm there at the FDA.
Campbell: Yeah. Obviously, this isn't the first, nor will it be the last time that someone who's in charge of the FDA leaves. But it is kind of sad in a way because this has been a transformational time, a revolutionary time, a game-changing time, in the development of new drugs, including gene therapies. Mr. Gottlieb has been very, very supportive. They've issued all sorts of guidance to the industry. They've demonstrated an incredible willingness to get these drugs to patients faster, and maybe without having to go through all of the standard hurdles that we've seen in the past. It'll be interesting, without a doubt, to see what happens with the next person that does take over that top job. Will they be as favorable to these gene therapy companies as Gottlieb was? I think that's probably going to create a little bit of a hesitation among investors in the short term for what is a very big long-term opportunity.
Jones: Great way to put that. Before we dive into the deals that have happened over the past few weeks, one quick note for our listeners out there, you're probably hearing a lot of loud noises and some bangs. I promise it's not Todd having a moment or us banging our heads against the wall because of the Scott Gottlieb news. It is literally construction happening under our feet. I just wanted to point that out.
Todd, let's talk about the first big deal that literally everyone has been talking about, myself included. That was news last Monday that Swiss pharma giant Roche, ticker RHHBY, was expanding its reach into gene therapy with its acquisition of Spark Therapeutics, ticker ONCE. This was a $4.8 billion deal with Roche acquiring Spark for $114.50 a share, about a 122% premium over their closing price right before the deal was announced. Todd, as a shareholder, I am thrilled, but let's talk about Roche. What are they getting for this deal?
Campbell: [laughs] Congratulations! It was like Christmas in February for investors. They get up one morning and, "Wow! I'm up over 100% on this deal!" One of the things that probably should be mentioned is, Roche is... I don't want to say they're a serial acquirer, but they're very big acquirer of businesses. They always have been. That's helped keep them on the cutting edge. Without a doubt, this deal elevates their game and puts them at the forefront of gene therapies because, as we started off our conversation, Spark Therapeutics is one of the only companies so far to have had their platform validated by winning an FDA approval. That FDA approval was for a blindness drug called Luxturna.
Jones: Luxturna, the first U.S. approved gene therapy drug, commanding a price tag of $850,000 for both eyes. But you can see the potential here with a platform like this. You mentioned the fact that it's been validated. It's not just Luxturna that Roche is getting, they also have other therapies. We're talking about hemophilia A, they've got a candidate called SPK-8011, potentially a blockbuster indication. They've also got SPK-3006 for Pompe disease coming down the pike. As you mentioned, Roche is a huge acquirer, but they're getting not just Luxturna, which is already on the market, but the potential for blockbuster indications here.
Campbell: Luxturna is not the reason this deal happened. It's a relatively small indication that is targeting. It's basically restoring the genetic ability of a gene called RPE65. There are only about 1,000 to 2,000 people in the United States who suffer from blindness because of this genetic mutation that it addresses. You mentioned, it's a very high-price drug, but, again, relatively small addressable market here. They actually have out-licensed the EU rights to that drug to Novartis, so Novartis actually will benefit most from its sale outside of the U.S., and Roche will benefit from the sales inside the U.S.
I think the real reason behind this deal was for that opportunity in hemophilia A. Hemophilia A is a blockbuster indication, 150,000 or something like that patients in the U.S. alone. And these patients, who are missing a critical clotting factor that subjects them to the risk of very serious and potentially life-threatening bleeds, the potential to be able to address this with a one-and-done gene therapy could be remarkable.
Jones: Yeah, especially for Roche. Of course, they've always been known as one of the biggest in terms of cancer portfolios, but their three main drugs -- you're talking about Rituxan, Herceptin, Avastin -- competition is heating up there where patent losses will start to build up, and that's a $21 billion per year opportunity right there that they're trying to at least offset with this acquisition. Glad to at least see that they are moving the needle. As you mentioned, Luxturna is really not the crux of the story. I was looking at 2018, the full year of sales was only $27 million. And as we were reading headlines last year, they were off to a relatively sluggish start, I think A, because of that price tag, which was so high, and so the commercial viability was an issue; also, as prescribers get more and more comfortable with gene therapy, hopefully those sales will take off. But yeah, you're exactly right. The story here was not about Luxturna.
Campbell: Yeah, these phase 3 trials for hemophilia A should be underway this year. You mentioned those other indications. They're buying it for the pipeline and that potential for the multibillion-dollar blockbuster.
I think what's really interesting is, think about the amount of money that has to get spent on diseases like hemophilia A just from the regular transfusions and everything...it would be revolutionary for patients, it would be revolutionary for the marketplace. One thing that you have to acknowledge, though, is that because these are such high-price drugs, as you alluded to, a lot of the risk to these companies in doing these deals and launching these drugs is, "All right, how do I negotiate relationships with my payers, like insurers, so that they're willing to fork over what could, over the long term, save us a lot of money, but up front be a really hefty price tag?" That's going to be very interesting, to see how these companies navigate that. Will they do value price deals? "OK, if it works really well in this patient, we'll be willing to pay X." I don't know how they'll end up doing that. But that's something that poses a risk to these companies as they develop these drugs.
Jones: Yeah, and that's been a battle that Spark has continued to fight with public payers. They've been attempting to roll out a value-based pricing model. As you mentioned, we'll have to wait and see what that looks like.
Let's turn our attention to the second big deal that took the airwaves by storm, and that was none other than biotech giant Biogen, ticker BIIB, making an announcement that it, too, was expanding its reach into gene therapy with an all-cash deal to buy an U.K.-based company called Nightstar Therapeutics, ticker NITE. That was a deal, $25.50 a share, just shy of $880 million. Todd, what's Biogen getting in this particular deal?
Campbell: Shareholders are "only" getting a 68% premium. [laughs]
Jones: "Only." [laughs]
Campbell: Only! Nightstar Therapeutics shareholders are probably like, "Oh, come on! I could have doubled my money instead of this 68%!" We won't cry too many tears for Nightstar shareholders.
Biogen makes a good splash, by buying Nightstar, into gene therapy because it nets Biogen, a drug or therapy called NSR-REP1. That's being developed for an inherited eye disorder that I will just abbreviate, because I cannot pronounce this, as CHD. It's a phase 3 gene therapy. The genetic mutation causes a progressive loss of vision, eventually winding up in blindness. There's a pretty significant need for it. The prevalence across the G7 is about 15,000 patients, so not a huge target market, but, again, like the deal that we just discussed with Spark Therapeutics, it's probably less about their most advanced drug and much more about having a pipeline that they feel -- in this case, it's not quite validated because there's no FDA-approved drug -- has a good shot at getting across that FDA or regulatory finish line.
Jones: So, Biogen here is getting two mid to late-stage assets. The one that you just mentioned, the NSR-REP1, being the furthest along. I think this is really critical for Biogen. Again, this is not going to be the transformational deal that I think a lot of investors were hoping Biogen would make, especially as they progress forward with their Alzheimer's drug, Aducanumab, which is extremely risky. But I do think this is one of those incremental deals that at least helps take some of the pressure off of Aducanumab actually performing. And we hope it does. We probably won't get data until next year. But that's been a huge part of what investors have been looking for. I think they may continue to make deals like this moving forward to help offset some of that risk.
Campbell: You make a great point. They went all in with their Alzheimer's trials. Multiple sclerosis, where they historically have generated most of their revenue, that competitive marketplace is getting more competitive and a relatively mature marketplace. So, if they're looking for growth, they've got to focus on some of these other types of technology. This certainly elevates their game, and it does it in a relatively scientifically easy area. The eyes are a really good target for gene therapies. They're relatively small, there's not a lot of risk of the immune system having a negative reaction, the antibodies to the viral vectors that are used. And obviously, Luxturna has already shown that yes, indeed, we can develop gene therapies that work in the eyes. So, we'll see how this plays out for them. I think data in 2020 for the CHD indication.
Jones: Yeah, 2020. What's really interesting about this Nightstar deal is, if you actually go back to the end of 2018, Biogen actually terminated a partnership deal with a company called Applied Genetic Technologies Corporation, or AGTC, which is very cleverly named there. This was a company that was also developing gene therapies for inherited eye disorders. They terminated that partnership only to come back and pick up their rival, which is Nightstar Therapeutics. I think it's really interesting to see, No. 1, just how committed Biogen is to gene therapy, especially these inherited retinal disorders; but even more importantly, I think you're starting to see exactly how the field will play out. They've had an opportunity to dive deep into the science and the financials of both companies, and they're moving forward with Nightstar.
Campbell: Yeah. "It's not you, it's me." [laughs] In this case, maybe it was, "It's you, not me."
Jones: Exactly.
Campbell: We'll see how Nightstar plays out.
Jones: We'll see how it plays out. But I think, all in all, a really nice deal here. Nightstar basically is getting the manufacturing capabilities that Biogen offers. Biogen is leaving to them the technical and the scientific know-how. So all in all, a really interesting deal. We'll have to keep our eyes on that.
All right, Todd, our final segment of this show is the opportunity to sell us on a company you've been following for a really long time. I've become more and more intrigued with this company as time goes on. This company is really an interesting way to play the gene therapy space, in some ways maybe a little less risky. Todd, what can you tell us about this company, Regenxbio, ticker RGNX?
Campbell: When I was trying to figure out who could be a target of an acquisition, I wanted to look for some common threads in the two acquisitions that were just done. One of the two common threads is that those companies were working on genetic eye disorders. So, I wanted to find a gene therapy company that is doing something involving the eyes. The other thing that I wanted to do is find a gene therapy company that I felt didn't have a sky-high valuation. I mean, all of these have relatively sky-high valuations because they're not generating out much in the way of revenue yet. But Regenxbio only has a $2 billion market cap. That arguably isn't too sky-high when you start thinking about the amount of money that's being tossed around in past acquisitions, if you talk about Kite Pharma or Juno Therapeutics or Spark.
One of the reasons I like Regenxbio is that these companies that are being acquired have these validated pipelines. They've demonstrated some success already in being able to get their viral vectors to deliver the payload to where the destination safely and effectively. Regenxbio is one of those few gene therapy companies that is on the cusp of an FDA approval. It is on the cusp of an FDA approval because of a relationship that it has for a drug that is addressing SMA. SMA is a disease in which genes are unable to produce a protein called SMN. And over time, these patients lose motor function and mobility, and unfortunately, sadly, many of these patients die by the time they're two years old, or they have to be on a permanent ventilator. That drug, Zolgensma is what it's being called now, is actually under FDA review for approval in May. That drug is owned by Novartis now, following an acquisition last year.
Jones: With this approval coming up in August, I'll be watching it, No. 1, for Regenxbio, but also, two, because it's going up against Biogen and Ionis and their SMA drug, Spinraza. A lot to like here, especially if they can get across the finish line and really validate their platform with this approval. But it's really not just their platform. Granted, their platform could potentially address literally thousands of diseases with this AAV vector delivery system. But even more so, they're also developing their own drug pipeline. Is that right, Todd?
Campbell: Yeah, they've got patents on about 100 different viral vectors that they think work better than the other viral vectors that are out there. Maybe that Novartis drug proves that they're on the right path with their approach to it.
One of the things that investors should know about this company is that it's working on its own eye drug for a very common cause of vision loss, wet AMD. We've probably talked about this on the show before in the past because the two drugs that are used to treat wet AMD right now are Eylea and Lucentis. Combined, those two drugs generate about $8 billion a year in sales. Wet AMD typically affects the elderly, and as a result, the prevalence is increasing significantly because of aging baby boomers. What Regenxbio wants to do is use gene therapy to remove the necessity of having to get up to 12 injections in your eye every year from either Eylea or Lucentis, depending on the patient and the severity of the disease. If they can develop a gene therapy that's a one-and-done for this indication, it could be a massive opportunity. Like I said, it's an $8 billion-plus market.
Jones: I think that's the major take-home point, is that potential for wet AMD. That's a huge opportunity for them. When you couple that with the fact that this is still a relatively small, and in some cases unknown, company, now could be a really awesome time to get in on this company. And they've got a ton of optionality. The sky's the limit for this company. Granted, it's not to say it's not without its risk. A lot of this technology is still very early on. And I imagine, like any other biotech, they're going to run into hurdles, they're going to have some pitfalls along the way. But all in all, really intriguing company to keep an eye on.
Campbell: If you look at Spinraza's sales last year, it was $1.7 billion. That was more than double the prior year. An approval in May of Novartis' drug, that could produce like $80 million worth of milestone payments that Regenxbio could receive. Plus, it's going to pocket a single-digit-to-low-double-digit royalty on sales if, again, this drug wins approval. You could actually see this company become a revenue-positive company, commercial-stage company, by the second half of 2019. That gives them, of course, a much longer runway for their cash and the ability to work on these other trials, including the one in wet AMD.
Jones: Yeah. A lot to like and a lot to watch here. And gene therapy is really just still in its early innings. We'll have to do a follow-up show specifically about gene therapy just to keep all of our listeners up to date.
But for now, that's it for this week's Industry Focus: Healthcare show. Thank you so much for tuning in! As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is produced by Austin Morgan. For Todd Campbell, I'm Shannon Jones. Thanks for listening and Fool on!
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