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A 45% Premium: Here's Why The Medicines Company Is Worth More to Novartis Than It Was to You

By Brian Orelli, PhD - Nov 25, 2019 at 2:24PM

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Understanding why can help you identify the next takeout target.

It turns out the rumors were true.

Novartis ( NVS 0.06% ) is buying The Medicines Company ( MDCO ) for $85 per share. That's a 45% premium above the closing price prior to the acquisition rumor being published.

Investors kicking themselves for not seeing the higher potential valuation shouldn't be all that upset. The Medicines Company's lead asset, inclisiran, a cholesterol-lowering drug that's passed multiple late-stage studies, is worth more to Novartis -- or, really, any large pharma -- than it would have been in the hands of The Medicines Company.

A female doctor talking to a male patient in an exam room.

Image source: Getty Images.

Market competition

Inclisiran is in the same class of drugs as Amgen's ( AMGN 0.63% ) Repatha and Sanofi ( SNY -1.30% ) and Regeneron Pharmaceuticals' ( REGN 0.18% ) Praluent. The drugs inhibit a protein called proprotein convertase subtilisin/kexin type 9 (PCSK9), which results in an increase in the removal of bad LDL cholesterol from the bloodstream.

Repatha and Praluent are antibodies that bind to PCSK9, while inclisiran is an RNA interference (RNAi) drug that inhibits the production of PCSK9. The result is the same, though -- less active PCSK9 -- which results in substantially lower cholesterol levels.

Inclisiran may have a slight advantage in that it can be dosed twice a year during the maintenance phase, while Repatha and Praluent have to be dosed once or twice a month. But Repatha and Praluent have been approved for years, so inclisiran's owner faces an uphill battle convincing doctors to prescribe the new drug over the established leaders.

Amgen and Sanofi/Regeneron also have cardiovascular outcomes data showing that their drugs not only lower cholesterol, but that they also cut the rates of deaths and major cardiac events like heart attacks and strokes. The Medicines Company is still in the process of generating that kind of data.

With competition ahead of inclisiran, much of The Medicines Company's premium valuation comes from Novartis' marketing muscle, which should result in a faster launch than The Medicines Company could manage on its own facing the powerhouses of Amgen and Sanofi/Regeneron.

Novartis can also justify the premium with a higher profit margin than The Medicines Company would likely be able to manage. For example, Novartis should be able to be more efficient with its sales force, perhaps hawking inclisiran with its heart-failure medicine Entresto.

Three blood vials on a diagnostic test order form.

Image source: Getty Images.

A quicker launch and higher peak sales in the hands of Novartis should also benefit Alnylam Pharmaceuticals ( ALNY -6.28% ), which discovered inclisiran and is due sales milestone payments and royalties of up to 20% on sales of the drug. Investors seemed to agree, driving shares of Alnylam higher on Monday.

Ironically, Novartis and Alnylam were partners in a major 31-target RNAi deal that Novartis cut out on almost a decade ago. Now, Novartis will be paying Alnylam RNAi royalties shortly after the deal closes in the first quarter of 2020. The Medicines Company is shooting for filing a marketing application with the Food and Drug Administration by the end of this year, setting up a likely approval of inclisiran in late 2020.

Finding the next Medicines Company

Takeouts have always been a major source of upside in biotech, but investors have to be careful buying shares solely for that reason. There are no guarantees that the drug will fit into the portfolio of a large pharma.

Investors would be better off looking for companies set up to go it alone, valuing the biotechs accordingly, and accepting any takeout premium that's eventually offered as a bonus.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Novartis AG Stock Quote
Novartis AG
$80.00 (0.06%) $0.05
The Medicines Company Stock Quote
The Medicines Company
Sanofi Stock Quote
$47.07 (-1.30%) $0.62
Amgen Inc. Stock Quote
Amgen Inc.
$202.44 (0.63%) $1.27
Regeneron Pharmaceuticals, Inc. Stock Quote
Regeneron Pharmaceuticals, Inc.
$635.16 (0.18%) $1.16
Alnylam Pharmaceuticals, Inc. Stock Quote
Alnylam Pharmaceuticals, Inc.
$171.36 (-6.28%) $-11.49

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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